Building a startup is impossible without money. Of course, you can find startups that are self-funding but that’s not the case with most of them. As a rule of thumb, the most common startup funding sources are personal savings, friends and/or family, angel investors, VCs, incubators, banks, crowdfunding, and government grants.
Let’s assume that you have neither personal savings nor rich friends or relatives who could lend you that initial capital (otherwise, you wouldn’t even have started reading this article, right?)
In this article, we’ll dwell on how to get funds from someone you do not actually know. You may find it useful at any point of your startup development.
#1. Angel Investors
Angel investors are basically rich people who might invest in your project in any fundraising round. Usually, if you’re seeking seed capital which involves a few tens of thousands of dollars, it takes less time to get an answer/funds from investors as less money is covered.
The trickiest thing which makes investors differ from self-funding or getting money from your family is that they all want to get their capital back. Usually, investors consider only those companies that offer an exit strategy. This means you are to get bought or go public later.
The good thing is that investors are not that restricted by all the standards that VCs are: they can let you sell some of your stock to them, making you cash out partially.
For sure, the best way to approach angel investors is through personal introductions. You can find a list of useful resources to approach investors from in this article – Building Your Startup: How to Make Your Startup Go Live.
To put it simply, a venture capital firm is usually a company that invests other people’s money in risky businesses (startups). Typically, getting funds from VC firms involves millions of dollars that’s why it may take much more time before you get an answer. Moreover, the restrictions they impose are firmer than the ones investors expect you to undertake.
A VC wants a higher interest rate than other types of lenders. Sometimes, it may even want to define a new CEO of its own choosing. On top of that, a VC will want to get its investment back first (or even ask for an investment several times as big) in any sale. That’s why if you’re thinking over approaching a VC, don’t wait till you are out of money.
Seed firms, or incubators, are companies that invest in startups at the very early stages (sometimes, when the startup is even just an idea). The amount of money is not that big as VCs would offer but they also impose some process standards.
The great thing about incubators is that they can offer a wide range of services, except for funding. They can advise on how to approach VCs or offer a mentor or tools to transform your startup from an idea into a working company.
Accelerators actually work in the same way, mainly with early-stage startups. They assist startups in finding investors or mentors who could help them reach the next growth level.
#4. Bank Loans
Borrowing from a bank is one of the most common and traditional ways to get fundraising. Yet, the chance you’ll get rejected is pretty high. If the bank considers you as a ‘not solid’ business to invest in or you do not have any experience confirming your ability to repay the loan if your startup fails, personal recommendations won’t work (as it could work with individual investors).
However, applying for a bank loan has its advantages, too. The costs are fixed, and you won’t have to sell your company’s share to the bank to give the investment back.
#5. Government Grants
Government grants are state-based programs mainly focused on small or medium-sized businesses aiming to provide them with funding. This is a great opportunity for promising undertakings to receive capital if they match all the requirements.
That said, many such programs are matching grants: they can require you to match up to 25-50% of the funds. Besides, applying for grants is a competitive process which means there’s no guarantee you’ll eventually receive a grant.
At FutureBlock Malta, we assist startups in applying for a wide range of Malta-based support plants in cooperation with the Maltese government. To find a suitable program and apply for a plan/grant, click here.
Unlike angel investors, VCs, or banks, crowdfunding platforms serve as an intermediary, covering different ways to raise money from a big number of investors.
One more advantage of crowdfunding is that the return investors expect to get from you depends on the crowdfunding model you choose. Investors can receive either tangible compensation (like interest payments or ownership in your business or a product), or an intangible reward (like recognition). The latter means the funds are given as a donation.
A Few Words on Consulting
If you’ve decided to set off your business as a self-funding company, consulting might be a good option. Actually, many startups have started like this – they firstly founded a consulting company that also built a software product and gradually transformed themselves into product companies, with clients paying their dev expenses. The reason why consulting might be a tough decision is that it’s hard to switch from consulting into a product company. Besides, it may take you many years before you finally do that.
As you can see, currently, there are many ways to raise your capital at any stage of your startup growth. What you need to do first is pick the option most suitable for your business model.
Also, take into consideration that getting funding might be a long process that might take you many tries before you finally succeed. Be persistent, use (or boost) your due diligence skills, and don’t give up if one way doesn’t work – try another one 😉