Seed Funding: 6 Ways to Fund Your Startup
You bring your amazing business idea to life, manage to achieve sustainable growth, eventually sell your startup for a pretty penny, retire on a beautiful beach somewhere, and then you wake up. Things don’t happen that easily in the real world. You need to invest a lot of time and resources into building your startup before you can start dreaming of that permanent vacation.
No matter how good an idea an entrepreneur is, if he fails to launch his business, that idea will not see the light of day. Being able to raise funds for a startup is perhaps one of the hardest things an entrepreneur has to do. While it may seem like there’s no shortage of money being pumped into startups, getting a slice of that pie for yourself is easier said than done.
For starters, your idea might not be technology-based, so it would be hard to tap into the venture capitalist or angel investor gravy train. If so, you’ll find them largely dismissive because anything offered to them has probably already been presented to them, or being tough and shrewd negotiators to get their proverbial pound of flesh if they see the value in your idea.
Either way, these aren’t the only options you have for funding your startup. Here are 6 ways to raise money to bring your idea to life.
The beginning of modern crowdfunding dates back to 1997, when a British rock band called Marillion asked fans to donate online to fund their reunion tour. Crowdfunding has since become a legitimate source of fundraising for startups, provided they are able to market it online effectively.
You’ll be surprised to know that most of the funds raised by a campaign on Kickstarter, a leading crowdfunding platform, don’t come from a tech startup, but from fantasy writer Brandon Sanderson. He wanted to raise $1 million to self-publish four novels he wrote during the pandemic, but ended up raising $20.8 million from 84,600 backers in just three days. The previous record was held by the Pebble smartwatch which raised $20.3 million in 2015.
Indiegogo and Patreon are other top platforms that startups can use for crowdfunding. You must deliver what you promise to those who support the campaign. It can be either a product or a benefit. Storytelling and effective social media marketing are key aspects of successful crowdfunding campaigns. Consider crowdfunding if it works for your idea, as it has the added benefit of not requiring you to give up equity or pay interest if you opt for a loan instead.
- Friends and family
It is perhaps one of the oldest ways to raise funds to start a business. It’s also the first option many entrepreneurs consider when getting started. It would generally take less effort to convince friends and family to invest in the business compared to professional investors or banks. The people around you might be more receptive to the idea and might also be willing to believe in your vision.
You can ask them for a loan that has to be repaid after a certain period of time or give them a stake in the business in exchange for the funds they provide. Either way, it’s important to structure them as business transactions, as you would with outside investors.
Take proper legal advice and draft contracts that include legal protections for both parties. This could help keep your relationships from souring even if the startup doesn’t take off.
- Use recurring revenue for capital with Pipe
If you have an established startup with recurring revenue streams, you can leverage a very unique way to fund your startup for future growth without needing to dilute or take ownership by taking in external capital or even having to contract. a loan. You can simply use your recurring income for capital.
Pipe is a platform that allows startups to convert their recurring revenue into seed capital. All of this happens in one click with instant payment. This is incredibly useful for scaling businesses. The platform matches startups with investors, which include approved financial institutions and banks, in a marketplace. They provide the initial capital by paying a reduced rate for the annual value of recurring contracts.
Since its public launch in June 2020, more than 4,000 companies have registered on the Pipe trading platform. Annual recurring revenue tradable on the platform is nearly $2 billion. It’s not just SaaS companies that can raise non-dilutive capital through the platform. Pipe also offers it to D2C businesses with subscription plans, property management companies, insurance brokers, and others.
- Small Business Credit Cards
Banks and financial institutions offer a plethora of credit card products for small businesses. They even offer perks like travel rewards and cash back to entice entrepreneurs who might be willing to sign up for a card. This is a viable source for financing your start-up, but will require extreme diligence on your part.
Banks usually have strict requirements that the business owner must meet before they can get the card. This would likely be tied to their personal credit score and they might even be asked to provide a personal guarantee. It would put you in trouble if you made late payments or worse, if you were in default, as it would affect your personal credit rating.
Small business credit cards tend to have high interest rates, often up to 20%, so if you are unable to pay the balance in full at the end of the billing cycle, the cost capital through this source can increase exponentially. This situation can quickly slow down and leave you in a position where you are unable to raise more funds and end up significantly damaging your personal credit history.
Ideally, your startup’s income should be stable enough to allow you to meet some or all of the obligations that will arise from using a business credit card. As long as it’s managed at a reasonable level, it can be a useful source of instant funding that even offers decent rewards.
- Small business loans
Conventional banks and alternative lenders both offer small business loans provided the borrower is able to meet their requirements. For new startups, they will likely want to see a full business plan to understand the viability and feasibility of the business before deciding on the application. It is a bit easier for established businesses to get a loan since they are able to provide a more accurate picture of their financial situation.
Here are some of the most suitable types of small business loans for startups:
SBA loans are guaranteed by the US Small Business Administration and because of this, they are more accessible to new startups. Repayment terms and interest rates are also more favorable. You can borrow up to $5 million as long as your small business meets the eligibility criteria.
A revolving line of credit provides instant access to funds once approved by the lender. You can access the funds when needed and only pay interest for the amounts withdrawn. It’s a great option for dealing with unexpected expenses and managing cash flow.
Startups can use a working capital loan to fund day-to-day operations. It is a useful borrowing vehicle to manage unpredictable income and expenses until stability returns. Working capital loans can be unsecured, but for startups that have little or no credit history, lenders will usually require collateral for the loan and possibly a personal guarantee as well.
- Startup incubators
Startup incubators rarely take equity if they don’t provide funding, as their primary goal is to incubate and mature startups so they can participate in acceleration programs. Networking is also an area of focus, as incubators provide startups with a platform through which they gain access to investors who may be interested in funding.
The incubation period can vary but is usually up to a year. Startups are given mentorship and office space so they are able to build a minimum viable product that is then able to attract investors. Some incubators can also connect startups with angel investors who are looking for early stage companies to invest in.
Startups that want to get the most out of their incubator experience should be receptive to advice from the experts who run the incubator. This may require making major changes to the business model or even pivoting the entire startup. The founder’s vision is important, but so is the guidance of experts who have the knowledge and experience that startups can capitalize on to build a strong business.
If you can, run it!
It is not impossible to start a business without raising external funds. Lots of people have. Most startups tend to be self-funded or seeded. Experts suggest that up to 85% of startups use some form of startup to start their business.
This may require you to save money over a period of time before launch and may also slow growth. On the other hand, the advantage is that you retain full ownership and have no financial liabilities with lenders.
However you choose to fund your startup, remember that turning it into a sustainable business will take focus, commitment, and courage. Good luck!
Andrew Gazdecki is a 4x founder with 3x exits, former CRO and founder of MicroAcquire. Gazdecki has been featured in The New York Times, Forbes, The Wall Street Journal, and Entrepreneur magazine, as well as prominent blogs such as Axios, TechCrunch, and VentureBeat.