Funding is a crucial part of starting and running any business or startup. Most business or startup ideas never come to life or die prematurely due to funding constraints. That is why you need to know and understand the different types of startup funding. We published an article on the top 12 causes of startup failures. The very first cause cited was cash flow complications. Such complications arise due to depletion of capital and or failure to raise more. You have many options to consider for startup funding. Here are some of the common types of startup funding:
When starting, this should be your first focus before anything else. Bootstrapping refers to starting your startup or business with little to no capital. You will usually be relying on personal income and savings. Such an approach works well when your business or startup involves selling stuff with quick turnarounds. Having minimal operating costs also helps. Plus, insisting on cash and carry also helps. Many global brands today started with bootstrapping being the means of injecting capital. An inspiring example is Don Wong Chang, a billionaire clothing business owner. He started his business using US$11 000 that he had saved over a period of 3 years from several jobs he worked on.
This one entails sourcing funding from family, friends, and relatives. I cannot underscore enough how risky and sensitive this can be. You must tread carefully. Many successful businesses or startups were started this way. However, many failed to take off or thrive. Often it is best to get funding in the form of gifts. That way, there will not be contractual obligations to pay back. If not, approach it as you would when approaching institutional investors or financiers. Make sure everything is on paper and legally binding to avoid disputes later.
Around 2019 I spoke a lot about crowdfunding. Crowdfunding is funding by many individuals pooling their money together for a common goal, usually via the Internet. There are several different types of crowdfunding, e.g., equity crowdfunding, crowdlending, and rewards-based crowdfunding. The good thing about crowdfunding is that you can use many crowdfunding platforms. Examples are Kickstarter, GoFundMe, Indiegogo, and more. In 2019 I discussed some interesting projects that have been funded on Kickstarter.
Last year we interviewed Lloyd Crowdfunding. They are a platform that brings together Small and Medium-Sized Businesses (SMEs) and investors to enable SMEs to raise capital. Lloyd Crowdfunding is a subsidiary of Lloyd Corporate Capital that has provided human, equity, and debt capital and training and advisory services to businesses in Southern Africa for over 15 years. Kindly check out the article, Lloyd Crowdfunding: The First Ever Licensed Crowdfunding Platform For Zimbabwean SMEs To Raise Capital.
A grant is a bounty, contribution, gift, or subsidy (in cash or kind) given by a government, individual, or organization for specified purposes to an eligible recipient. Grants are typically given on the premise of certain conditions, e.g. the intended use, maintenance of stipulated standards, or proportional contribution by the recipient (or other grantors). You often find grants available for tech startups or science-based startups. Usually, if your startup or business idea has an impact mission, grants tend to be there for you.
There are different types of loans. Some of the common types are bank loans and convertible loans. There are also revenue-based loans. Bank loans are quite common, but not many are eligible. That is why loans obtained by peer-to-peer lending are becoming most common. Convertible loans are an interesting variation. Initially, the loan starts as debt financing, meaning it will have to be paid back. Failure to pay it back (with interest) within the specified period turns it into equity financing. This means you must give up a portion of your startup or business proportionate to what you owe. Revenue-based loans are given with no collateral needed. Rather your ‘collateral’ will be in the form of projected revenue over a certain time span. If your business or startup is sure to generate revenue, this may be for you.
This entails capital given by private investors or financial institutions. It is also known as risk capital. The funding has to be paid back thus, it is debt financing. Venture capital involves professionals using other people’s money to invest in businesses or startups. The money must be paid back with interest because the people behind want a return on investment. Venture capital firms typically pool funds from various sources, e.g., corporates, pension entities, or investment entities. Venture capitalists often have a direct and substantial say in your day-to-day operations. Their requirements are usually rigorous, and collateral is usually needed.
An angel investor is usually a former professional or entrepreneur who provides startup capital to starting or growing enterprises. Their uniqueness lies in that they invest their funds. Angel investors exercise little to no control over how you run your operations. An angel investor does very little due diligence, and collateral is usually unnecessary. It is also possible to not be required to pay back. Even when required to pay back, interest may not be needed. In Zimbabwe, there is still a need for momentum to build up regarding angel investments.
We have barely scratched the surface since there is so much to discuss for each type of startup funding. The good thing is that you now know your options. You need to explore more than just one option. Remember to focus most on the first four first and then explore the others when needs to be.