Whether you’re launching the next big thing in fintech or a rival to Uber, your startup is going to require some cash injection. It’s not always easy securing funding for your company, no matter how great the idea. Thankfully, there are quite a few avenues to explore.
Entrepreneurs should be thinking of how to fund their venture from the get-go. This allows them to not only have realistic expectations of what is needed but gauge interest in the product as well.
Besides bootstrapping, which isn’t always feasible, especially in South Africa, there are quite a few avenues when it comes to funding your venture.
The family and friends route
One of the first places any budding entrepreneur can try is family and friends. This avenue usually results in small loans, which are paid back over time, or in the person receiving equity in the new venture.
There are some instances in which this doesn’t work, such as massively scalable companies that require financing for business intelligence systems, machinery, or a lot of staff. Just because you’ve known someone for a year or all of your life, doesn’t mean they’ll be able to fork over a few million for the new Facebook.
What about this thing called Angels?
The word “Angel” in finance doesn’t relate to any biblical reference, but rather individuals who use their own money and invest in early-stage startups. And, yes, family and friends can be lumped into this category as well. Angels are primarily investors or organisations that are on the lookout for investment opportunities, often wanting a return on their investment and not necessarily any equity shares.
Until recently, Angels in South Africa have been on a who-you-know basis, with the need for personal introductions and knowing the right people. The South African Business Angel Network is aiming to change that with a support group for Angels and linking them to startups requiring funding.
Should you use a venture capital firm?
One of the most common funding methods for startups, and one that usually produces high amounts of required funding are venture capital (VC) firms. These companies raise money for investment and can invest anywhere from R100 000 to over R50-million on budding companies.
These large sums of money do come at a price. VC’s will often want large amounts of equity in a startup, sometimes taking a controlling share. They may also place a member of their company on the startup’s board in order to oversee its growth and utilisation of funds.
Can’t I just crowdsource the money I need?
The method of raising funds publically for a project was popularised by the Kickstarter boom a few years ago. It allows entrepreneurs or creators to outline their products online with all of the necessary information and an estimated completion date. The public may then choose to donate money to the project, securing the item for themselves and receiving a few extra goodies in the process.
Crowdsourcing the required funds for your business isn’t ideal for most entrepreneurs as it’s geared towards individual products and not companies.
What about incubators and accelerators?
Accelerators and incubators have become a staple in the international startup scene. Often funded by banks or VCs, these programmes will either see a startup nurtured from its inception to a fully-fledged business, or equip entrepreneurs will all of the necessary tools in as little time as possible.
Often, accelerators and incubators will give a startup funding in order to either launch the business or take them forward. These can also be paired with pitching competitions but it’s a bit of a gamble.
What is corporate finance?
Traditionally, the way to fund a business is through a bank. These institutions offer a wide range of corporate finance packages for companies, regardless of which stage they are in. Banks also don’t just help entrepreneurs with finance to get their company off the ground, but also vehicle finance, mergers, and BEE facilities.
Unlike VCs, banks look at the return they’ll receive on investment and plan out repayment plans with business owners. They also don’t take equity or a share of the startup.
There are a number of ways for entrepreneurs to finance their startups, whether they approach family and friends or banks. Make sure to have a clear business plan when approaching someone for money.
Featured image: Cafe Credit via Flickr (CC BY 2.0, resized)