Ways of Raising Capital for Startup

Ways of Raising Capital for Startup

There are many ways of raising capital for your startup. You must consider all options and choose the one that best suits your particular venture. Here we provide an overview of seven common ways of funding to help you weigh the pros and cons of each source and make an informed decision.

#1 Bootstrapping

Bootstrapping refers to the practice of funding your project out of your own pocket. This is the ideal way of starting a new venture, as you will not owe anything to anyone in the process. You are in full control over your business, and you alone make decisions. Self-funding shows your dedication, therefore your project is more attractive to investors. However, if you fail, all the hard work you have put into your personal savings will go to waste.

Pros:

  • complete control over your business
  • draws further external investment

Cons:

  • risky; can cost life savings
  • no advice or guidance

#2 Family and friends

Borrowing money from family and friends is another way of raising capital for your business. Relatives and friends base their involvement more on their trust in the business owner rather than the business itself. It is an easy way of funding but it can have a negative impact on the relationships.

Pros:

  • easy funding process
  • flexible payment method

Cons:

  • no advice or guidance
  • can damage relationships

#3 Angel investors

Angel investors are wealthy individuals that are looking to invest their own money. Their role in your project may vary depending on the terms both you and your angel must agree on. Your angel investor may fully trust you with the way you handle the funds and have no involvement in your business. Others, however, may want to participate in decision-making and/or demand a certain share of your profits.

Pros:

  • advice and mentorship from investors
  • flexible business terms

Cons:

  • partial involvement in decision-making
  • shared revenue

#4 Venture capital

A venture capital firm is a group of investors that are looking to multiply their wealth. They are usually not interested in early-stage investment. VC investors do not like to take risks and fund those companies that are already making profit. If they do decide to fund your startup, be ready to give up control to some extent.

Pros:

  • large funding resources
  • guidance and mentorship
  • grant business credibility and open opportunities for further funding and partnerships

Cons:

  • not an early-investment method
  • demand involvement and shared revenue
  • demand a portion of profit when you sell your company

#5 Bank loans

Bank lending is an another investment option. Though banks will not be involved in the decision-making process, you will have to prove that you have a sound business plan, before they are ready to lend you money. This may imply an overwhelming amount of paperwork to be done.

Pros:

  • many options to choose from
  • fast funding process, if you qualify
  • no involvement in the process

Cons:

  • risky, implies debt
  • a lot of paperwork

#6 SBA

Small Business Administration are government bodies that are dedicated to assisting small businesses. SBA helps entrepreneurs raise capital and win government contracts for delivering goods or rendering services.

Pros:

  • Facilitate bank loans

Cons:

  • Strict requirements

#7 Peer-to-peer lending

Peer-to-peer lending is the practice of receiving capital from a large group of independent investors. Traditional peer-to-peer lending involves the use of a crowdfunding platform where entrepreneurs pitch their projects, and both institutional and retail investors can contribute money.

Token sales are a new type of crowdsourcing in the blockchain industry and involves issuing and selling digital tokens. Token sales differentiate based on the type of the token being distributed:

  • ICO (Initial Coin Offering) sells utility tokens that grant access to goods and services to their holders,
  • STO (Security Token Offering) sells security tokens that work like equities, i.e. holders are entitled to a share of revenue.

Pros:

  • network of investors draw additional funding
  • less paperwork
  • many options to choose from

Cons:

  • requires effort and time to collect funding

Bonus info

IPO (Initial Public Offering) is when a company makes its shares available for public purchase on stock markets. This means that retail investors can buy a stake in the company.

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