Startup funding comes from many sources, from personal investment to loans.
Heaptalk, Jakarta — Almost all startups go through the funding stage, primarily at the start of the businesses. Obtaining funds is crucial as fuel for growth and scaling up business operations. There are several funding sources that startups can consider, cited from a Canadian venture capital financing company, Business Development Bank of Canada (BDC), and Prasetiya Mulya Executive Learning Institute, spanning personal investment, love money, venture capital, angel investors, crowdfunding, business incubators, grants and subsidies, and loans.
-
Personal investment
This funding source is often used by founders at the start of a startup. According to Prasetiya Mulya Executive Learning Institute, personal investment is also known as bootstrapping, which means using personal funds as capital for the business you start up.
One of the advantages is that founders do not need to owe other parties which tends to become a burden in the future. In addition, using personal funds can make business owners more disciplined in using funds.
The most essential thing is to ensure that the funds or assets used are sufficient to run the business. Therefore, founders need to separate funds for professional needs and funds for personal needs to avoid mixing expenses.
-
Love capital
This funding is sourced from loans from spouses, parents, family, or friends. Commonly, this money will be returned as the business profits increase. Founders should explain in advance the type of business that is being run.
Although the capital providers are the closest people, founders still have to treat them as professional business partners. In addition, founders must also remember that mostly family or friends do not own as much money as other funding sources, for example, banks or other investors.
-
Venture capital
Venture capital can provide financial assistance to potential startups. Besides capital, this company also gives support in the form of business strategies, introduction to potential customers, business partners, employees, and other things to help startups run businesses. Parties providing capital from venture capital are called venture capitalists.
According to the Business Development Bank of Canada (BDC), venture capitalists typically look for startups with high growth potential in sectors, including information technology, communications, and biotechnology. Venture capitalists take an equity position in the company to help it carry out a promising but higher-risk project. The equity position can be some ownership or equity in the business to an external party.
-
Angel investors
Angel investors are generally wealthy personals or retired company executives who invest directly in small firms. They can invest in early-stage startups ranging from $25,000 to $100,000. Institutional venture capitalists prefer larger investments that can be up to $1 million.
In return, angel investors have the right to oversee the company’s management operations. In practice, this right can be in the form of granting seats on the board of directors and ensuring transparency.
-
Crowdfunding
Crowdfunding refers to a form of fundraising carried out by startups to obtain public contributions in return for equity in the company. This startup funding source takes various forms, spanning equity crowdfunding, debt crowdfunding, and donation/rewards-based crowdfunding.
Funders will ask for compensation in the form of equity with lower liquidity than public shares. Crowdfunding regulations are also considered to be more relaxed than IPOs.
-
Business incubators
Business incubators or accelerators mainly focus on the high-tech sector by providing support for startups at multiple stages of growth. Incubators will bring together startups to share space and administrative, logistical, and technical resources. For example, an incubator could share the use of its laboratory with startups to develop and test their products at an affordable cost before starting their own production.
The incubation phase can last up to two years. Once the product is ready, the startup will leave the incubator facility to be able to start its production. For the most part, incubators cover typical business sectors, including biotechnology, information technology, multimedia, or industrial technology.
-
Grants and subsidies
A grant refers to a sum of money conditionally given to startups that do not need to be repaid. However, the companies are legally bound to use it under the terms of the grant. Otherwise, they can be asked to repay it. This funding source can be accessed by startups to help cover expenses, spanning marketing, salaries, equipment, and productivity improvement.
-
Loans
Loans are the most commonly used source of funding for small and medium-sized businesses. Most startups have difficulty accessing loans compared to established businesses. Entrepreneurs with solid business plans and a good credit rating are more likely to be able to access loans.
