Sources of funding for entrepreneurs
Cashflow is the lifeblood of your business.
In this post we look at the main sources of business funding available to entrepreneurs.
These include the following:
- Personal Savings / Surplus Income From a Job – where many early stage and pre-startup entrepreneurs begin.
- Family and Friends – A popular source of support and financial help.
- Customers / Sales – Sales and pre-sales are an excellent way to finance your business.
- Grants – Free financing from government, public benefit or philanthropic organisations.
- Debt – includes, loans, overdrafts, credit cards, etc.
- Equity - Financing that is given to your business in exchange for shareholding. There are different types of equity investors, including Angel Investors, Venture Capitalists, and Private Equity Investors (institutional investors who typically invest in the growth stage).
The best source of funding for your business is sales. It indicates that your business has traction. Running your business using only cash obtained from sales is called bootstrapping. A great example of this is Spanx. The founder, Sara Blakely, maintains that beyond the $5,000 in savings she initially spent to get Spanx off the ground, she has never taken an outside investment.
It is possible to grow your business using only cash obtained from revenue, but sometimes, it you want to scale your businesses to multiply revenue by 10X or more, it requires an injection of investment.
There are two main types of investors that entrepreneurs usually encounter; Angel Investors and Venture Capital Investors. Let’s take a look at the differences between them.
- An Angel Investor is someone who puts their own money into the growth of a small business, at an early stage.
- They can also potentially contribute their advice and business experience.
- The Angel Investor might be:
- A wealthy, well-connected individual who’s taken a personal liking to your product.
- A group of Angel Investors who club together to fund startups.
- A friend or family member who’s decided to put some money in.
- Angels make their own decision about the investment, and in return for providing personal equity, they take shares in the business.
- The amount they invest is flexible – it could be a small amount to get you off the ground or a larger amount.
- While they can provide insight and advice about your business, their job is not to build up your company.
Venture Capital funding is a different animal.
- Rather than individual investors, venture capital usually involves a whole firm, including investors, board members, and people whose job is to help your business develop and grow.
- Venture capital firms are made up of professional investors, and their money comes from a variety of sources, including corporations, individuals, private and public pension funds, and foundations.
- The job of venture capital firms is to find businesses with high growth potential.
- The firm takes shares and has a say in the future of the company and how it runs.
- In exchange for their involvement, VCs expect a high return on investment.
- After a period of time, often 5 to 10 years, the VCs sell their shares back to the owners or through an initial public offering - hopefully making much more than what they put in.
- Unlike Seed Funding, Venture Capital usually deals with very large amounts of money which can include multi-million deals.
- When you consider the risk and sums of money involved, it is generally easier for businesses a bit further down the line to gain the trust and money of venture capitalists.
- Startups can win venture capitalist investment but need to focus on the right indicators.
When approaching investors, there's a right way and a wrong way to do it. In fact, just as there are common mistakes first-time investment seekers regularly make, there are also winning approaches that get the attention of investors amidst the crowds.
We will look at these winning approaches and common mistakes in our next post, so stay tuned.
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