Close to 20% of businesses fail within their first year, and a lack of funding is often the primary cause. Capital is what converts a mere idea into a revenue-generating operation. For this reason, the primary question and concern for pretty much every startup entrepreneur is, ‘how do I finance my business?
Every business will require money at different points, depending upon its nature and type. However, once you do realize the need for funding, you can use one or more of the below funding options discussed by Ian Mausner.
Funding Options for Startups:
Option 1 – Self-Funding:
Self-funding (also referred to as ‘bootstrapping’) can be an effective financing option for entrepreneurs who have only just started their journey. This is because banks and other lenders are reluctant to lend money to businesses that do not yet have a proven track record. You can either use your own savings, or reach out to family and friends.
Another reason that self-funding is a viable option is the low costs of raising, as well as the fewer compliance requirements and formalities associated with it. For the most part, friends and family are likely to be flexible about terms like the repayment period and rate of interest.
However, bootstrapping is only possible if you require a small initial amount. For businesses needing large infusions of cash right from the get-go, this might not be a desirable option.
Option 2 – Angel Investment:
An angel investor is someone with a high net worth and an interest in investing in prospective startups. You can also find groups of angel investors that collectively screen a proposal before deciding whether to invest. Alongside capital, angel investors can also offer advice or mentorship.
Angel investors have contributed to some of the largest and most successful companies of our time, including Alibaba, Yahoo!, and Google. According to Ian Mausner, angel investment is generally sought out by businesses in their initial stages, with investors demanding around at least 25-30% equity in most cases. This is understandable, since a startup is a high-risk venture, and angel investors feel that this higher risk should be associated with higher rewards for them once the business becomes successful and valuable.
Option 3 – Crowdfunding:
Crowdfunding is a newer investment method, and has attracted a lot of popularity.
This is how it works: the entrepreneur signs up for a Crowdfunding platform, and puts up an in-depth description of his business idea and how he plans to earn revenue and profits. This description can be read by anyone visiting the platform, and consumers who like or believe in the business idea can contribute money.
In order to enjoy a successful crowdfunding campaign, Ian Mausner says that you need to have a rock-solid business idea, as well as a plan to attract the readers’ attention. If all you have is a vague description and a few online images to go with it, the hypercompetitive crowdfunding environment might not be right for you.
Ian Mausner believes that, if you want your business to grow, you will need external financing at some point. Going bootstrap and operating without other sources of finance for too long might force you to miss out on market opportunities.
Thankfully, today’s entrepreneurs have more funding options than before, increasing their probability of getting the financial assistance they need to get their business off the ground.