An out-of-the-box idea, strong determination and high-performing team are essential receipts in building a successful startup. However, these are not enough to ensure your business running smoothly without stable financial support. Money, above all, is often a prerequisite. According to Business Psychology, money in early startup is a lagging indicator of business success. It is the source to keep startup innovative and grow. That being said, as a startup owner, you need dependable resources to keep your business getting the funding it needs.
Here are some methods of startup funding proposed by Fundable, along with each pros and cons:
Funding #1 Personal savings
Top funding resource comes from personal savings. The majority of startups are funded largely in part by an entrepreneur’s personal savings. Around $48,000 amount are invested in 57 percent of startup worldwide.
PROs: This might possible for some individual. Self-savings funding is your own money which means you do not have to think about the refund as in loans. You also do not have to share your startup with someone else and you have the sole authority to decide how your startup will look like.
CONs: You might have not enough funding money to start so you have to delay the business launch.
Funding #2 Family & friends
Family and friends can invest the most in startups. In average, they are contributing $23,000 amount which can be calculated to be a total $66BB per year. About one in three (38 percent) startups get family investment to start their business.
PROs: You can set your own repayment schedule with your loved ones. It is easier as you do not need to going to a lot of financial hurdles to be approved. Additionally, you can even have lower interest rates.
CONs: Lack of clarity issues if both party have different expectations of the business. You probably will get tax issues. It might add to social awkwardness if you do not pay them back on time.
Funding #3 Venture capital (VC)
VCs write the biggest checks with an average investment of $2.6MM to seed stage companies. More than $5.94MM average amount invested and 0.05 percent of startups get this funding. Until today, there are more than 450 number of active VC and 3,700 number of investment per year.
PROs: The money is yours to keep. You do not have the obligation to repay the venture capital funds. You will not have investor debt if your business is going under. Venture capital can also help your company grow quickly as they can connect you to other business leaders who can help you.
CONs: Your investors own a stake in your company. Your company might not be ready to grow. Rising funds via venture capital is an arduous process.
Funding #4 Angel investment
Angel investor gives 16 times more checks than VC’s investing in over 61,900 companies per year. $74,955 average amount invested and there are 0.91 percent startups get this funding. There are more than 268,000 number of active angel investor and 61,900 number of investment per year.
PROs: They are ready to take on high risks associated with the implementation. It could be somebody of your friends or relatives. Business angel can bring to the startup his invaluable experience.
CONs: You should share a business with angel investor. In other words, you are not in full control of your own business. If you chose the wrong angel, it will be difficult to cut the connection.
Funding #5 Banks
The small business administration (SBA) backs just under 100,000 bank loans per year to small business. About $143,899 average amount are loaned to over 1.43 percent startups. There are 97,290 number of loans per year.
PROs: You can get money in a short period of time and the minimum payments are quite low.
CONs: The absence of one payments can seriously damage your loan. For a loan, you need a good credit rating and big interest rates.
Funding #6 Crowdfunding
Crowdfunding is the fastest growing funding source, expected to total 5.1BB in 2013. There are more than $7,000 average crowdfunding campaign size. $3.2BB total raised in 2012. And 1MM number of successful campaigns to date.
PROs: You don’t have to give away equity in your business or intellectual property rights. You can get feedback early-on in the innovation process. You can also easily connect with your target audience.
CONs: You need more time and money in creating an attractive project page. You must spend time on marketing and PR for the project. There is limitation of the financing.
Read here: 3 Most Tried and Failed Business Ideas