Fundraising for a start up business
The majority of start up businesses are funded entirely by the founders, at least in the early stages, particularly if only a small amount of capital is required initially. This can involve the use of personal savings, if the individual has sufficient funds to set up the business.
However, if larger amounts are needed, perhaps as an initial investment for the required equipment, which is often expensive, then it is going to be necessary to obtain outside funding. There are a number of options for obtaining funding, each with different risks and benefits, so they should all be considered carefully before a decision is made.
Seed funding is cash, usually small amounts, provided to help set up a business by the founder’s family and friends. Many businesses are usually set up with less than $50,000, so it is feasible that this money could be raised by the founder and immediate family, should they wish to invest.
The advantage of this is that the business is still completely in the control of the founder, to be operated in the way that they see best. The borrowed funds will normally be repaid once the business is making a profit.
A bank loan is a good way to secure larger amounts of funding without the need to bring in outside investors. A bank loan will ensure that the founders retain complete control of the business and the way in which it is run, but will provide a large enough injection of cash to purchase equipment, pay for business premises, and other initial set up costs.
Venture capital is money provided to start up businesses, usually those that are high risk, but have extremely high potential returns. The money is provided in return for owning equity, or shares, in the company, which will usually be offering a product in a high technology industry, such as computing or biotechnology.
The venture capitalists will invest through a venture capital fund, normally structured as a partnership, and they will often provide some support in addition to the money, perhaps advice on how to run a business. These funds are often intended to have a lifespan of ten years. The money will be paid back with management fees and interest.
Angel investors are normally private individuals, often retired entrepreneurs, who have chosen to invest their own personal funds in a new start up business. This is similar to venture capital because it involves an investment of money in return for part-ownership of the company.
However, it is worth considering the fact that businesses who are initially funded by angel investment are far more likely to succeed in the long term than those who obtain any other type of funding. Amounts raised by angel investment are usually lower than those provided by venture capital, but considerably larger than the seed money that friends and family might be able to obtain.
There are many reasons why angel investors choose to put money into a start up company, not all of which are purely to do with the financial returns that a successful business would give them.
They may have a particular interest in a certain technology, for example, and are using this as a way to keep their knowledge current. Some are interested in passing on their knowledge and experience to a younger generation – angel investors are often more willing to be “hands on” than venture capitalists, providing valuable business advice to those they work with.
Things to consider when fundraising for a new business
Starting up a new business is risky, especially if you are investing your own savings or taking out a bank loan. If you get behind with payments on your loan, then your own personal credit rating can be affected, so ensure that you don’t miss any payments.
Borrowing money from friends and family to set up your business may seem like an easy option, but remember that they are putting their own savings at risk to help you, and not everyone will be prepared to do this.
Making use of venture capital or angel investment will mean you have access to much greater funding, but you do start to lose control of your business as a result – the investors will own a portion of your company.
Always be sure that the agreements you and your partners come to are the right choices for the future of your Business.