Starting a business is never an easy venture but the rewards outweigh both the risks and the stress. One of the first obstacles to overcome and a key decision to make is how you are going to fund your new business in the first instance. There is a range of options available but not all will be suited to your circumstances. Let’s take a look at what these are. There are pros and cons for each.
If your venture is technologically driven and is in a potentially high growth niche this could be the option for you. Most venture capital companies work by releasing funds and taking a stake in your business in return. Often, they want to take the company public to get back their investment through selling shares.
Given the riskier nature of investments, most venture capitalists want to invest in businesses in fields such as biotechnology, communications, and information technology. Make sure you explore any venture capital offering with care.
Personal Investment & Family Investors
When starting your venture you should put capital in it yourself. This proves to other investors that you have faith in the project and that you’re not afraid to take risks. Normally this looks like either upfront cash or property as collateral.
If you can fund the startup yourself so much the better.
Family investors are another option and this is referred to as bankers and investors as patient capital. This means the loan is repaid at a much later date when the good times roll.
Family dealings are often emotionally charged and you may face potential demands from those you borrow from that you would not have to deal with from a different funding source. Spouses, parents, other family and friends may not charge interest but will expect something from the project and more often than not a stake in the business.
Angels or angel investors tend to be retired company executives or otherwise wealth individuals who have a passion for investing in startups. Most angels are leaders in their field and tend to gravitate towards similar businesses which implies that should they invest in your business they see some kind of potential.
Should you receive funding from this source it tends to be at the early stages, and the funding comes with certain conditions.
Typically this takes the form of a managerial role for the investor. Often this is a seat on the board of directors and an assurance of transparency.
As well as investment, the angel often brings networks of highly valuable and useful contacts.
Angels tend to value discretion so to meet one you have to go through dedicated various sites and companies to get the ball rolling.
Business incubators offer different types of resources rather than straight funding. For example, they offer new businesses space in their premises and utilise various administrative, technical, or logistical resources.
As incubators tend to be more for technology-focused startups, premises offered tend to be more suited to this end.
Typically, the incubation process lasts two years after which you strike out on your own. This could be a viable option and could save considerably on costs.
Whatever funding source you chose any agreement should be approached with care.