There are plenty of avenues out there to raise the funds you need to fuel your startup. Whether you are developing an iPhone app or are working on a technology startup, a medical device or a SaaS (Software as a service) that will redefine a niche, you need funds – and for that you would need investors.
There’s the traditional angel investment, hedge funds, private investors, venture capitalists, business loans and the relatively new crowdfunding. You can explore one of these or several options. Keep in mind, raising funds is not the only objective though. You need to find the right type of investment for your business, one that will complement your startup. Let me teach you more about each of the ones you could focus on for your startup.
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Just like how you obtained a loan to get thats sports car when you were 18, business loans are usually from banks. The only difference is, instead of just showing that you have a part-time job and can pay off the car in a few years time, a business loan is based on the business plan you have for your startup. They're going to want to know you have a solid strategy of how the business is going to make money in the future. In a couple of years, if all is going well, you can probably ask for more.
What does it take to get a business loan? You're going to have to know all about your costs, your margins, your forecasts, your future expenses etc. It is a lot of number crunching and...
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The newest style of funding which has been growing over the last couple years, Crowdfunding is only getting bigger and better. The basic idea of Crowdfunding is to fund a project through an online platform like Kickstarter, by collecting funds from a group of people by offering rewards and/or perks. Not only is this useful because you can obtain the funds before paying a programmer to code your app, you can also raise interest for your product before hand.
"Since Kickstarter's launch, on April 28, 2009, 12 million people have backed a project, $2.6 billion has been pledged, and 112,372 projects have been successfully funded." - Kickstarter.com
How to succeed in Crowdfunding? You have to downright have a good product/service that people are willing to pay for before even getting it. Not impossible, but you better have one hell of a product narrative and marketing campaign to convince strangers you're going to bring your prototype or concept product to life.
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These guys usually provide capital for a startup in exchange for equity - and usually have a portfolio of companies in which they invest their capital. This is the most often sought out type of funding, because it is Angel Investors full-time job to scope out great business ideas, so not only do they provide money, they have the experience too.
So what does it take to find the right Angel? Let look into this with more detail.
- You have to offer a good ROI (Return on investment) to any investor. It could be stocks, part ownership or complete ownership, share in profits and you may even have to share the ownership of the patent, technology or intellectual property that you are working on. Decide what kind of ownership you wish to have. Some investors want control so they would want to have majority shareholding. Some are fine to let you have the control while they get their financial returns. The quantum of investment, the potential of returns and what kind of enterprise you are working on will decide the ownership and terms of engagement.
- Decision Making is a very important part of the agreement. Even if an investor doesn’t have the power to decide anything without consulting you, he or she can always prevent you from taking decisions on your own. Decide how you wish to let the investor intervene and make sure that is in writing. Angel investments or silent investors don’t usually require you to consult every time but those too can intervene and have some degree of veto.
- Focus on the purpose and eventual goal. Make sure the investor is on board with that. You may wish to sell the app sometime in the future. You may want to start working on new apps. You may want to develop a product or technology and then continue building on it. Later you may wish to diversify the same enterprise or startup once the time is right. That's why the Angel Investor must be in sync with your plans and should be with you. If not, then there should be a clear exit strategy in place to facilitate the investor’s returns as you raise more money and grow your business or use the money you make to facilitate the expansion.
- People buy into people, not products. As I've said many times in my previous blogs, remember that people buy into people. It doesn't matter how good an idea is, if the investor doesn't think you have passion to follow it through or the experience to know how to drive the product into the future, you're not going to have any luck. So be transparent, honest, genuine and passionate.
So remember, look for right minded and resourceful investors. Not only do you need to impress them, you have to see them as a useful partner too. Don't focus on just the dollar amounts you're being offered - money is not the only criterion. An investor with resources and the right expertise and knowledge can easily change your fortunes.
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If all goes well, you can then eventually start seeking out for Venture Capitalists (VC's). Often confused with Angel Investors, the main difference is that Angel Investors usually invest their own money into startups, whereas VC's are usually larger firms that invest the money of others hoping for a larger return.
In fact, if you're startup is doing well, you'll likely be approach by VC's themselves.