Launching a startup is exciting, and there’s nothing more fulfilling than seeing your brilliant idea come to fruition. But before you get your new venture off the ground, you need to have 100% focus, dedication, perseverance, and the most important of all, money.
In this article, we’ll take a look at various funding options for startups, so you’ll know what options are available in raising capital or fuelling growth for your business.
Crowdfunding is a more “non-traditional” way to finance companies where new ventures offer incentives or shares in the business in exchange for cash or loans from backers.
This type of funding is done when a business campaign or idea is posted on a crowdfunding website so people can start pledging or contributing money to reach the set goal.
Although this form of funding is not as popular today compared to the previous years, it is still a viable option for new businesses to raise capital.
2. Venture Capital
Venture Capital or VC is one of the most popular methods of raising startup funding, and it is considered the “ lifeblood” of startups worldwide. To date, there are over 400 VC funds available across the country.
A VC provides startups with funds raised from high net worth individuals, corporations, and substantial superannuation funds. VC firms can raise significant capital for startups. Unicorns like Canva and Airwallex, for example, captured multi-million dollar capital in their funding rounds backed by a VC.
In most cases, venture capital funds are interested in startups with long-term, high growth potential, so this may not be the best option for very early-stage startups.
3. Angel Investors
Angel Investors are high-net-worth individuals that have expertise or interest in a specific industry or niche. Unlike VCs, angel investors often operate as individuals and are pretty much hands-on in the business operations and growth of the startup that they fund.
4. Accelerator Funding
Early-stage startups can benefit from this type of funding as accelerator programs provide them with a launchpad to advance the business into the ecosystem.
Accelerators are often focused on a particular industry and provide mentoring programs, workshops and provide access to industry experts for advice. Although not applicable to all, some accelerators offer their participants a decent amount of capital in exchange for equity.
See the list of accelerator programs in Australia here.
5. Debt Funding
Debt funding is where instead of exchanging equity, startups will receive capital that they will repay in instalments over a set period.
If a founder considers this type of funding, they must get the right amount of money to enable the venture to get off the ground and, at the same time, not be overburdened in making repayments.
There are three types of debt funding for startups:
- R&D Finance – This type of debt funding is a lender offering the R&D tax incentive payment in advance. The said government funding will serve as collateral for the loan.
- Venture Debt – This kind of funding is provided by specialist lenders and is primarily accessible to startups already on a growth path or generating revenue.
- P2P Lending – Also known as peer-to-peer loans or debt crowdfunding, P2P lending allows startups to borrow loans from multiple individual investors or smaller lenders. Like the venture debt, revenue-generating startups are qualified for this type of funding.
The advantage of debt financing over funding from VCs or angel investors is that founders maintain ownership and have complete control over the startup. In addition, interest fees and other charges on loans are tax-deductible. However, the downside of this type of funding is the risk of potential bankruptcy if the business cannot meet its payment obligations.
Bootstrapping could be the most challenging yet most rewarding way to launch a new venture. A bootstrapped startup means the business is established using the founder’s cash and is sustained by its revenue.
Bootstrapping means the business should cut costs where possible, and growth could be restricted as the startup has little to no support in terms of cash. However, this also means that founders do not have to dilute equity early, which is advantageous when the business takes off. In addition, owners are not obligated to consider the input of external parties when making crucial business decisions.
7. Government Funding
Depending on the nature of your venture, your startup may qualify for several government funding and tax incentives. These grants can help provide capital and funding for business growth.
Identifying what type of funding, where you qualify for, and what loan structure is the best for your startup. If you need the expertise of a VCFO to help you raise capital through VCs or secure a loan, reach out to us at Cloud CFO today.