Exploring Alternative Funding Routes for Startups

Roshni Khatri

16th Sep'23
Exploring Alternative Funding Routes for Startups | OpenGrowth

Managing a startup can be likened to steering a ship at sea. Just as a ship's captain must have a comprehensive understanding of critical navigation equipment like sonar devices, gyro guidance, and automatic pilots to ensure smooth and efficient sailing, a startup leader must grasp the essentials of their business operations. While other metrics shouldn't become distracting, a holistic view requires an understanding of what they signify.

In the realm of startup leadership, the allocation of financial resources is crucial to navigating the sea of opportunities effectively. There exist several potential funding avenues, each with its own set of advantages and drawbacks. By discerning these distinctions, you can make informed decisions tailored to your business's unique journey.

In this post, we will delve into alternative funding routes, providing you with insights to determine which funding solutions align best with your company's needs and how to secure the necessary capital for your growth initiatives.

How does the startup fund work?

Although startup finance can take many different forms, it often comes from one of three sources: financing yourself, supporters, or small-business loans. So you should follow funding options to raise startup capital for your business as per your convenience. 

  • Self-financing

If you have sufficient personal funds, you can decide to bootstrap, or self-finance, your business. By using your own funds to start your company or by setting aside money for retirement, you can keep complete control over it and avoid paying interest. You risk losing your money if your company fails, which is a disadvantage.

  • Investors

Venture capital firms and angel investors favor investing in start-ups with outstanding growth potential. This type of startup financing doesn't entail regular payments, but it probably involves giving up some of your company's ownership. If your company proposal gets funded, some investors may want to participate actively in the procedure for making choices, and others will adopt a less involved approach.

  • Loans

Small-business loans let you keep complete ownership of your fledgling company, but you'll have the responsibility of paying them back right away, along with interest. The majority of conventional lenders, including banks, only lend to well-established businesses with sound financial statements. You might need to turn to other avenues as a startup, such as internet lenders.

Funding Options

There are many alternatives to banks and other conventional lenders for funding new businesses. You may pick the best sort of startup finance by being aware of your financial requirements and business objectives.

1. Grants

My recommendation is to consider grant funding as your primary option before tapping into your personal finances or seeking assistance from family members. At this stage, your ideas are likely scribbled on the back of an envelope or a napkin if you're a food enthusiast. You might have also outlined your vision on a PowerPoint or mind map, but there's not much beyond that.

Now is the time to actively search for grants, particularly those aligned with your field of interest, from associations, charitable organizations, or government agencies. There are numerous opportunities available. I, too, explored these avenues when I first embarked on this journey. Some were successful, while others were less so, but they all contributed to my learning experience and improved my business pitch.

The grant application process compels you to think logically, ensuring that you meet eligibility criteria and adhere to the grant's specific requirements. It prompts you to start preparing your business for more advanced fundraising stages. Grants typically cover the development of your initial minimum viable product (MVP) or a functional proof of concept.

 

 

One significant advantage is that grants don't saddle you with debt or dilute your equity. However, like anything worth pursuing, there are drawbacks. Grant applications can be competitive, and the process can be time-consuming. Nonetheless, this competition and the time invested help you prepare for the challenges ahead, serving as a valuable preview of what lies ahead.

2. Savings, Relatives and Friends

There are two ways to get these extra resources. One is to use any accessible individual savings. Asking for help from friends and relatives first is another simple option. Family and friend fundraising has the advantage of allowing you to gather money quickly and with less red tape.

On the other side, if things go incorrectly—and they frequently do—it may damage your own private connections. I strongly advise staying away from so-called relative financing, as they may offer money but may also lead to problems in the future.

3. Bootstrapping

Once you've secured a grant, worked towards your Proof of Concept or Minimum Viable Product (MVP), perhaps dipped into your own finances or borrowed from close contacts, it's time to find paying customers to support your startup's growth. Acquiring paying customers indicates that your product has, to some extent, received validation in the market. It marks the transition of your pre-revenue business to a revenue-generating startup and signifies that you might have found your product-market fit. This approach is particularly effective for startups with limited overhead costs, which can be categorized as fixed or variable.

In my experience working with startups, I've observed that reducing fixed overhead costs is often beneficial during the initial revenue stage. In fact, minimizing all overhead expenses is essential for scaling your company rapidly without encountering significant setbacks or the need for external funding. However, it's worth noting that achieving extremely rapid growth, often referred to as "startups on methamphetamine-type" growth, can be challenging without external financing.

The choice between rapid and steady expansion depends on your company's objectives. Many successful businesses have followed slower, more stable growth trajectories, resulting in longer-lasting success. Rapid growth isn't always the primary focus for every startup.

4. Crowdfunding

By soliciting small donations from a large number of people, fundraising enables you to raise money quickly and with little up-front cost. Fundraising often comes in three flavors: equity, rewards-based, and crowdlending.

Through equity crowdfunding, backers get ownership interests in the firm. However, it is uncommon for businesses to only rely on this type of fundraising. Instead, they frequently receive the majority of the capital they require from a lead investor before going to the general public for further assistance.

Offering prizes or benefits to supporters who donate to your financing campaign is known as rewards-based funding. It is the type of crowdfunding that is most frequently employed by well-known sites. Crowdlending is the practice of obtaining cash from a large number of people, frequently via internet-based platforms. For firms that do not fulfill the criteria for conventional bank loans or are not yet ready for equity fundraising, this may be a tempting alternative investment option. However, it may be quite challenging to stand out in a competitive market, and there is no guarantee that you will ever reach your financial goal.

5. Small Business Grants

Grants for new businesses might be challenging to obtain because of the stiff competition, but if you do, you'll have free capital at your disposal. Grants don't need repayment or interest payments as loans would. You could have more success securing a grant for your company if you belong to a certain category, such as female, veteran, or minority business owners.

6. Online Lenders

Online lenders, which are typically nonbank or alternative lenders, might be a good choice if you need quick money. Compared to conventional lenders, online lenders typically want less documentation, less collateral, and a lower credit score. They frequently provide higher rates of interest and extra costs as a trade-off.

 

Funding alternatives for businesses

 

To conclude, we can say that obtaining finance to support the growth and development of a new business company is a crucial step in the process of raising funding for startups. The process may be challenging, but entrepreneurs may successfully secure investment from financiers by using the right technique and plan. It's important to collect money for starting companies since it provides the capital required for growth and development. It costs a lot of money to establish a business, and many businesses do not have the initial funding to get going. Besides this, you should also follow the strategies for raising capital as small business owner. 

 

OpenGrowth is constantly looking for innovative and trending start-ups in the ecosystem. If you want more information about any module of OpenGrowth Hub, let us know in the comment section below.

A keen observer, who loves to spend time with nature. A fun loving person, enjoys to explore the new aspects of life. Passionate about reading and learning new things. Roshni is dedicated towards her work and has worked in different professions.

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