Startup Funding, Common Ways Founders Find Capital
Startup funding involves a lot of nitty-gritty processes and exhausting work to turn the heads of investors. In this entry, we’ll discuss how to raise capital and sustain it in the long run. Read on to learn more about startup funding.
In the very competitive world of startups, it’s a race to raise capital. With several competitors vying for the same investors, it’s difficult to get your hands on a good lump sum of money.
How do you stand out if you’re new to the industry? How did the most successful founders find capital for their startups?
We’ll try to answer these questions by first defining what a startup capital is. We’ll also find out how to compute the amount you’ll need for your business. Let’s face it, money only sounds great when you’re on the receiving end. But when you’re in the process of making it, it’s a whole other experience. This is why it’s best to come prepared.
What is a Startup Capital?
So, what is startup capital? A picture of a zeroed-out bank account? Or perhaps an optimistic image of businessmen in suits handing out large bags of money?
Regardless of what images it invokes, startup capital is generally considered as the lifeblood of business. It sustains your capacity to grow as a startup. Without it flowing inside your system, the game is pretty much over.
Initially, you use startup capital to launch a company. But over time, it goes through stages where it funds other areas of business. In the succeeding stages of funding, you’ll need it to maintain the day-to-day operations of your startup, as well as its expansion in the long run.
For a startup founder, startup funding is a crucial part of the success of a business. If you don’t have a clear and defined plan to raise money, you’ll find it very difficult to navigate the highly volatile industry in the future.
But, how much startup capital do you need to launch your business? And how much more to sustain it? There’s a lot of factors that come into play. these are the things you need to include in creating your business plan. Let’s find out more about estimating the amount you need to raise for your startup.
Startup Funding: Calculating your Capital
Thanks to today’s open source technologies and an endless amount of free startup resources, the cost of starting a startup has drastically gone down. You no longer need to shell out gargantuan figures for fancy software or spend a huge amount on marketing.
There are plenty of ways to cut down on expenses now. You can even outsource processes such as software development. The bottom line is that your overall startup capital will depend on how creative you get in your business strategies.
According to the Kabbage survey, around 58% of small businesses in the US started with less than $25,000 and one-third started with less than $5,000. Now, these figures are only rough estimates and each startup is unique. You’ll have to spend more on higher-quality services or products.
Here are some of the common items that usually take the bulk of your capital:
1. Research Expenses
You can’t go in blind. The first step to starting a business is to know if you have a feasible market. You’ll have to invest in hiring experts to study your target market, as well as the industry you plan to join. The research should include the latest statistics and trends, as well as the assessment of your competitors.
2. Loan Payments
Yes, there are fees in borrowing money. To acquire capital, you’ll need to avail of either equity financing or debt financing. Once you take out loans, you’ll need to prepare interest payments. Depending on the type of loan you avail, the interest can pile up over time and might become overwhelming. Hence, you’ll need to plan out your budget way before you sign up for a loan.
3. Licenses and Permits
One way to get credibility is by completing all the necessary business permits and licenses. You’ll have to pay up for these processes and all the other legalities involved in your operation. You might have to pay extra for industry-specific permits as well.
4. IT Infrastructure
You’ll need IT experts to build a website, set up information systems, and install software for your operations. These are other functions you can also outsource to cut down costs. Hiring programmers and IT experts from other countries will significantly reduce expenses.
Another thing to compute is the cost of equipment and basic supplies. These items play a major role in your daily operations. Add up how much inventory you’ll need to get started, as well as the initial cost of your devices. Keep in mind that you can’t cut corners when it comes to equipment as it can compromise the quality of your work. Invest in good quality products that will last a long time.
When you’re just starting in the industry, you’ll have to spend for your promotion. And any type of marketing will require payment. Whether it’s going the traditional route such as ads on the local newspaper, or doing a social media campaign, you’ll need to set aside money for marketing tactics. It’s needed to attract clients and investors alike to your business.
Take note that the abovementioned items are only the capital expenses. You also have to set aside money for business expenses and contingencies. It’s just as important to calculate how much you need to move forward. The Small Business Administration (SBA) has a full list of expenses you can refer to.
Acquiring Startup Capital
Now that we know how to estimate your startup capital, it’s time to find out how you can raise it. Although startup owners normally take the bulk of the expenses out of their own pockets, there are ways to infuse cash from other sources. Here are some ways you can apply for startup funding:
Most banks provide funds in the form of business loans. It’s the traditional way startup funding. The only drawback is that the debt interest can pile up over time. This can become a problem if you haven’t met your desired profit.
Another alternative is to seek the help of investors. A venture capital entails giving a share of your company in return for startup funding. The negotiation will involve possible scenarios like IPO and a buyout by large enterprises. You’ll have to convince investors they will benefit from your business.
Another startup alternative is angel investors. Angel investors are people who are looking to invest their money or equity in start-ups. They usually provide private equity or second-round funding to help kickstart small businesses.
Startup funding is an endless cycle of gaining and spending cash. For most startup owners, this is a headache in running their business. This is why most of them employ the help of financial experts to manage their cash flow.
If you happen to be a startup owner raising your capital, we can connect you to the right people. Full Scale has a wide network of connections to help you raise capital and scale your business. Our founders, Matt Watson and Matt DeCoursey, are angel investors themselves. They specialize in helping startup owners take their business to the next level.
Full Scale offers a wide range of offshore software development services. You can hire programmers, project managers, content marketing writers, graphic designers, and QA specialists at a much more affordable rate.
Ready to get started? Talk to us!