- The accelerated growth capacity of startups provides an attractive advantage to attract risk-taking investors.
- There are seven main sources of financing for a startup
The startups, characterized by their recent creation and innovative approach towards scalable and fast-growing business models, they frequently face the challenge of securing external financing. This challenge acquires additional complexity due to its emerging nature, with few years of existence and lack of a track record that supports its solvency.
Despite these obstacles, the accelerated growth capacity of emerging companies gives them an attractive advantage, capturing the interest of investors willing to take risks in search of high profitability. This panorama has stimulated the creation of various forms of financing adapted to the different stages of development of these companies.
Sources of financing for entrepreneurs
These are seven notable funding sources for startup:
Bootstrapping
The practice of self-financing, also known as bootstrapping, implies supporting your startup with own financial resources. This strategy, while demonstrating a strong commitment in the eyes of potential investors, may have limitations, as sometimes the entrepreneur's personal funds may not be enough to take the business on a larger scale. This approach is common in startup which are in very early stages of development.
The 3 F's (family, friends and fools)
The term "family, friends and crazy people" refers to the financing option known as the 3F, widely used by self-employed people and entrepreneurs, and in some cases, the only viable one. Although this alternative is usually the last on the list, it is often the first source of financing that the entrepreneur considers. Requesting financing from family and friends offers the advantage of accessing interest-free funds and with little interference in the management of the business. The "crazy" ones are external investors who, although they have no family or friendly ties with the entrepreneur, are willing to contribute capital due to the charisma or attractiveness of the idea. This option stands out for its flexibility and can be crucial in the initial stages of a company.
Loans and aid to entrepreneurs
Entrepreneurs have various public aid and subsidies at their disposal that can be essential for the development, start-up or growth of a business. Despite these options, it is important to highlight that public aid is rarely the complete solution for companies, as in most cases it only provides partial financing. Additionally, accessing these grants often requires the submission of a significant amount of documentation and solid guarantees of success. However, it is interesting to explore the search for these public resources when looking for financing for a business project.
Business incubators and accelerators
The fundamental purpose of these entities is to ensure and expedite the take-off of companies and startup in exchange for a stake in the company's capital. Being an opportunity reserved for a few privileged entrepreneurs, being selected by incubators and accelerators carries a series of significant benefits. These include access to physical spaces, specialized training, mentoring personalized, expert advice, opportunities networking and financing.
The collaborative environment allows entrepreneurs to share resources, establish valuable contacts, share experiences and, ultimately, build a community based on knowledge. The objective and operation of an accelerator is similar to that of an incubator, with the difference that, in general, they take on projects from entrepreneurs who already have a developed business model.
Business angels
These are investors who finance entrepreneurial projects on an individual basis, with their own capital and with the perspective that the return on investment is 4 or 5 times higher than any other type of investment within a period of 1 to 5 years. Obviously, as these are investments with a considerable level of risk, the subsequent benefits are usually greater. In addition to providing investment, the business angel They also offer entrepreneurs their knowledge and business experience.
crowdfunding
The crowdfunding is a financing model that consists of obtaining investment from collective capital contributions, which are made in a on-line. This type of financing is achieved through platforms that allow innovative projects to be discovered and brought to life. Entrepreneurs will receive the capital only when they have reached the fundraising objectives.
Inside of the crowdfunding, two financing models can be distinguished:
- Lending: Investors receive an interest rate on the capital invested, which is usually between 10 and 15 %.
- Enquity: each investor receives an average of between 10 and 25 % of the money invested in stocks or shares.
venture capital
Better known in Spain as venture capital, it is usually preferred by entrepreneurial people. This is a financing model especially suitable for large projects with significant growth potential. For this reason, the investments are usually very high and in exchange they receive a share in the shareholding. This financing model is very common in startup and companies in the technology sector and is carried out in companies in the growth phase.
In conclusion, entrepreneurs have at their disposal various sources of financing adapted to the different stages of development of their projects. From autonomous financing (bootstrapping) to the support of incubators, accelerators, business angel, crowdfunding and venture capital, each option presents unique benefits and challenges.
Despite the complexity inherent in the emerging nature of startup, their capacity for accelerated growth provides them with an attractive advantage to attract investors willing to take risks in search of profitability. Exploring and understanding these alternatives is essential to making informed decisions in the business financing process.
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