How to Fund your Startup Business from Scratch
It is no longer news that funding remains a perennial issue facing young entrepreneurs in their businesses. Whether you are at your idea stage or you are trying to scale your business to the next level, a lack of adequate funding may limit the extent to which you can execute your plans. In fact, we have heard a couple of entrepreneurs tell us that they have had to rationalize on the quality of service delivery because of a lack of adequate funding.
So recently, as a way of addressing this issue, we decided to host a webinar with an executive at Sterling Bank- Ezinne Nwokafor who serves as the head of startup banking. She provided useful insights that demystified the issue of funding for participants and we have decided to share excerpts from that webinar with you. The feedback we got from many of the participants at the webinar was really amazing. And this goes to show that the participants found the information shared very valuable and useful.
If you missed the webinar and are looking for a brief summary of all that was taught, then this post is for you. If you have been struggling to figure out this issue of funding and you don’t know where to begin to generate the needed resources to get your idea off the ground or scale your business to a wider market, then you need to read this post very carefully.
So before we consider the 6 ways to get funding as Ezinne shared, we must first recognize that there are two major categories or types of funding that are available for businesses: one will cost you equity (ownership shares), the other will cost you debt. There is a third unpopular category, grants and gifts.
- Debt, the type that is related to taking loans, is money that you are expected to pay back with interest over an agreed period of time. This can be from individuals or banks. But this is not a good idea if you are just starting out.
- Equity means offering up portions of ownership of your business at market value to investors in exchange for money. But to offer equity to investors, there has to be some perceived value or proof of concept to convince them.
- Grants are usually common for charities, non-profits or social enterprises. However, there are special grants for profit-seeking enterprises. As for gifts, we can as well hope a kind uncle remembers us…lol.
However, we must recognize this basic fact that funding is only available to those that bring value to the market place. Let me rephrase it and I hope you get it this time: if you are not bringing value to the market place, don’t expect anyone to give you their hard-earned dollars to fund your business.
I don’t mean to sound harsh, but nobody has the money to invest on a crappy idea. You have to prove to investors that your idea has what it takes to accumulate revenue. In fact, you need to be able to communicate to potential investors that your idea has the potential to deliver enough value that potential customers will pay for. It is actually easier to get investors’ attention and maybe eventually get their money when you show them that you have already acquired some paying customers.
That said, let’s get right into the 6 ways to fund your business from scratch:
1. Start by bootstrapping your business.
This basically talks about self-funding your business. This is so obvious that I should not mention it in this article. But a lot of entrepreneurs are stuck in the idea stage because they don’t realize this early enough. By taking a close look at your idea, there’s actually a part of it that you could actually figure out how to fund on your own so you can be better positioned to talk to investors.
In bootstrapping your business, you can use your personal savings, or you can consider saving up for your idea by getting a full time job. You may also want to capitalize by selling a valuable personal belonging. You see, it can be harder convincing someone to take a bet on your idea when you have not done it yourself.
There are many startup success stories that started this way. At Sagefour, we have adopted this method especially because we are first time entrepreneurs. This has certainly made a demand on our creativity, our ability to minimize expenses and build as lean as possible. By bootstrapping, you get to build out the basis of your idea before seeking investors. This approach lets you grow your audience and user base which serves as great validation and hopefully lead to revenue before you seek additional funding.
2. Reach out to family and friends
It is wise to start seeking for external funding for your business from family and friends. Just as Ezinne Nwokafor told us, “You need to leverage your network when seeking funding for your business. It will surprise you to know the huge potential in your phone contacts for getting funds.” Never underestimate the power of your network. You need to build it consciously and tap into it bravely.
In most cases, it is easier to convince your family and friends to take a chance on you and your idea than investors. If you are embarrassed to talk to those that care about you the most about your idea, how do you think you can convince investors to bet their money on you? Your family and friends provide the needed support system that can keep you accountable until you succeed. It is also possible that certain family and friends would require some form of investment plan or legal document that convinces them to stake their hard-earned resources on your business. You may need to get legal advice when it comes to that.
Ultimately, this is a very personal decision that needs to be taken seriously. And depending on your relationship with certain family and friends, this may not be an option for you. But it’s important to do an audit of your personal network before considering other option
3. Crowdfunding Platforms
Crowdfunding involves getting a large group of people to contribute relatively small amounts of money each to fund your business. This method of raising funds is fast becoming the most preferred way of raising funds for most entrepreneurs whether they are improvising or using established platforms.
You can launch a crowdfunding campaign privately within your personal network of family and friends. For example, if the goal of your campaign is to raise one million naira to fund your business idea, all you need is find ten people that can give you hundred thousand naira each or twenty people that can give you fifty thousand naira each. You get the drift right? However, you need a third party to manage the process to give them the confidence to participate.
Also, you can launch a crowdfunding campaign on a crowdfunding platform with the required structures to facilitate a large scale campaign. There has to be some sort of insurance cover that guarantees that provides a safety net for investors’ money. But to launch a successful campaign would require some well-planned effort on the part of the entrepreneur. You can take a look at previous campaigns and learn from them. A good example of a crowdfunding platform is farm-crowdy.
4. Apply for grants
With a well-crafted grant proposal, entrepreneurs can secure government-backed grants. There are also wealthy individuals that have grants that they give to encourage entrepreneurs. These grants may not be exactly what you are looking for but they would go a long way to get your idea off the ground and attract investors to engage with you. All that is required is access to relevant opportunities for grants and a well-articulated grant proposal that communicates the potentials in your idea clearly. If you are not confident of your grant writing skills, you can hire more experienced professionals to maximize your chances. And due to the sheer number of applications that are made for the few available grant opportunities, success is usually dependent on your ability to keep trying until you get it.
5. Angel Investors
Angel investors are single individuals looking for high potential startups to invest their money in exchange for equity. Angel investors are a great blessing that needs to be taken with caution. At an early stage of your idea and work, you probably don’t have any proven traction and financial statement that supports your claims of success in the business. The need to have the first believers in your business model would go a long way in getting things off the ground. The first steps towards landing an angel investor is asking the right set of people. At this point, you should have a circle of startup entrepreneurs and also join communities. Angel investors are lurking around to hear someone talk about you to them and also share your passion. If you happen to come across them, their participation in your startup could do a lot to help you scale. This is because angel investors usually bring their experience and expertise into the business relationship and are committed to seeing the business succeed. However, you need to get advice while negotiating for equity so you don’t sell-off your ownership control.
6. Equity Investors
Finally, on our list of options are equity investors or venture capitalists. This is a group of professional investors coming together to invest their expertise and resources in your startup in exchange for equity. But you have to meet their requirements. They are mostly interested in startups with high-growth potentials. But they get to back you with their expertise and experience to ensure that your startup succeeds.
Equity investing is a huge stake to bet on at an early stage. The true worth of your business is not yet determined, as all your financial forecasts are still dependent on some factors you might not have factored into your valuation properly. Valuation is always an approximate. Until the business has some defined customers and a stable business model the equity can’t be determined. And you would be either overpricing or underpricing to determine a stake of your business to give.
At Sagefour, we imagine a sustainable future for young entrepreneurs where funding is no longer an obstacle to starting and scaling high impact brands. There are several ways to get funding these days and these varies based on your level of experience and track record. But the key to getting funding is to be sure that you are bringing value to the market place. And if it is possible, as an early entrepreneur, you should consider bootstrapping for as long as you can. Only consider other sources of funding when it is absolutely necessary to scale.
Do you have any other great ideas, hack or tips to getting funding? Or do you have questions on these sources? Kindly share in the comment section below!
Wish you the very best!