In the majority of cases, start-up funding is linked to risk capital and valued technology companies. In reality, only a small percentage of businesses receive venture capital funds. Many more firms are financed by personal debt, credit, and friends and family investments. Deciding how to fund a business can be challenging, in part because of the variety of funding structures available. For any funding form, the company and the founders have their risks and rewards.
TYPES OF STARTUP FUNDING
Startup funding can be divided into four broad categories.
- Personal Savings and Debt
Many entrepreneurs begin with personal savings to finance their companies. Savings may be in cash, investment, or pension savings. From the entrepreneur’s point of view, it means avoiding the interest rates associated with loans using personal savings.
But few entrepreneurs can completely finance a company from their personal savings. Another source of financing is personal credit cards and bank loans. The downside is that the business owner is directly responsible for the payment of personal credit cards and bank loans if the company fails.
- Business Loan
In new businesses, approximately 40% of the capital is debt in the form of loans or credit lines. Business loans with specified repayment terms shall be offered for a particular amount of capital at a specified interest rate. Business loans are usually made for start-up expenses and are popular with continuing operating costs as opposed to credit lines. This is dominated by small banks specialized in soft knowledge assessment, such as business strategies and market analysis. The Personal property of the contractor is not used as collateral, so corporate debt gives greater protection to the contractor in the event of bankruptcy.
This is not, however, the case in low credit infrastructure developed countries. In such situations, even a personal guarantee from the contractor can have to cover the company debt.
- Family and Friends
New businesses often receive funding from the founder’s friends and family. The funding may be structured as a loan if, unless the company fails and is forced to declare bankruptcy, the person who provides it is paid in interest.
The funding can also be structured as an investment in which the funder obtains a percentage of the company upside if it succeeds. In general, when external funding is provided, family and friends do not necessarily need control of business decisions.
- Angel Investors
Angel investors are rich people offering capital in return for a share in the company’s ownership for an early-stage company. Typically limited amounts are spent. Along with the funding, they may provide mentoring and advice to young entrepreneurs, or they may demand some influence over business decisions.
Historically, under 3% of all new ventures and 7% of the fastest-growing companies have been funded by angel investors. Angel investment in 2014-2015 has, however, risen exponentially. The successful IPOs of technology companies have produced a crop of millionaires who have become active investors in angels. For others, angel investment has become a social status, and these investors are frequently involved in rounds of financing without a lead investor and due diligence –the so-called “partners’ rounds.” Such rounds may lead to a large number of start-ups since each investor contributes a small amount.
You can have a kitchen with too many cooks in it if each Angel wants to “mentor” the founder. Only the overhead contact of giving a courteous ear to your advice will drain your time (often contradictory or trivial).So you should avoid having more than a handful of them if you are considering Angel investors.
- Venture Capitalists
Less than 1 percent is funded by risk capital funds in all-new start-ups. Many people are participating in these funds, and then these funds are being invested in many companies in return. Three examples of venture capital funds that invest heavily in Asia are the New Enterprise Associates, Khoslav Ventures, and Sequoia Capital.
Like angel investors, risk capital funds may provide advice and mentoring and require some business control.