Startup Funding - What Is It?

There are several potential sources of startup capital. While all capital types will net you cash, no two forms are the same. Consider your situation when reading the following biographies to determine which type of startup capital would be best suited for you. Be sure to consult with your attorney before making a final decision.

Private Funding: Startup capital comes from a variety of private individuals and organizations. The type of startup capital that you receive may come from your personal savings, friends, or other contributions. Other common startup capital comes from venture capital or other investment firms. Another common source of startup capital comes from family members or friends who want to become investors in your new business.

One downside to this type of funding is that if the business fails, the individual who received the investment may not have enough funds to continue operations. However, if they are successful, this type of capital can provide a great deal of help to the business owner as they enter their first year of operation.

Angel Investors: Angel investors can provide startup funding by securing a note, equity, or another form of capital. An angel investor typically wants a percentage (usually 20%) of the value of the business. If the business succeeds, the individual will receive most of the investment. This type of financing generally requires a lengthy amount of time to obtain, but the potential for reward is great.

Venture Capital: Venture capitalists typically make large investments in companies that are not-so-well-known. These investors typically have access to a greater number of capital resources than private investors. Because of this, venture capitalists typically require more equity have deeper pockets and are more willing to take risks than most private investors.

Seed Capital: Seed funding provided to startups comes from investors who are looking to take a chance on the business idea but do not have an established reputation or track record. Typically, seed money can be obtained easily by providing an unsecured line of credit. This option allows new businesses to meet expenses and production costs at no cost to them while they build their business. The downside to seed capital is, it usually takes longer to receive approval for this type of funding. It also typically requires more diligence when it comes to evaluating the business' capital needs, and ability to generate profits.

Crowdfunding: A relatively newer method of startup funding, crowdfunding involves collecting a limited amount of money from a large group of people. Typically, startup entrepreneurs will attract investors through the use of websites such as Kickstarter, where they describe their product, how it will be made, and who they will kick in if they get involved. After a large number of potential investors pass through the website, the funds will be divided between the entrepreneurs and those that were interested in the project. Crowdfunding benefits both investors and startup entrepreneurs. With crowdfunding, there is no need to provide equity for the venture, which makes it appealing to a large number of people without asking for any up-front investment.

Angel Investor Listing: Similar to the Crowdfunding process, angel investors can also provide Startup Funding to new businesses. However, unlike Crowdfunding, an angel investor will provide funding based on their expectation of the future profit of the business. In addition, since they have invested in the company they can offer a level of capital beyond the cash-out percentage that would be offered by a crowd-sourced campaign.

These four methods of obtaining Startup Funding can prove to be successful in some instances; however, it's important to remember that most new businesses will not find success with these methods. As they say, "The proof is in the pudding." For this reason, it's wise to spend significant time networking with local business brokers, and mentors as well as doing research on similar companies prior to embarking on a formal funding search. Also, it's a good idea to work with seasoned entrepreneurs who can help you evaluate your options for funding and provide tips for bootstrapping your business.

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