How to choose the right type of funding for your startup

How to choose the right type of funding for your startup

People can find the idea of starting their own business off-putting because of the lack of funding. Often they believe that the only way to access the necessary funding is to turn to the bank and this debt will douse anyone’s motivation to launch their own entity.

Historically, acquiring enough capital to actually launch a business has been a difficult task. But in modern business, both banks and investors alike have come to realise just how important it is to support entrepreneurial activities. In Africa, entrepreneurship is one of the ways to beat the years of poverty and lack of developed infrastructure experienced by the continent.

If you’re an aspiring small business owner then there are options for funding you can consider that aren’t bank loans and that won’t leave you in debt.

Government grants

In South Africa, you can apply for a government grant. This is when your funding is awarded to you by the government. But your business initiative must support efforts such as black economic empowerment, job creation, and developing the economy. These grants do not need to be repaid so there’s no debt involved but to qualify for this type of funding you have to meet some stringent criteria.

Angel investors

Angel investors are typically private individuals who pump funding into brand new startups to assist them with launching. In exchange for this liquid cash, the Angel investor is given 20 to 25 percent return on their investment. Most Angel investors have a wealth of business strategy experience and are very useful in assisting with the launch. They’re not a silent partner unless they specifically choose to be, so they often play a pivotal role is the company’s success. Google, interestingly enough, was started with the help of Angel investment funding.

Venture capitalists

Venture capitalists will often inject large amounts of money into a startup but they can be picky about the criteria these companies need to meet. The startup needs to be able to show strong potential for high growth and while this usually means high-risk potential, if you have a sound exit strategy to present, a venture capitalist can be secured.

Venture capitalists are happy to invest a lot of money into an initiative but their expectation is that you have a quick turnaround time enabling them to recover their investment within three to five years. Like Angel investors ,enture Capitalists often have expertise in specific industries which means they can advise the business owner.

Crowdfunding

Crowdfunding is a very popular way of financing your small business. Crowdfunding happens online through sites such as Kickstarter and Indiegogo. Investors can pledge you whatever they’re willing to donate and the accumulative amount is yours to use. There are terms and conditions involved though, some sites require you to pay a fee for using their site and others want full transparency and project goals included in your pitch. Often times you will need to have some funding in place already because you don’t know how much you’ll actually accrue throughout this exercise but it’s an excellent boost to your cash flow.

These are a few of the most popular ways that successful entrepreneurs have grown capital for their startups. Sometimes your startup capital doesn’t need to be a staggering amount either. Often times, startups that focus on creating a lean entity that operates with a bootstrapping financial strategy can get away with a small amount of capital which is really just used to launch.

Being unaware of how to secure funding for your new business should not be a reason to stop pursuing your startup. If you want to know more about how to connect with investors and practice your elevator pitch then make sure you attend events and conferences which offer you ample networking opportunities. AfricArena 2017 is taking place in November in Cape Town and is set to be a stellar event focused on African tech development and entrepreneurial activities within the sector. If you’re serious about your idea and business pitch then sign up to meet with some of the most prestigious African business heavyweights in Africa and the world.

Authored by: Pete Anderson

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