If you’re a startup founder, you know that raising startup capital invites a whole host of opportunities for your business to grow and scale. It’s an exciting time for your business to grow from an early-stage startup to a fully-operational business, and we’re here to help explain the different funding options that can make that possible.
The question is, how do you land this capital in the first place? Of course, founders have a wide range of funding options to choose from depending on your startup’s needs. From VCs to angel investors and everything in between, below is an overview of the common fundraising options available for your business, and how you could prepare for and launch a campaign on Republic.
How do startups raise capital?
When it comes to raising capital for a startup, you have several options. Choosing the best one for your company depends on a few factors, such as what funding stage your company is in, what your capital needs are, and what short-term and long-term goals you are trying to achieve.
Here’s an overview of some of the more common options available to early-stage businesses:
{Want a more in-depth explanation of your fundraising options? Check out this article.}
Bootstrapping
Bootstrapping refers to financing your business without raising external capital. The growth of your startup is funded solely by personal savings as well as the revenue subsequently generated by the business.
Of course, self-financing your own business comes with its own set of risks - the most obvious being the financial risk associated with putting your own personal savings into your business.
On the flip side, if executed well, bootstrapping does come with its own set of benefits. For instance, you won’t have to give up control of your business - you will remain the sole owner of your business for as long as you like! In addition, your company shares won’t suffer dilution.
Friends and family
Of course, bootstrapping may not work for everyone - for instance, you may not have the personal capital, or you simply may not be willing to take the personal risk associated with bootstrapping. That’s why you could also consider a friends and family round.
A friends and family round is exactly what it sounds like - it involves raising capital from your network of friends and family to get your early-stage startup enough funding to become operational.
This form of early-stage financing comes with its own set of pros and cons: On one hand, due to founders’ personal connections with investors, these rounds typically (but not always!) come with low interest rates and flexible repayment terms.
On the other hand, these investors may not always be the most savvy – your friends and family could simply be investing out of support for you, while lacking industry knowledge and experience to properly assess your startup. This could lead to them making poor investing decisions, like pouring too much of their personal savings into your business. This means that if your business takes a hit, this could strain relationships and even set them back financially.
Venture capitalists and angel investors
While getting capital from your friends and family might initially be helpful in getting your startup up and running, you may find yourself looking for more significant funding to bring your startup to greater heights as your business grows. This is where venture capitalists (VCs) and angel investors come in.
Angel investors are typically high-net-worth, accredited investors, who invest their own money in startups in exchange for equity. They may also take up an advisory role in the company, as they tend to also have valuable industry knowledge and experience.
Venture capital firms also provide capital in exchange for equity. Compared to angel investors, VCs tend to take a more hands-on approach in the fundraising process and day-to-day business operations. Because they usually invest a larger sum of money than angel investors, venture capitalists will want to see larger and faster returns on their investment compared to angels. It’s thus important to have to have solid business plans for how you will generate revenue and scale your business when approaching VC firms for capital.
Community Financing
Community financing campaigns invite the general public to invest in your company in exchange for ownership, typically in the form of an equity stake. There are a number of benefits to this approach. Here are a few:
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Helps founders to gain access to a large pool of potential investors
With community financing campaigns, you could potentially gain exposure to a huge network of hundreds - or even thousands - of potential investors. What’s more, these investors could then become customers and champions of your brand.
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Builds buzz and excitement around your company
Community financing campaigns can be an excellent way for you to boost visibility and get people excited to invest in your company. This could serve as a great PR opportunity, and can be priceless when it comes to attracting early investors and users.
Depending on the type of regulation you raise under, it can provide up to $5M (Reg CF) or $75M (Reg A+) without the restrictions and dilution associated with traditional financing methods (loans or venture capital)
With community financing, you will get the opportunity to put your startup out there and get people from the public to buy into your company. While you’re giving them equity, this also translates into more people being invested in the success of your business.
Now that you have a broad understanding of the fundraising options available to you, stay tuned for our next post on why you should considering raising with Republic, covered in Part II, next week!
Ps. Ready to raise with Republic? You can apply here.
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