Funding for small businesses and startups
You need funding to do something in your business or startup.
You need to source the money in some way.
Enter the funders.
Where can I get funding?
There are different types of funding rounds. It is not necessary to have the funding in this order, but it does make sense that one would want to try these first, as to maximise your profit.
- Pre-seed and seed rounds – These are friends and family rounds that are often used to launch an enterprise. One could:
- Consider a bank loan in this round, as it is not yet exchanging equity for money. The bank will charge you interest and you would need to pay back the money in instalments.
- Angel Rounds – Angel investors or private investors offer money in exchange for ownership equity, debt (i.e. a loan) or similar. They often offer more than just money, including skills and network support.
- Venture Rounds – Venture capital firms would invest in your company for equity and promises of returns. The venture rounds are normally named “A round, “B round”, etc. the more rounds of funding needed, the more concerned a venture capitalist (VC) would be as this would infer that the company is probably not sustainable in the long run.
- Mezzanine Rounds – If a company is planning to do an initial public offering (IPO), i.e. list on the stock market, this type of funding should carry them until the desired outcome is achieved.
It is worth noting that there are other options for funding as well.
Banks sometimes approve funding for small businesses. The downfall is that they require securities – a guarantee that the money will be paid back.
Funds, grants and government agencies – there are multiple grants and help for small businesses. These include the Small Enterprise Finance Agency (SEFA), National Empowerment Fund (NEF) and the Small Enterprise Development Agency.
When should I acquire funding?
This graphic is an oversimplification of the process, which will be used a the basis of the process funding analysis.
It is possible to get funding anywhere in the startup process. For example:
- Idea phase: Many incubation hubs offer assistance and financial help for founders that have an initial idea.
- Prototyping and MVP: Many people do not have the financial means to build a prototype or a minimum viable product (MVP).
- Scaling: Once the business has been established and the business model has been proven to work, the next logical step would be to grow the business. This would cost money!
Lean principles teach us that we should delay decision making as much as possible – until we have no other choice. This applies to funding as well. A cash injection might help your company a lot, but it might be worth it to first establish a solid foundation: automate processes and do market research and explore the costing model and channels for your product/service. This makes sense for a few reasons:
- It is not advisable to give your company equity away if you can avoid it.
- Your investors become your boss. They want to see a return on their investment!
- Many companies want early funding for their idea
Finding funding for your business can be complicated. Depending on where in the process you are, you might get away with asking friends or family for the cash you need for your business to survive.
In other cases, you would need to speak to venture capitalists.
Ideally, you would want to keep all the equity. Bootstrap your company as much as you can.
And start raising equity when it will benefit you financially.
Simply be effective.