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For entrepreneurs, starting a new startup is an exhilarating experience. It’s what we live for. One of the biggest hurdles in starting a new business is making sure the company has enough funding to not only keep the doors open but also invest in future growth. Unfortunately, nearly 40% of businesses fail because they run out of cash.
Without adequate funding, it is impossible for startups to invest in the right technology, equipment, product development and other resources they need to expand and grow. For this reason, entrepreneurs must have a strategy to secure the financing they need to realize the full potential of their business.
Traditionally, most small business owners finance their startup in one of three ways: personal funds, loans from friends or family, or a bank loan. While these are good options, there are numerous other effective ways to obtain financing in today’s business world.
Related: 7 Ways to Fund Your Startup in 2024
1. Venture capital
Venture capital seems to be one of the most common buzzwords in the startup world – and for good reason. In addition to cash injections into the business, venture capital often comes with strategic guidance and industry connections. The challenge is that closing a VC deal is extremely difficult. Only 5 startups out of 10,000 will successfully secure venture capital funding. Entrepreneurs will have to prove themselves through rigorous due diligence, forgoing partial ownership and meeting high growth expectations.
2. State contributions and incentives
There is nothing better than free money for an entrepreneur. To help encourage business growth in their area, many state, local and federal agencies offer grants, incentives or tax breaks to businesses that meet certain criteria, such as operating in a specific industry. Securing public funding can be time-consuming and come with constraints, so entrepreneurs should carefully consider their options before applying for public funding.
3. Strategic partnerships
Financial resources do not always have to be in monetary form. Forming a strategic partnership with a complementary startup can enhance growth by providing access to a pool of shared resources, expertise and market reach. The right strategic partnership can allow an entrepreneur to accelerate growth without financially burdening the company. For the partnership to work, both entities must work closely together to ensure their goals, values and expectations are aligned.
Related: Want to grow your business? That’s why you need strategic partnerships to succeed.
4. Income Sharing Arrangements (ISAs)
The downside of raising capital through traditional debt financing is that it requires the company to accrue debt with interest. To avoid over-leveraging your business, ISAs offer an innovative alternative. Under this model, investors provide funding in exchange for a percentage of the startup’s future revenue. While this offers flexibility and allows investors and entrepreneurs to share incentives, ISAs can have strict milestones that must be achieved within a specific time period.
5. Collective financing
Crowdfunding is a method of financing a business or venture by receiving small sums of money from a large number of people who believe in the project. While crowdfunding can be an effective way to raise capital, it will require the company to convey its brand through compelling storytelling, strategic marketing and aggressive promotion.
In addition to financial resources, crowdfunding can also help the company build an enthusiastic and loyal community around the company’s products and services. It can also simultaneously test whether there is market demand for your business in the early stages of the startup process.
6. Blockchain-based financing
Blockchain technology has unlocked new avenues for fundraising, including tokenization and decentralized finance (DeFi). These innovative approaches allow startups to access capital in a decentralized and transparent way, separate from the traditional banking sector. It is important for entrepreneurs to keep up with this trend as the regulatory landscape is constantly evolving and there is inherent risk with blockchain-based financing.
Related: Decentralized venture capital will transform startup investing forever
Securing the funding you need for your business can take a lot of time and effort. By exploring a range of funding strategies, from venture capital to blockchain-based financing, entrepreneurs can optimize their chances of success. There are also pros and cons to consider with each of these options. If possible, it is wise to adopt a financing diversification strategy to mitigate or reduce any potential risk. As you embark on your entrepreneurial journey, you may want to consider the guidance of a strategic business coach to help you navigate the nuances of startup financing and propel your venture to success.