How Do I Finance My Startup? - The Question that can Make the Difference Between Success and Failure!
In order for an initial business idea to grow into a successful company in the long run, financial resources or access to financial resources play a crucial role. However, information about funding opportunities for startups and their requirements is not widely available in the BPoC (Black and People of Color) community. This conclusion, among others, was reflected in our survey conducted in the summer of 2021. In the survey, we asked more than 60 aspiring and existing BPoC founders what their motivations and challenges are/were.
When asked for the challenges in building a company, several reasons were identified. However, over 55% of the participants agreed on three aspects: besides bureaucracy and lack of experience, access to financial resources was one of the biggest challenges BPoC founders face. Failure or making mistakes is a very negative word for many. However, it is essential for founders to learn from failures and seize new opportunities. In addition, our survey included the question on what reasons can lead to failure. Once again, access to financial resources is decisive, in addition to a wrong founding team and a lack of a network.
Under the mentioned aspects, the following question arises, which possibilities do exist for a startup to finance itself and which conditions and/or requirements must one consider?
Financing Options for Startup
With regard to financing, founders have a wide range of options to choose from. Apart from the classic means of financing, such as Family & Friends and bank loans, we have listed and briefly explained the most important sources of financing for startups below.
State funding: The German state supports founders with various scholarships and grant programs. One example is the NRW Gründerstipendium.
Founder competitions: Examples of competitions are: Deutscher Gründerpreis, Gründerwettbewerb – Digitale Innovation or Breakthrough Award
Business Angels: Business Angels are usually successful entrepreneurs who have already founded a company themselves. As investors, they try to help other founders to succeed by providing financial support. In addition to financial support, a business angel serves as a mentor and provides his/her know-how. In return for their commitment, business angels receive shares in the company and thus profit from future increases in value.
Venture capital companies: Similar to business angels, venture capital companies usually support startups not only with investments, but also with industry know-how and contacts. They take a percentage stake in the startup with the aim of using the invested capital to generate profits on exit (from the sale of the stake).
Crowdfinancing – Different models can be distinguished in crowdfinancing:
- Crowdfunding, the backers usually do not receive any financial consideration. Rather, their “donation” is rewarded, for example, by access to the company’s products or services.
- Crowddonation is a donation-based support, without a return service, for social and humanitarian projects.
- With crowdinvesting, the backers have a monetary share in the subsequent success of the company.
- Crowdlending corresponds to a loan at a fixed interest rate that must be paid out after an agreed term.
Accelerator programs support young startups in the early stages of their formation – usually by providing workspace opportunities, contacts or mentoring. Some programs also offer financial support to startups.
What is the Right Type of Funding For You?
The right type of funding for you, depends on various factors. First, it is important that you meet the respective requirements in order to receive funding. Each type of financing has its own characteristics, which bring advantages and disadvantages with them. The differences are mostly in how fast you get the money, how much money you get, and whether you have to give up company shares or co-determination rights for it.
Therefore, as a founder, you should not only make the decision dependent on which financing you can get the easiest, but ask yourself the question: Which form of financing is best for what I want to do? The answer to this question will significantly influence the success of your startup.
Good luck with your decision!
ADAN Elevate Project Team Member