Starting a business? 6 options for financing a start-up

Startup plan

The first option for funding a start-up is your own money.

Photo credit: Shutterstock

What you need to know:

  • Many do not realise how large their personal network is and how many opportunities it gives them.
  • A start-up benefits more from a partnership with a venture capitalist due to the large amount of funding available.

Successful business entrepreneurs are those who strike when the iron is hot, regardless of their circumstances at the time. Thankfully, there are numerous options for financing a start-up, a new business experiment finding its place among others.

In today’s information age, it is easier than ever before to gain information on the details of these various options, as well as the array of methods for utilising them. There are also many business incubation centers in Nairobi and Mombasa, and are growing across the country.

The first option for funding a start-up is your own money. This comes through the long number of hours you must pump into the experiment stage of the idea until it becomes a viable business concept, as well as money used to make it possible.

This is the cheapest and most convenient method of financing. There are no hoops to jump through, and no need to involve anyone else in your business. However, this option is neither practical nor possible for most young people, especially those from a weak economic background.

One of the primary sources of funding for small business entrepreneurs is from people within their own network. Unfortunately, many people do not realise how large their personal network is and how many opportunities it affords them. Make a list of the people with whom you interact or have interacted with in the past.

This list may include, but is not limited to friends, general acquaintances, business associates, family members and family friends, professionals, clients, members of clubs and groups of which you are also a member, people who attend your place of worship, neighbours and present or former teachers, professors, religious leaders, co-workers, business partners, and classmates.

Many wise men and women in enterprise have cautioned against merging the world of business with one’s personal life. It is certainly true that there are many pitfalls inherent in doing business with family and friends, there are also ways to minimise these dangers. Family and friends can provide the initial seed money required to reach the cash flow stage of the startup, an essential stage for venture capital funders financing consideration.

Venture Capitalists

Angel investors, technically still amateur investors, are the fourth option. They are unlikely to possess the same level of motivation and tenacity toward pursuing new investment opportunities as would a venture capitalist. The process of obtaining funding from them is likely to be more drawn out, and you may encounter rejection numerous times.

The distinct advantage in working with an angel is that you will not lose as much control over your business as you would when working with a venture capitalist, and there is also the possibility of enjoying greater flexibility in negotiating the terms of the deal.

Among the four different types of angel investors, Operational angels who not only contribute cash, but also bring their operational and financial experience may work better for a startup. Entrepreneurial angels, Guardian angels, and Financial angels are also available.

Venture Capitalists are last, and are the prominent source of start-up funding. A venture capitalist is a professional investor who contributes financially to your business in expectation of receiving a high return on his or her investment. For the startup owner, this option opens you up to many more opportunities due to the large amount of funding available, as well as the access to the investor’s vast network of professionals.

Venture capital owners look for ideas that have proven themselves, especially those that have begun to generate some cash flows. In regular language, you have demonstrated a large market exists. Often, your start-up will find a place to add value either as a supplier or user the services from their existing portfolio that make attractive.

Every young person wanting to go into entrepreneurship should make an attempt to take their business concept beyond the comfort of the cold rooms to produce cash flow. You stand a better chance of attracting a venture capital source.

Before mentioning your proposal to your prospect, put together a business plan. Put the same effort into this plan as you would if you were presenting it to your banker or venture capital source.

Patrick Wameyo, is a financial literacy coach at Financial Academy and Technologies, and an entrepreneurship coach at The Entrepreneurship Center EA. Email [email protected]

Welcome!

You're all set to enjoy unlimited Prime content.