Putting all your eggs in one basket will never be considered good business strategy , especially when it comes to financing your new venture. Diversifying your sources of financing will not only make your start-up business more resilient to possible downturns, but also improve your chances of obtaining the right financing, tailored to your specific needs.
Never forget that bankers do not necessarily see themselves as a single source of financing. Moreover, lenders will consider you as a proactive entrepreneur if you have sought or used various methods of financing.
Whether you opt for a bank loan, an angel investor, a government grant or a business incubator , each of these funding sources has specific advantages and disadvantages, as well as criteria for evaluating your business.
Here is an overview of seven typical funding sources for start-ups:
1. Personal investment
When you start a business, you should be the primary investor – whether investing your own money or pledging property as collateral. You thus prove to investors and bankers that you are committed to your project for the long term and that you are ready to take risks.
2. Money from relatives
This is money lent by spouse, parents, other family members or friends. Investors and bankers think of this form of financing as patient capital , that is, money that will be paid back later, as your company’s profits increase.
3. Venture Capital
We must first remember that venture capital is not for all entrepreneurs. Indeed, venture capitalists seek to invest in high-tech companies and high-potential companies in sectors such as information technology, communications and biotechnology.
These investors also take a stake in the companies they finance in order to help them carry out a promising project, but involving greater risk. This means that the entrepreneur must transfer part of his business to a third party. Venture capitalists also want a good return on investment, which usually materializes when the company begins to sell shares to the public. Look for investors who have relevant experience and whose knowledge will benefit your business.
BDC has a Venture Capital team that supports cutting-edge companies occupying a strategic position in a promising market. Like most other venture capital firms, this team invests in start-up companies that show great potential, but prefers to support companies that need significant funding to establish themselves in their market.
4. Angel Investors
Angel investors (angels) are usually wealthy individuals or retired corporate executives who invest directly in SMEs owned by others. They are often leaders in their field. They give the company the benefit of their experience and their network of relations, but also of their technical knowledge or their management know-how. Angel investors tend to fund companies in the early stages of development, and the amount invested ranges between $25,000 and $100,000. Venture capital companies prefer to invest large amounts, in the order of a million dollars.
In return for the risk they take in investing their money, angel investors reserve the right to oversee the management of the business. This often means that they sit on the board of directors and demand an assurance of transparency.
Angel investors want to stay in the shadows. If you want to meet some, contact specialized associations or do research on the Internet. The National Angel Capital Organization (NACO) is an umbrella organization that helps build the capacity of Canadian angel investors. You can consult its member directory to find people in your area to contact.