Eight ways to raise capital for your startup
Startup capital can be raised through bootstrapping, business partners, angel investors, accelerators, venture capital, grants and convert social capital to financial capital.
Raising capital for your business idea is one of the difficult hurdles every entrepreneur must overcome. To execute your ideas or grow that business, you need financing to make it happen.
Most African entrepreneurs started from scratch, just like you. So we profiled a number of them to show you how they raised capital for their businesses. These entrepreneurs include Charles Dairo, Jason Njoku, Joshua Chibueze, Oluwatomi Solanke, Dare Odumade, Palmer Lucky and Jack Ma.
Hopefully, the journey of these entrepreneurs will inspire you to walk their path of raising the capital your business desperately needs. Let's jump right into it.
They are bootstrapping, business partners, angel investors, accelerators, crowdfund your idea, venture capital, grants, convert social capital to financial capital.
Bootstrapping means using your personal resources, such as personal savings, personal computing equipment, and work space, to start and grow your startup. It’s an excellent funding approach that keeps ownership in-house and limits the debt you accrue.
Charles Dairo started a web design company, CKDigital, right after leaving university. The company which is more than 10 years today is completely bootstrapped, and has served reputable brands like FMDQ OTC Plc, Cardinal Stone Group, Royal Exchange Group, Vitafoam Plc, Red Star Plc and others.
Finding a business partner who can provide the necessary funds in exchange for a stake in your business is another excellent way to raise capital. Jason Njoku used this fundraising strategy to fund IrokoTV.
Jason met his business partner and co-founder, Sebastian Gotter, at the University of Manchester, where they both studied. Sebastian was the rich partner who contributed an initial seed investment of $150,000 for a 50% stake in 2010.
While Jason was the entrepreneur who fully understood the local market and was responsible for executing the business plan. Today, Iroko TV has now grown into an industry giant worth over $40 million from international investors.
A guaranteed way to raise capital is to find angel investors. But who are angel investors? Angel investors are wealthy private investors focused on financing small business ventures in exchange for equity.
A classic example of the impact of angel investors on a startup is the story of Piggyvest. While sharing at the first edition of Zero to scale, Joshua Chibueze, CMO and Co-founder at Piggyvest revealed how Olumide Soyombo played an instrumental role in raising their first seed of $1.1 million.
Accelerators and Incubators
If you are building a startup around an innovative idea, you should find accelerator/incubators programmes that invest in your niche. Startup incubators help entrepreneurs refine business ideas and build their startups from the ground up.
Startup accelerators on the other hand provide early-stage companies that already have a minimum viable product (MVP) with the education, resources and mentorship needed to promote what might otherwise be several years of slow growth into a few short months.
African startups such as Flutterwave, Cowrywise, and Bamboo are modern examples of startups that benefited from accelerators. There are many accelerators and incubators you can participate. Some of these accelerators include Y Combinator, Seedstars and Techstars.
Related Article: Getting into YCombinator as an African founder
Similarly to angel investors, venture capitalists typically invest in the range of a few million dollars and are willing to reinvest when their investments show strong growth potential.
While angel investors are typically individual investors who dip into their own savings to invest in your business; the Venture capitals are businesses that invest in early-stage and high-growth startups that have a single purpose – maximise the returns on investment.
Oluwatomi Solanke, founder of Trove, a Nigerian fintech recently revealed that Ventures Platform, was one of Trove’s early investors. Ventures Platform is an African venture capital firm that invests in startups from pre-seed to Series A and across several sectors.
There are tons of active African venture capital firms that are actively investing in African startups.
Raising capital through grants is another way to raise capital for your startup. Grants are funds disbursed by federal governments, foundations, and institutions to fund projects, ideas and other initiatives linked to public benefits. Grants are not to be paid back once received.
However, grants can be difficult to obtain and can require an extensive application process. They can also be few and far between and often industry-specific – clean energy, sustainability, biomedical research, and non-profit.
In addition, with bootstrapping and a bit of savvy profit reinvestment, Dare Odumade grew Chekkit before he became a Tony Elumelu entrepreneur, which qualifies him to get a non-refundable $5,000 grant. Other notable foundations that give out grants include the Lagos State Employment Trust Fund, Bank of Industry, and Africa Digital Financial Inclusion Facility.
Convert social capital to financial capital
A great source of capital many entrepreneurs fail to pay attention to is social capital. Social capital refers to the value (potential) of positive human interaction. The result of social capital may be tangible or intangible and may include financial favours, useful information, innovative ideas, and future opportunities.
It usually comes from close friends, current and former work colleagues, neighbours, business partners, current and former classmates, etc. These people are much more willing to listen to your business idea because they trust your business acumen, character and expertise.
Jack Ma, the Chinese billionaire founder of Alibaba, used this strategy to start the global e-Commerce giant. In 1999, Jack Ma invited 18 of his friends to his small apartment in Hangzhou. There, he pitched his business idea and vision in 2 hours and raised $60,000 to kickstart Alibaba.
By the time Alibaba became a public company in 2014, it was valued at $21.8 billion on the New York Stock Exchange to become the biggest US IPO in history — bigger than Google, Facebook, and Twitter combined.
Crowdfund your startup idea
Crowdfunding is another creative way modern entrepreneurs are raising capital for their business. It is the use of small amounts of capital from numerous individuals to finance a new business venture. With the rise of social media, crowdfunding provides entrepreneurs with a platform to pitch their business idea in front of waiting investors.
Palmer Luckey was only 20 years old when he developed the idea of Oculus Rift. It was a virtual reality headset that was better and much more advanced than what anyone had made at the time.
Forming a company with John Carmack, both entrepreneurs launched a crowdfunding project on the creative platform, Kickstarter. They raised over £1.7m with 9,500 investors, making it one of the biggest and fastest funding stories in modern history.
Startups that grow very fast rarely use internal funds alone to scale their operations. So the financing options listed above should guide you as an entrepreneur depending on your situation. However, apply caution when seeking capital in order not to give too much of your startup equity.