It’s like chess, every side needs its queen. Funding is as important as it looks on paper. Businesses have wound up, merged, gone through acquisition, some were even sold. These scenarios are all directly or indirectly related to money. Every business owner needs to understand how important the queen is, in a funding context. That knowledge cannot come without first knowing the role she plays in this entrepreneurial game. The basics of funding, hence funding 101, is the final piece in every entrepreneurial puzzle.
The love of money being the root of all evil, isn’t really an entrepreneurial belief. In fact, here we need lots of it for businesses to first see the light of day before contemplating survival. Business ideas have died prematurely; some began existing and just could not cope with the rigidity of business. That goes to show that some of these businesses may have been victims to lack funding. However, entrepreneurs fail to understand that just like chess, the game of funding has its rules, funding style, variables and so on. The ones lucky enough to search for this knowledge would be doing the opposite of counting their losses.
What Is Funding
Funding can be said to be the money provided by an organization or the government for a particular purpose. It could also be said to be a case of making available resources to finance a need, program, or project. So it is quite clear that it normally comes in the form of money. But funding can also appear in certain forms like effort, time or trust from a firm or person. This practice includes the provision of capital that is used to kick start a business. Capital can however be said to be in its purest form or in its social form. Let’s take a little break from funding and understand a little about capital and its forms.
Capital is an element of funding. We could call it the end product. Therefore, Capital happens to be anything that can be used to elevate one’s ability to generate value. So if an entrepreneur requires funds of 500,000 naira, the amount specified is the capital needed for that project to be executed. Now understanding this moves us to the forms in which capital can appear.
Some entrepreneurs are still of the opinion that capital is only highly monetary. However, you are about to find out otherwise. So, forms of capital will be restricted to two, for this purpose, they include financial and human capital.
This is the purest form of capital as it satisfies the necessary outlook. Because it entails businesses collecting money from institutions to pay back later through return on investment, which is a debt. Businesses also receive money to pay back with part ownership of the company, which is equity.
Financial capital includes: Equity, Debt, Investments & Working Capital.
Human capital entails how people can contribute to the success of your company either intellectually or through other means. They may not necessarily give you money, but their time, efforts and trust speaks loads. Social capital simply refers to relationships that contribute to the success of a business. This type of capital is a reflection of the strength of your relationship with the other person. This may appear as giving tangible or intangible information or simply sharing the same goals that translates into greater heights for the company, which is where skills and intellectual capital comes in. Skills & intellectual capital are often found in employees.
A part of this explanation was born out of a simple quest to change the narrative about capital, only being financially intensive. A lot of businesses have commenced today based on relationships and valuable information given by fellow humans. Now, you didn’t forget we were talking about funding did you?
Sources Of Funding
Also regarded as Crowdfunding, this is a type of funding that does not require a return on investments. Evidently, the money gotten from this type of funding is given to the entrepreneurs based on merit or the simple level of importance through donations by crowds. They are either given by a group of people (crowdfunding), a company or the government. They involve donations, subsidies, & grants. A section of this also includes Equity Crowdfunding, and it requires donations for part ownership/stake in the outcome of the business.
This is simply the type of funding we are used to, hence the name “pure funding”. It requires a lot of information about the business like a business plan, cash statement and all. This form of funding includes Credit, Venture Capital, Taxes.
Mostly organisations or companies that either require a return on investment or simply want equity, give these forms of funding. This is built under the simple concept of debt funding; taking money for a specific amount of time and paying back when due. An example is a loan.
Styles of Fund Sourcing
This is the approach taken by an entrepreneur to make use of any of the aforementioned sources of funds above. There are various ways to do this and the article on 7 sure funding styles to kick-start your business better explains these funding styles. Funding approaches include:
- Family & Friends
- Venture Capitalist
- Micro Banks
- Industry banks
There are a lot of ways to approach funding; it all depends on your business and the level of funds needed. Picking a style logically comes with understanding them all. Read the 7 sure funding styles to kick start your business idea.
Reasons For Funding
Businesses or individuals require funding for a lot of reasons besides starting a business and they include:
This form of funding is used specifically for research as the name implies, and is exclusively utilized in technology and social sciences. It can also come in commercial and non-commercial forms. The research and development department provides funding for commercial purposes, while NGOs or charity organizations carry out non-commercial research funding.
Launch A Business
This has been the essence of the sermon today. Entrepreneurs needing money to launch their business is one of the most common areas for funding. Businesses even after being launched need to survive.
Uses On Investment
This includes, Venture Capitalists having clients that fund them to invest in companies for high returns or other Fund Management Firms that gather a lot of money from different sources to buy securities. Here, funding is needed to make more money through investments.
So whether it requires Venture Capitalists or Angels, entrepreneurs must find a way to fund their businesses. But they must first understand how to bootstrap. Find this information and more in our first lecture on funding, Funding 101: The Final Piece In Every Entrepreneurial Puzzle.