Funding is one of the most vital factors when it comes to taking your startup off the the ground. Not having enough capital can adversely affect a business be it a startup or a full fledged company. Typically, funds allow entrepreneurs to to enhance, expand, grow, or start their business. Money is the bloodline of any business. That’s why, at almost every stage of the business, entrepreneurs find themselves asking – How do I finance my business? The type of funding strategy applied depends largely on the nature and type of the business.
There are several strategies to acquire funding for businesses. In this article, I’ve discussed five such strategies (there’ll be more in future articles!)
Bootstrapping
Bootstrapping, also known as self-financing, is a method of funding a startup which involves the business owner investing from their own savings or getting their family and friends to contribute. The startup is funded from the business owner’s pocket rather than an outside source. This method of funding a business is especially useful for first-time entrepreneurs who haven’t gained any substantial traction, don’t have the build for scalability, or any other investor attracting factors, but still have great potential for growth.
One of the things to consider before adopting this funding strategy is the amount of initial financing required. Some ideas require only a minimal amount to get off the ground, whereas some ideas require heavy capital in order to be executed.
Crowdfunding
According to investopedia.com, Crowdfunding is the use of small amounts of capital from a large number of individuals to finance a new business venture. The crowdfunding strategy involves the entrepreneur taking a loan, pre-order, contribution or investment from more than one person (a.k.a a crowd) at the same time.
The process starts with a business owner putting up a comprehensive account of their product or service on a crowdfunding platform. In addition, the business owner will also have to make clear the aims and goals of the company, the reason they are raising funds, etc. and then consumers can read about the business and if the business’s offering appeal to them, they can pool in their money. Those giving money will make online pledges with the promise of pre-odering the product or giving a donation. Anyone can contribute money toward helping a business that they really believe in.
An additional benefit of crowdfunding is that along with raising capital, it also does the job of marketing the business’s product or service. By putting funding in the hands of common people, this strategy can also cut out the hassle of having professional investors and brokers coming on board the business.
Some of the popular crowdfunding sites are Indiegogo, Wishberry, Ketto, Fundlined, Catapooolt, Kickstarter, RocketHub, Dreamfunded, Onevest and GoFundMe.
Angel Investment
An Angel investor is typically a person with a superfluity of money and looking to invest this surplus cash in a startup in exchange for a percentage of ownership of the company (also known as ownership equity). Angel investors are otherwise known as private investors, seed investors or angel funders. Angel investors offer mentoring or advice alongside capital. Angel investments are less riskier than debt financing. Unlike a loan, invested capital does not have to be paid back in the event of business failure. The investor knows the risk he or she is taking when the put their money in a company.
From thebalancesmb.com, a primary disadvantage of using angel investors is the loss of complete control as a part-owner. Your angel investor will have a say in how the business is run and will also receive a portion of the profits when the business is sold. With debt financing, the lending institution has no control over the operations of your company and takes no share of the profits.
Raise Funds By Winning Contests
Elevator pitch contests, (like MIT$100K, Twitch, GE’s Ecomagination Challenge, etc) are where contestants are given a fixed period of time to come up with a business idea and persuade judges of their business’ potential. Contests have to present their products/services or just pitch an idea. It should be comprehensive enough to convince anyone that your idea is worth investing in. Winners are then awarded with a cash prize and even gain media attention. These events are a good platform for entrepreneurs to validate their ideas as the judges are mostly successful entrepreneurs or investors.
Venture Capital
Venture capitals are professionally managed funds who invest in companies that have long term growth potential. They usually invest in a small business for equity in the company and exit when there is an IPO or an acquisition. Other than financial assistance, VCs can also provide managerial and technical expertise or provide the businesses with network connection or other resources to further The company’s growth. A VC investment may be appropriate for small businesses that are beyond the startup phase and have already generating revenues and gained traction.
A major trade-off of venture capital funding is the forced management that is enforced on the company. Venture Capitalists typically look to recover their investment within a three to five year time frame (which is why they invest in companies with fast growth potential). That being said, to ensure fast growth of the company, the VCs bring in their years of business experience and sometimes take over the management of the company. Furthermore, the original business owner lose a part of equity of the business to VCs.
References:
- mashable.com- “8 Funding Contests to Kick Start Your Big Idea”
- Entrepreneurship course notes
