The idea of this article came from a few conversations that I was part of in the last ten days…
The first as a passive participant with a colleague who was trying to implement a project with a known client and my colleague kept referring to the difficulty in securing the right funding…
The second with two of my friends who are trying to figure out the best ways and the best time to raise the required funds for their emerging startups…
So timing …the type of funding required at the various stages and the value of funding are according to me the critical questions over which most entrepreneurs lose their sleep about…
Whether to go for funding at the concept stage or at the prototype stage or product functional stage or after gaining traction and if so after what level of traction are all questions which do not have any right or wrong answer…
So let us look at some of the key funding options available, which would be good and at what situation…But before we start, keep this in mind….raising money is never easy as no one parts with their money easily.
- Bootstrapping.
The process of utilizing personal saved up funds or funding from friends and family is known as bootstrapping or self -funding. Obtaining funding from family and friends is a unique way to kick off your startup. Friends and family are usually flexible when it comes to servicing your loan debt much more than other external sources.
So, if you approach the right friend or family member that supports your idea, you can get some, if not all the funds you require to start up your business.
Pros
-Debts stay closer to home and are from people who trust your capability.
Cons
-Bootstrapping does not work for large businesses; it only works for small-scale enterprises.
2. Crowdfunding
Crowdfunding platforms are set up for individuals to pitch their business ideas or challenges to a community of investors or people willing to support their ideas or cause. If the crowd funders on the platform buy the idea presented, they will make a pledge to support his business model publicly and donate funds respectively.
Pros
Crowdfunding essentially creates public interest for your business, thus running some free marketing and providing finance for your business at the same time.
Cons
-If your business pitch isn’t as solid as your competition, then there is a probability that your idea rejected.
3. Angel investors.
Angel investors are basically people with a huge amount of capital and are willing to invest it on over the edge business ideas.
Pros
– Angel investors offer mentorship alongside capital for startups
– Angel investors are willing to take risks on business idea as they anticipate heavy return on investment from your startup
Cons
– Angel investors provide lower investment capital to business ideas compared to venture capitalists.
4. Venture capital.
Venture capitals funds are managed by professionals that have a keen eye for seeking out companies with great prospects. Their modus operandi involves them investing in a solid business rather than an equity. Once there is an IPO or acquisition of the business they are partnered with, they then pull out and seek other investments.
Pros
– Venture Capitals effectively monitor the progress of a company they have invested in, thus ensuring the sustainability and growth of their investment.
– Companies with astronomical growth rates such as Uber, Flipkart have a pre-designed exit strategy that enables them to reap huge profits that they can, in turn, re-invest in the growth of their company.
Cons
– Venture capitals will remain loyal to your business till they have recovered their capital and profits. This usually occurs during a slim three to five-year timeframe. Since VC have their own exit time horizons expect some pressure to speed up things…
– You tend to lose control of your business since you are giving up a large part of it to venture capital investors
– Venture capital investors seek bigger companies with proven levels of stability and identifiable workforce. This could prove to be an obstacle for you because business startups don’t usually have this level of stability.
VC are tough negotiators and will always demand their pound of flesh and hence not recommended in the initial stages of the startup
5. Bartering.
Exchanging goods or services as a substitute for cash can be a great way to run on a little wallet. Example: trading free office space by agreeing to be the property manager for the owner. This technique can also work with legal, accounting and engineering services.
Pros
This method is very effective in the initial stages if your business plan includes high growth trajectory.
Cons
Not too many are open to old age bartering these days.
6. Form a partnership.
A more established company may have a strategic interest in helping to develop your product and be willing to advance funding to make it happen. This normally happens if you are working in an area, which is considered as a future growth driver in the sector that the established company is operating.
Pros
- The most obvious benefit of forming a strategic partnership is that it will introduce your brand quickly to a new audience…
- Gain Access to New Technologies and Resources.
Cons
Nevertheless, they also can carry baggage, as well. Disagreement may arise from declaring ownership of anything from new products to new production sites, which can lead to lawsuits and diminish your collective financial success.
7. Incubators.
A start-up incubator is a company, university or other organization that provides resources–laboratories, office space, consulting, cash, and marketing–in exchange for equity in young companies when they are most vulnerable.
Slight differences separate the terms “business incubators and accelerator”. Incubators nurture business while accelerators fast-track businesses.
Pros
– A no-brainer, incubators provide an environment that encourages and inspires. In this environment, there is a lot of potential for cross-pollination of ideas and possible alliances and synergies. Alternatively, co-working spaces and other sandboxed environments can offer an inspiring environment.
Cons
– During its 4-8 month lifespan, if commitment is lacking, the startup might spiral in a downward direction. Beware of bubble incubators that are in the game only to pursue only a hot trend and play poker with startup teams. Wall Street mindset definitely exists in startup funding.
8. Small business grants. This is more likely to work if you start out while in college itself. Team up with a professor at your local university. Grants associated with commercializing products are usually favored over ones allocated for academic study only.
Pros
- Well certainly, the number one “pro” when using small business grants is that grants are essentially free money. Grants do not need to be repaid.
Cons
Unfortunately, the “cons somewhat outweigh the “pros” when it comes to using small business grants. In no particular order, here they are:
– They are Time-Consuming
– You Need to Justify Purpose
– You Must Be Prepared for Tough Competition
– Eligibility is Strict
Bootstrapping among other funding sources outlined in this guide is the best way to kick off your business campaign. However, in order to stay truly competitive in the market, you must always interchange your funding sources. This provides you with some level of flexibility and over-dependence on one source of funding.
Cash is the lifeblood of business. If you run out of it and lack access to additional resources, the game is over. As the founder of a startup, you will find that raising funds is a significant part of your efforts and, for better or worse, a major challenge. Unless you have a clearly defined plan and a path to follow, you’re going to end up wasting precious time that could have been spent elsewhere.
So, the best suggested format is a rolling seed process with three phases:
Pre-seed, seed, and post seed.
In pre-seed, startups raise up to 10% of total planned capital usually from friends and family, the founders and crowdfunding sources. Seed encompasses 20 to 40% of money raised and can include an institutional investor.
Now that startups essentially need to hit growth-stage milestones, many founders need post-seed financing. These rounds tend to be for the balance 60%
One byproduct of this multiple closing process is less dilution for the founder. Usually, a startup’s valuation grows in each phase of the seed process provided the team hits specific milestones.
So, instead of taking $5 million all at once in a super-sized seed round at, say, a $7 million valuation, that $5 million can be split up at valuations between $5 million and $12 million for each phase.
To optimize the seed process, Always be fundraising. If you play it right, you’ll preserve equity for the founding team.
When it comes to funding, there is one thing that can increase your chance of getting funded astronomically – traction. Yet, founders often struggle to get traction and hope that investor money will help them get it. This problem can be solved if you start lean, test your product and gather meaningful feedback from your customers.
Use that feedback to modify your product. After you get traction, you are certain to get interest from investors. How much traction? Compare yourself to your competitors at the moment they got funding and use that as a benchmark.
Is this the only way? Never…There is no perfect way in this like all new paths that we set out on.. When you are going to raise money, have the investors feel good about what you are going to spend their money on – not marketing, not development, not business development, but scaling. Let them know you have a clear business plan with the returns and financial projections clearly worked out.
Each stage and each type of investor requires separate preparation and homework…But more on that next time…in the next article…
Till then …
Good luck with financing your startup…
Cheers!
