How do you finance your business? This is one of the key questions at the start of any project. How you answer it determines many aspects of your future company - the amount of resources you have, the amount of time you can take until profitability and even strategic direction. Therefore, carefully evaluate all the options you have before making this decision. It’s not something you can rethink in later stages easily!
In our time as entrepreneurs, we have been working with organisations funded in a number of different ways. Therefore, we will be happy to describe the main funding options to you. Hope it helps you to make an informed decision!
It means starting up a project only with your personal resources. This includes your personal savings and sometimes resources from your friends and family. This approach gives your company a lot of strategic freedom. Since you don’t depend on any outside investment, you don’t have to be accountable to any third party. Therefore, a decision where the company is going belongs only to you.
This also means a high risk. Should your business fail, you’re going to lose your own money and time. New entrepreneurs are likely to feel a lot of pressure because of that. As a result, many bootstrapping companies try to “play it safe” and are less willing to focus on experimentation. This, together with the lack of mentorship and experience, may inhibit your company’s growth in the future.
Your business’s “Godfather”, who takes your project under his generous wing. Usually an angel investor is a successful entrepreneur himself. Therefore, in addition to financial resources you also get access to his network and experience. Moreover, working with external resources lifts a part of the burden of losing all your assets. This allows you to be more creative and risk taking without worrying about instant financial consequences.
However, working with someone so experienced has its downsides. Angel investment is usually provided in exchange of equity. Therefore, you have to consider the opinion of your investor. Should your vision of the project not be well aligned, you will have major problems in your project’s development. Further, it might be a challenge to find a right angel investor. This is especially the case if you don’t work in one of the “hot” industries.
These are collaborative programs which are focused on startups. They provide resources necessary to succeed - financial, network, space, education, etc. In exchange, they usually take % of the equity. This option provides you with the most resources. In addition to finances and mentorship, they often help with practical aspects of being an entrepreneur. Sometimes, you don’t even need to have a business or an idea - you can come to the incubator and find out what you want to do there!
This gives you a lot of creative freedom and room to experiment. Moreover, you become a part of a community of entrepreneurs. This kind of support is a great asset for new businesses! However, these types of programs might be too restrictive for some businesses. You would have to follow the program of your incubator and shape your idea and vision according to their views.
VC is an investment capital provided in exchange for equity. Experienced investors provide it to support your startup or a small business. The difference from the angel investor is where the money comes from. Typically, VCs don’t use their own money. Instead, they pool resources from investment companies, large corporations and pension funds. Therefore, it might be more challenging to raise capital through VCs. You will have to convince not just an individual person, but all the involved parties.
Furthermore, VCs prefer to invest in the later stages of the project to minimise their risks. However, they have more capital to work with. Therefore, if you have a business which requires a large investment, VCs may be a better fit. Unlike angel investors, VCs are usually not interested in the role of mentor, but they might ask for a seat in the board of directors. Therefore, you will still have to align your company’s strategy with them.
PThis one is rather self explanatory. You fund your project with a loan from a bank. With this financing option, you build your project with the money from the bank. This way allows you to keep a complete ownership of your company. You won’t have to run any strategic decisions though anybody, and all the future profits belong to you.
However, this is also true for responsibilities. Should your business not work out, you would still have to repay the borrowed amount. Furthermore, banks tend to be risk-averse, therefore it can be challenging to obtain financing for a new business without a proven track record. This is especially the case for startups, for which it usually takes a while to reach profitability and develop a solid demand for their products.
An increasingly popular way to fund projects with the help of the community. In crowdfunding, you raise funds with a large number of small amounts of money from the people participating in the campaign. This way, you leverage resources of the large number of people interested in your project. This allows a broader pool of investors, who can invest as little as a few euro in your business.
Crowdfunding helps you to raise funds with little risk. There is usually no obligation to repay the backers. You only need to fulfil your backing promise - what you offer your backers in exchange for their contribution. Furthermore, as crowdfunding engages a large number of people from the early stages, it helps you to build a loyal following from early on. Also, it allows you to keep a full control over your venture.
However, crowdfunding can be time consuming and difficult to set up. You have to be creative about what you offer in return for investment. This might be impossible for some businesses. If your product is too specific, or you fail to explain it clearly, your crowdfunding campaign is likely to fail.
Hope that this brief overview makes it more clear for you what options you have when it comes to financing. There is no one best way to go about your financing. What works best depends on many factors: the type of your business, its stage, your personal credit history and entrepreneurial experience. Therefore, before deciding what type of financing, evaluate carefully all these factors. Wishing you a happy start of your business!