The path of every business, no matter its nature; whether product or service oriented, or its scale; however big or small, follows a somewhat uniform trajectory, at least in its initial stages. After the idea has been mulled upon, its viability affirmed and its foundation laid, all of them converge onto a singular, critical question, ‘Where do we get the money from?’
Capital Investment
It would not be an exaggeration, if one were to say that this question has given many an enterprising individuals, especially first-time entrepreneurs, sleepless nights. The question is critical in nature owing to the fact that the fate of the business depends upon its answer. The course of all major functions and operations will be influenced by it. Therefore it is no surprise that it consumes disproportionate amounts of brain juice and time before one arrives at a conclusion.
This article aims to provide an overview of the means that are available to entrepreneurs to fund their endeavours. I sincerely hope that reading this piece will in some way expedite the arduous process, point you in the right direction and act as a preventive measure for the aforementioned insomnia. Rather than deep diving into the specifics of each method, which can be found in numerous articles on the internet, let us endeavour to touch base with them and explore the underlying thought process that goes behind taking up those options and weigh their pros and cons.
Below are listed the sources, in no specific chronology:
1. Bootstrapping The term is said to have originated in the early 19th century America; in the phrase ‘to pull oneself up from one’s bootstraps’ to denote an impossible task. Bootstrap is a situation in which an entrepreneur starts a company with little capital. Any venture that is started by using personal resources or by using the initial revenues to induce and sustain further growth is a bootstrapped venture.
Pros Focus
Bootstrapping helps maintain focus on revenue generation from day one. It emphasizes on the ‘earning money rather than spending’ motto. So entrepreneurs tend to spend less by outsourcing for their.
Organic growth
Bootstrapping encourages an organic approach towards building your business. It ensures a more sustained growth trajectory.
Innovation and Improvisation
Hurdles one faces whilst bootstrapping act as a catalyst for innovative thinking and initiate a learning curve that will be with you for life. Making optimal use of resources, growth hacking, micro-managing are some of the invaluable skills that you can pick up.
BYOB
Be your own boss. Raising funds through venture capitalists or angel investors means you lose absolute control of the company and its operations. You have to be answerable to someone and share profits with them later.
Low risk
As compared to any other method, bootstrapping is the least risky. Risk mitigation takes place as the need for placing collaterals or loans and debts does not arise.
Cons
Revenue
Bootstrapping also means that you will have limited resources to start with, so you’ll be stretched for money at critical junctures. In absence of a sound profit plan and flawless execution of operations that generate daily revenue, it could be detrimental to the health and future of the business.
Time
As one will lack money to spend for R&D, hiring, marketing and advertisement, certain milestones will take longer to reach. Achieving targets might be delayed and patience is of essence.
Visibility
In absence of a well-known backer or investors, visibility will be affected. The word of mouth, credibility and reputation that certain investors bring with them will be missing which in turn translates to being the new kid on the block for longer than expected.
2. Personal Investments - Friends and family
Personal investments are also a common method of funding ones enterprise. Many entrepreneurs, especially ones who are starting out combine personal savings from previous employments, with a loan from the family or friends/ close relatives which makes the pool considerably substantial.
Although one can argue that this could also qualify as bootstrapping, it deserves a separate mention owing to certain dynamics that come into play when borrowing money from individuals external to the organisation.
Pros
Ease
It is relatively easier and more economical to raise funds from your family and friends. If you can’t sell people you know your idea, it might be a good time to take a look at your selling skills or the business plan. Also, no paperwork and no interest!
Cons
Strained relations
It is a sure shot way of spoiling relations with people who you will be encountering for the rest of your life. Imagine if the business were not to progress as planned, you’d be the reason for the most awkward family dinner of the year.
3. MSME grants
Micro, small and medium enterprise grants are funds allotted by governments of respective countries each year, in order to support and nurture an environment of entrepreneurship and spur growth of technological, economic and social ventures in said countries.
One must look up to respective federal or central government websites to gather information on specific grants and their guidelines.
Pros
No interest
These government grants are for the betterment of the economic conditions of the nation so carry very low or zero interest and repayment charges. No strings attached money!
No equity sharing
One need not share any equity with the government to take advantage of these loans.
Cons
Red tape
The downside is that there is tremendous amount of paperwork or bureaucracy involved in order to avail of these funds. A number of documents must be collected and notarised, permits must be applied for, permissions and clearances taken and hands greased (sometimes) in order to get a green light.
Time and efforts
Carrying out the above mentioned process is a long and arduous task that not everyone is qualified to do. A lot of time and effort must be invested, which some argue could be better used elsewhere.
Strict guidelines
Not every business is qualified to avail of these schemes. It depends on respective governments of individual countries on how they allocate these funds and who are eligible in order to use them.
4. Crowdfunding
Crowdfunding, for the lack of a better metaphor is like trick or treat. You take a little from every individual but in the end, if you manage to reach out to a whole lot of people, you get a whole lot of candy. In this case the candy is start-up capital.
Pros
Eliminates middlemen
Business owners directly raise funds from investors who pledge their money in return for special rewards of various degrees. This eliminates conventional banking middlemen and is like a mini-IPO without the hassles.
Product/ Service roll out
No more are entrepreneurs subject to the whims of angel investors and the bank. They can roll out the product/ service and at the same time build a customer base that is loyal and provides free word of mouth marketing.
Cons
Flop show
The whole project could go down under if the way you sell your project isn’t an interesting story that people want to hear. The sites do not start raising money until you reach a certain goal.
Cash flow
In the unfortunate scenario that the project drags on and cannot be completed with stipulated funds, the company stands at risk of being sued. No one can foresee the future. All we can do is make estimated guesses.
Expertise
By crowdsourcing you miss out on the collective experience, expertise and network of people your bank and investors bring to you. This mentorship is valuable and one would find it hard to put a price tag on it.
5. Angel Investing
Angel investors are affluent, experienced individuals who have invested into successful businesses in the past and would do the same for your enterprise for convertible debt or ownership equity. They have at one point been entrepreneurs themselves in all likelihood. Although angel investing used to be informal in nature in the past, it has now entered the investment domain with innumerable networks of angel investors who come together and invest in businesses that show promise.
Pros
Risk takers
Angel investors are seasoned and foolhardy businessmen who’ve weathered the market and can smell a good deal. They would be more than willing to invest in your idea if it has the potential to pay off. Unlike banks, where you’d have to jump quite a few hoops and still not be certain of getting the funds, here you can be more confident. On an average, they invest in the vicinity of $25,000 and $1.5 million.
Interest free
The money that is raised from an angel investor comes with no interest tag. It isn’t a loan. Yes, let that sink in. The investor in return gets a portion of the ownership stock of the company. So as the company starts to rake in profits, the investor gets his share of the spoils.
Expertise
The investor also brings to the table, years of experience and business knowledge and market intuition. This is something that cannot be valued in terms of money.
Cons
Strings attached
The investor expects fair returns out of the money he invested in you and therefore will take a sizeable and agreed upon portion of the profits from the company. Although when starting out it doesn’t sound like a bad deal, investors are known for their sharp acumen and negotiation skills, and later it might not be as easy to part with your hard earned money.
Loss of autonomy
You are no more in charge, so to speak. You answer to the investor as well, seeing that his money is also riding on your company. Your efforts and performance are now under spotlights. Your moves are watched and expected to be shared with and agreed upon, depending on the level of involvement of the investor.
Pressure
Wooing investors isn’t easy, mind you. One must go through multiple rounds of fund raising meetings, business pitches, etc. Also the pressure on you goes up because your actions are now under scrutiny and you are answerable to someone other than yourself.
6. Venture Capitalists
Venture capitalists differ from angel investors in that they are not individuals but companies or businesses. They both hold private equity. They pool together funds from people and invest in companies they deem profitable or promising. The fact that they manage others investments affects their risk management factor.
Pros
Deep pockets
VC’s invest big money in comparison to Angel Investors. They make high volumes investments. These usually start from $500,000 and go up to $5 million.
Network and consultation
Getting funded by one of these is a sure shot way to get on the map. They bring with them considerable knowledge and management experience, as their interests are vested in yours.
Cons
Returns
As they invest big dollar it is fair that they expect big payoffs as well. Their bars are set much higher than those of Angel investors. They anticipate anywhere between 20x to 40x returns annually.
Patience
They go through a very meticulous process of due diligence even before you are chosen as options for investment, given the nature and quantum of their investments. It should not come as a shock that the whole procedure could take anywhere from 6 months to a year. One must possess the virtue of patience. Some people would argue that time could be spent elsewhere.
7. Start-up Incubators
Incubators, as the word suggests, are organizations that provide an ecosystem for start-ups that nurture their growth. This ecosystem is comprehensive; it could include workspace and related infrastructure, access to means of production, staffing, expertise, mentorship and capital.
Pros
Environment
The foremost advantage is the domain itself. The atmosphere provided sustains growth and encourages innovation, collaboration, free thought and inspires excellence. It holds potential for alliances and allows the possibility of marriage of different disciplines and ideas as incubators house a variety of start-ups.
Exposure
The exposure to seasoned entrepreneurs and industry professionals who add depth and dimensions to the knowledge and expertise available are valuable.
Cons
Institution
Say what one may, ultimately incubators are institutional in nature and follow certain pedagogy. One must follow the rules, the schedule and the time commitment that comes with them. One must commit to certain years of incubation to get in.
Process
The process is tedious and requires one to prepare by investing time and resources with no guarantee of getting in or liking it once one gets through.
8. Online Lending
Online lending is an alternative form of money lending for businesses and individuals, which is also technically known as P2P lending. It is an online service of pairing borrowers with lenders. As they minimize overheads and eliminate the need for middlemen, interests are lower and they are increasingly getting famous as options to replace traditional financing institutions.
Pros
Options
P2P lending can be beneficial in the way that it gives you a multitude of loan offers to choose from. This helps in the decision making process.
Ease of access
As it is online it is perhaps the most convenient and accessible of all methods.
Cons
Nascent
As this an alternate financing method, there is still considerable headway to be made in this field in regards to law and policy making.
9. Barter
As barter means the trade of goods and services without involving money, this is a start-up ecosystem that is focused on bringing together entrepreneurs so as to make it possible to exchange services, products, technologies, etc. that can be of mutual benefit to them. Barter networks and exchanges have now come into existence that facilitates thousands of enterprises to share their resources and take advantage of others resources.
Pros
Variety
A number of well-run exchanges offer their services and enlist hundreds of companies you can choose from.
Cons
Valuation
It is hard to put a finger on the value of your service or product in contrast to someone else’s, especially if it belongs to other verticals.
Tedious
One must pay membership and transaction fees, not to forget the filtering process to find a good match consumes time and energy.
10. Bank/ Line of Credit
Traditional banking and financing instruments are still amongst the most popular ways to bankroll a business. Although conventional, they have been around for the longest time and continue to hold sway. Banks usually need one to place some kind of collateral against the loan but there are a variety of loan schemes for SME’s that are collateral free as well.
Pros
Fixed Interest
Banks provide loans at fixed interest rates. Due to the glut of banks, these rates are usually competitive and regulated.
Fixed payments
The interest repayments are fixed and with adequate planning one can manage to pay them off rather efficiently.
Cons
Paperwork
The foremost reason why individuals are reluctant to approach banks is the paperwork and time consuming process.
Collateral
Although there are collateral free loans available, most banks require a guarantor for the loans or some sort of asset held as collateral by the bank in case of defaults in payments.
In conclusion, whatever approach it is that suits your business, it is about the journey and the lessons learnt along the way. As long as we as entrepreneurs keep in mind that we must create value first and the money will automatically follow, we should do just fine.
Let me know what options sounds feasible to you and your enterprise. Share your thoughts on this subject and lets start a conversation.