The Realities of “Startup Life”: How to Fund Your Business #101

When you start a business, you need funding. The four different ways to fund a business include Bootstrapping, Crowdfunding, Private Equity and Venture Capital (VC). Each of these options has various pros and cons, which need to be considered before determining which path you want to go down.

So what are the differences between each of these options, and how do you work out which is the right one for your business?

Type of Funding

Pros

Cons

Bootstrapping

  • Answering to yourself. You are responsible for all decisions, both good and bad, that you make relating to your business.
  • Able to focus on the direction you want the business to go.  
  • Revenue is limited to what you can sell.
  • You might not be able to develop products at a faster pace due to limited funds.
  • Limited credibility in the market, especially if it is a highly competitive one.

Crowdfunding

  • Low risk, less investment required.
  • Increased exposure to potential customers.
  • No equity – unless you are doing equity crowdfunding.
  • Validation of business idea.
  • Saves time – if people don’t like your idea you’ll find out quickly.
  • You will be spending your backer’s money, not your money to build the product.
  • Gain invaluable research data.
  • A reduced share of ownership if using equity crowdfunding.
  • Spend time setting up the campaign.
  • Risk of failure.
  • Paying a fee to setup and start the campaign.
  • No wiggle room to deviate from the main features outlined in the campaign as your backers will be expecting them.
  • You are required to wait until the end of the campaign to receive the money.

Private Equity

  • Aligned incentives.
  • Acceleration of growth.
  • Funds provided which will allow you to develop and innovate at a faster pace.
  • Can bounce ideas off of shareholders.
  • Access to talented business professionals who will be able to advise and teach you new skills.
  • You are reducing your share of ownership of the business.
  • More pressure to deliver.
  • Risk of using excessive leverage.
  • Risk of focusing on short-term results instead of long-term goals.

Venture Capital

  • The money is yours to keep.
  • Enables more rapid growth.
  • An increased network of professionals that your VC’s can introduce you to who might be able to provide additional resources and skills to help grow your business.
  • You are reducing your share of ownership of the business.
  • The company might not be able to cope with rapid growth.
  • It is time-consuming to raise funds.

If you have any questions on how to determine which is the best course of action for you, or if you’re a startup business who just wants to understand more about the financial side of your business, please feel free to drop me a message on LinkedIn.

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Photography by Danny Ortega, Georgina Jackson and the team at Intuit.

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