The previous decade heralded the beginning of a new entrepreneurial phase with startups being the talk of the town. With the rise in startup cultures and the trend of young entrepreneurs hitting the bullseye with their excellent startup business skills – a lot of focus happened on the success stories.
The reality also would be hard to ignore, that startups have always encouraged and branded the fact that money needs to be raised vs money needs to be made for a successful startup. Thus, a lot of bright entrepreneurial minds have never jumped the gun fearing the loss in strategy to be able to raise funding. Even though it sounds tough, raising funding should not be a deterrent to moving one’s ambitions one step further, because along with raising funding, making money at the end of the day also stays crucial for the simple success and sustenance of a business plan.
This looks complicated and hence can be a big deterrent and act as a demotivating factor for a lot of bright entrepreneurs.
For any business to thrive, one needs to raise capital for their business. It is obvious that after a while if the business plan goes well, one would be making more money than what they have spent. But for that time to come and to avoid the business plan from imploding, there needs to be a requirement of adequate financial aid, thus steps in the need to raise funding.
Now, there are many kinds of funding that are available to raise and sustain your business.
The following are the simplified versions of each type of funding along with the pros and cons of the same.
To put it in layman’s language – this is a personally raised funding where one is raising a startup with their own money and the financial proceedings from the sales go towards the everyday operations and functions. This is available to every entrepreneur where you take money out of your investment or from family and friends. This is a personal kind of funding. Although a head’s up, bootstrapping might look easy it is not as the entire risk lies with the self-invested.
Pros – Complete control, More product focus, Low cost, Higher profitability chance
Cons- High risk, Wipeout savings, Personal sacrifices, Might stunt growth
The most natural and instinctive form of raising funding for any entrepreneur is taking a loan from a bank. Just like all loans, one borrows financial credit and returns the same over a stipulated period, often with interest.
There are credit cards, bank loans, lines of credit and microfinance that are various forms of taking a debt.
Pros – Quick processing, Less stringent, Few rules and regulations
Cons- A higher rate of interest, Small loan amounts, period or fear of penalty can pinch cash flow due to interest
Equity is divided into categories – Seed Funding, Series A, Series B, Series C+, IPO/Acquisition
Debt may not be a comfort zone for everyone as it requires a lot of confidence and good predictability in one’s own business. There is a risk factor involved.
This is where Equity steps in. To put in simpler words, Equity is where there is an investor who will have part ownership in the company in any form in return for capital. They are called “venture capitalists” who invest money or capital in return for potential returns as the company grows. If not, they can even exit the company with their shares that they can use for their profit after their valuation.
This is the kind of funding that happens at the initial stage of the product or prototype pitch or the idea level. At this stage, the requirement for the product in the market or the sign of product-market fit is weighed.