A lot of startups are known as disruptors because they’re based on innovation, solving problems in new ways or addressing the disadvantages of existing products or creating entirely new categories of goods and services. A startup focuses on rapidly growing market in its niche, and solving user’s problem with its product. More often than not, one of the reasons why ideas are not executed or startups fail among other reasons is lack of funding.
What are the available funding mechanisms to startup companies?
Some of the funding mechanisms stated to be available to startup companies are, but not limited to: Bootstrapping, Venture Capital Financing, Angel Investors, Crowdfunding, Loans/Grants, and many others.
Bootstrapping is the term used to describe a method of funding or starting up a business using nothing but personal financial resources. It is a popular approach for startups who are trying to reduce risk, conserve capital, or gain control of their brand. Energy is expended on the developed product or service itself rather than pitching to investors and other potential sources of capital funding. It can however be a time-consuming and sometimes difficult process, but typically results in greater control of the company and minimized amount of outside debt.
Venture capital (also called “venture funding”) is money given to startups by private equity firms as the capital they need to grow or expand into new markets. If your startup has potential for long-term growth, you can go to venture capital firms. Venture capital financing is provided not just in financing but also in the form of managerial and/or technical expertise. The goal of venture capital investors is usually to get high return on investment (ROI). Venture capital funding is a great option for startups that are keen on scaling quickly. . Venture capital funding provides valuable information, resources, strategic guidance and technical expertise/assistance to make a business successful.
Crowdfunding is an adaption of technological disruptions that has come to the forefront in the 21st century. This is when a “crowd” funds a project or business with small donations from many people, rather than one or two major investors. This type of funding mechanism cuts out having to access only professional investors and allows the public to invest in an idea or startup. Crowdfunding also helps to drive engagement to and awareness of the startup. The types of crowdfunding are; donations, debt, rewards and equity.
Angel investors are individuals with a high net worth that helps startups and small businesses gain financial backing in exchange for equity in the company. These investors can sometimes mean the difference between an idea becoming an empire or never getting off the ground. Because of their entrepreneurial background, they know a good investment opportunity when they see one. They more often than not, have an investor network and can get multiple people to invest. However, an angel investor’s higher risk tolerance may come with the expectation of a high return.
Picking a funding mechanism for startups basically depends on the size of the startup, its envisaged growth and purpose, as well as weighing the pros and cons of each mechanism. Startup founders should take all this into consideration before opting for a funding mechanism.