From crowdfunding to venture capital – Startup funding for the non-millionaire founders

Some days back I came across a tweet from Geoff Roberts, Founder of Outseta where he spoke about mentoring startup founders and 50% of these founders just wanting to raise VC money as startup funding as their goal.

The tweet from Geoff Roberts that struck a chord

The situation is no different in various parts of the world. Somehow success has become synonymous with VC funding. It’s disappointing to think that its 2018 yet so many of my brethren think of startup funding only in terms of a VC handing over a million-dollar cheque.

Thought I’d take a moment to discuss a quick list of various funding options that can work beautifully for you.

1. Personal savings:

Probably the most common source of startup money. These are the savings you’ve made through your years of working jobs. Yours earned, yours to spend.

 2. Bootstrapping:

Bootstrapping refers to the process of using only existing resources without needing to hand out equity for any favours sought. For example, using your own savings plus borrowing from family and friends and utilizing existing infrastructure like parent’s garage and old laptops.

It’s not just a method but also a mentality of cutting down your expenses to a minimum.

With hardly any formalities surrounding this funding, it’s a preferred and stress-free source of financing for your venture. It’s also great in a way because when the money is yours or your close one’s, you tend to be more frugal and prudent about spending it and tend to use it judiciously.

3. Silent partnership:

Though not very common, I have encountered this arrangement with a few startup founders. The founders borrow some money from a friend who is given part ownership of the company but no active role. In most cases this silent partner was given a monthly payment(salary like) with zero interference from the silent partners side. (Not to be confused with Angel funding)

4. Crowdfunding:

Crowdfunding is raising small amounts of capital or loans or pre-orders from a large number of individuals to finance a new business venture.  This is done via crowdfunding platforms like Kickstarter, DreamfundedGoFundme, Ketto, fundable, fundlined etc.

The benefit of crowdfunding platforms is that it acts as a sort of idea validation as well with the public likely to fund an idea that’s “sellable” and “attractive”. It also acts as a method of branding because  people who will contribute to your fund campaign  are likely to share about your business and act as evangelists. Financing and marketing join forces in this method.

It expands upon the pool of micro-investors from whom funds can be raised. Crowdfunding makes use of vast networks of people through social media and crowdfunding websites to bring investors and entrepreneurs together. If your campaign has been successful in raising funds, it can act as a catalyst in gaining VC funding as well in some cases.

5. Seed funds or Angel Investors:

The initial capital which is used to start a business is referred to as the seed fund. Angel investors are generally High net worth individuals (HNWIs) or small entities who provide a one-time investment to help the business propel. Angel investors invest in small startups or entrepreneurs in return of equity or convertible debt

6. Venture Capital (VC) and Private Equity(PE):

Venture capital is the funding obtained in exchange for an equity stake in the enterprise with a formal contractual overhead. VC and PE investors generally tend to make large ticket investments ( $1 – $6 million in first round)  in exchange of sizable chunk of ownership of a startup. VCs ideally focus on new enterprises and PE on large existing enterprises , however exceptions are made depending on the startup’s idea.

Venture capital firms generally engage with ideas that are likely to have a long term potential and possibly be business disruptors in their industry. If milestones decided by the fund are met, the VCs may influx more money towards the success of the venture periodically.

7. Bank loan:

This is an extremely common and widely sought-after form of financing a new business. Depending upon the nature of the business and the loan amount the bank may or may not request collateral in exchange of the loan amount. There are also specialised schemes within banks for startup loans that are collateral free and some specialised banks itself eg India has SIDBI

Providing medium or long-term finance is one of the main functions of the bank. Therefore, before providing the loan, bank sets the fixed period over which the loan is provided (e.g. 3, 5 or 10 years), the rate of interest and the timing and amount of repayments.

8. Convertible Notes:

These are the short-term debts taken from banks, angel investors, micro-lenders or financial institutions to tide through a few months of cash shortage. These are super useful if the entrepreneur is hopeful of future revenues or sales. The debt could either be returned in cash or converted to equity if the founder is unable to pay back in time.

9. Incubators and Startup Accelerators:

These are organisations and institutions which provide a sort of parental guidance to a startup founder and their idea. They provide some initial funding, frameworks and mentoring for a fixed period of 6-12 months in which the startup founder must prove their business model.

Business incubation programs help create and grow young businesses by providing them with necessary support, financial and technical services. Some popular incubators are YCombinator , Village Capital, AngelPad, DreamItExcubator, TechStars

10. Consulting side gigs:

A Business founder is most likely a person who is an expert in something, and experts make excellent consultants. A lot of modern day founders raise their startup money by taking many consulting assignments and saving that to form a startup corpus. You could do this in parallel to your startup or up to a few weeks before you go full swing into your startup world.

11. Alternate cash cow:

Okay this is when you have an existing business and re-route the profits of the first business to fund your second business. e.g. I have a Media and digital marketing agency Limitless, the profits of which I initially used to sustain the development phase of Alore CRM my second company.  Both companies are running in parallel focusing on different things but it definitely helped to have one regular stream of income coming in.

The alternate cash cow could also be a business unit, product line, or investment. Essentially, cash cows help companies and founders to pursue other high return opportunities.

12. Moonlighting:

This is taking paid assignments beyond your normal job, especially without telling your employer. Generally, this can be defined as having a second job typically secretly, after the office prior or in addition to one’s regular employment. It’s also an additional way of building up a corpus to be used for funding your startup.

13. Cryptocurrency:

Honestly, I don’t believe too much into this at the moment because of how terribly unregulated this market is at the moment. However, with time this is sure to gain momentum and regulations will follow. It would be worth a lookout for the future founders who might buy in cheap now to cash out later. Risky but possibly worth it

14. Barter services:

This is a non-scalable way to manage resources in the initial days of the startup life but you can end up saving some money through this. For example: you could do free designing for somebody and in return they do free development for you. This system would be based on complementary skill this system is called Barter services.

15. Pre-selling:

This is the method where you sell your product or services in advance by creating an effective marketing strategy at the onset. Remember how Apple and One plus went about taking pre orders in their initial days ? Not only does this validate your business idea, market need but it also helps you produce as per demand and not have excess inventory in hand. The biggest gain of this method is also the fact that you can manage finances much much better without having to take loans or funding. There are tools like Maitre , Quick MVP etc which help you build a waiting list etc.

16. Contests:

Once you begin to dig deep into the startup world and the niche that you are going to enter, you are likely to bump into various startup contests where the prize money is a sizeable amount to fund your dream to reality. I suggest look for such contests and business plan competitions and if you’re confident about the uniqueness of your idea, go ahead on this. Check out f6s, Microsoft for startups , 10000 startups etc.

17. Check with your college entrepreneurship cell:

Most good colleges today are coming up with entrepreneurship cells which are highly likely to showcase what amazing stuff their alumni are up to. I suggest you have a look at these cells at your college and check with what kind of support they provide and are likely to. eg Harvard has Arthur Rock center , NSRCEL at IIM Bangalore, HEC Paris Entrepreneurship cell, Erasmus Entrepreneurship program

18. Govt programs

Here I’m doling out generic advice for lack of specific knowledge on every country’s help schemes for startup funding. However, I’m loosely aware of many Govts being active in promoting startups. Always keep a lookout for a specific sector or scheme that your local govt is rolling out in terms of tax rebates, mentorship, loans etc that could come to your advantage.  for e.g. In South Africa there is BEE, in India has the startup India program, Israel has the Govt Innovation policy, French Govt initiatives  etc.

I’d love to hear your comments on this and also what funding sources I may have missed out. Do drop in your comments to help broaden knowledge on this topic and possibly prove to be useful for startup founders.



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