Suddenly, a light bulb goes off. A brilliant idea to make a difference in the world through tech innovation.
People with the entrepreneurial spirit, might probably fall for the sharing economy hype and kick start an online business right away.
But, the mistake is thinking that generating a unique idea is the biggest challenge in building a startup In actuality; money will be the most persistent problem of a young startup.
Companies need money to run a business; it’s crucial for creating a website, renting an office space and most important, paying employees. Adequate funding will determine the livelihood of your startup.
These days, there are three popular methods to raise funding: via bootstrapping, crowdfunding or by raising capital.
What are the pros and cons of each model? How do you know which model to use for your startup? Let’s take a look.
Bootstrapping in building a startup means using existing resources (self-funded) to operate the business.
It is a widely used option for young entrepreneurs working on a minimum viable product (MVP).
The method gives the Founders full control over the startup with autonomy to set agendas without outside pressure and influences.
Bootstrapping forces entrepreneurs to be careful and wise in making decisions since there is not enough money to afford mistakes. Plus, in the long run, this culture may help the company develop good habits in running the business.
Launching a startup with personal money (which is often limited) can mean the business does not develop as fast as desired.
Compared to opting to work with venture capitalists and angel investors, networking opportunities are more difficult when bootstrapping. Furthermore, the company will have limited access to desired markets which reduces visibility.
Although it is not always necessarily the case, bootstrapping may reduce credibility of the startup because having well-respected investors backing the business can boost consumer confidence.
Crowdfunding is the process of raising funds using the internet and various social media channels in order to raise small chunks of money on mass scale.
Using a mediator platforms such as Indiegogo or Kickstarter, anyone exposed to the campaign can make financial contribution to the project. The best thing about this method is that it’s possible to get funding without having to sacrifice equity or personal savings.
Social media helps kill two birds with one stone because it’ll spread the funding messsage word while increasing visibility of the startup.
Pledges and backers from the campaign can serve as a validation of the idea and could potentially attract future investment opportunities.
However, creating an attractive crowdfunding page takes time and effort. Besides a convincing story, Founders need creative ideas such as perks and even a video to draw attention.
Most of crowdfunding platform providers charge fees for their services and the company may need to pay taxes on some occasions.
Lastly, by putting the startup project online, entrepreneurs run the risk of having somebody else copy the idea.
This is where a startup can get the big bucks and the company will likely progress at quicker pace.
Venture capital (VC) firms are ready to invest in high potential startups in return for equity. Garena’s latest US$170 million funding (Asia’s most valuable startup) just proved that VCs in the region not afraid to spend cash.
Depending on the industry, some businesses (like SaaS and ecommerce) require large upfront funding in making the product — a tool VCs can provide.
Besides the financial benefits, VCs can provide expertise and other assistance to build the startup. It adds credibility and open doors to a wide pool of individuals that could potentially be business partners and future investors.
However, VCs do not invest money for charity, it is all about profits and the firm will take measures to ensure a return from the investment. Sometimes that could even mean ejecting the Founder from his or her company.
With a VC, the Founder loses full control of the company. In most cases there will be moments in which the company will need to follow a direction in which Founders think is wrong. But, VCs often see the blind spot the Founders miss.
Considering all options, it is more than possible to adopt each model progressively.
A startup can start out bootstrapping to generate an MVP, followed by crowdfunding and VCs to grow and expand. Why restrict funding options? Adopt an entire model and, if necessary, make a switch.
Ultimately, it’s a matter of preference and identifying how each method can fit in well with leadership style, company progress and the Founder’s goals.
The article “Should I bootstrap, crowdfund or raise capital for my startup?” first appeared on e27.
Kenneth Low is a co-founder of Arcadier, a SaaS company that powers next generation marketplace ideas.