4 ways to fund your startup : pros and cons

September 12, 2019

There are multiple ways to fund your entrepreneurial project. Some are better than others depending on your situation.

One of the biggest issues that most businesses face when starting up is finding needed funding for their projects. There is no project in the world that does not need at least some kind of investment from an outside donor.

It could be used as a salary for various employees the project may need, or it could be simply about staying afloat as most Startups fail to make a profit in the first couple of months or even years of initiating operations.

Quite a lot of startups fail before they’re even able to get a personal office, that’s already known to us. In most cases, it’s due to their inability to find donors and investors ahead of time. But there are multiple ways of going about it. Some are better than others. But all of these methods should be used at one point or another.

Investor funding

Investor funding is usually the go-to capital raising strategy for most startups. They simply start running around the world looking for willing investors to fund their projects.

In most cases, those who stick to their goals and try again no matter how many times they are rejected, are bound to find somebody willing to invest with them. The simplest examples are on Shark Tank, where entrepreneurs participated in the show multiple times and finally got what they were looking for.

The advantages of Investors

The biggest advantage is that you get the funding pretty much immediately and are in most cases not expected to return the whole amount back. This creates some kind of capital that you can use as an investment in the company as well as a source of pay for yourself.

Furthermore, most investors are knowledgeable people who know what they are doing. So if you ever need business guidance or mentorship, your investor is the first person you should address. And don’t be shy, that investor wants you to succeed just as much as you want it.

Disadvantages of Investors

When you have a bunch of investors, or even when you have one, you will usually have to give up some part of your company to them. In most cases, it’s not about the investor giving you funds to succeed, but about them buying a part of your company before it has even succeeded.

This is how many investors became filthy rich with Tencent in China, while it was still in development. Now Tencent owns apps and companies such as WeChat and Riot Games, the two largest companies in their respective industries.

Whenever you find an investor, expect them to demand at least 20% of the company for the price they are giving you. Unless they’re angel investors of course.

Angel investors are people that give startup funds and don’t request any part of the company, they simply with their investment returned and that’s it. That is the best-case scenario though and there aren’t too many of them to go around. Your business needs to be exceptionally good, and it needs to solve a problem, it shouldn’t be something that is simply lucrative, it needs to be beneficial to the society it will cater to.

Sponsorships

If your business is something related to entertainment or something that doesn’t necessarily have a product to sell, then you yourself need to become the product.

Although your viewers or “customer base” will have a free attendance or spectatorship deals, they will become your means of generating an income by promoting others.

For example, when we look at the eSports industry in other countries, many eSports experts mention just how much the industry is able to generate through sponsorship deals as well as company promotions during the events.

Furthermore, depending on the niche you’re targeting, there will always be ways to branch out. For example, eSports branches out to beverages, furniture, tech, games and etc.

It can be done in a similar fashion based on your own niche as well.

Advantages of sponsorships

The sponsorship deals do not add any extra load onto your own team. All that you need to do is make sure that during transmission or during the conference, the company’s logo is showcased. This is as easy as simply putting branded water bottles or some merchandise during the event.

Disadvantages of sponsorships

The disadvantage is that in order to get some serious funding, you will have to convince a lot more people than usual. For example, the higher you want to go with your event business, the more companies you need to grab as sponsors or fewer but bigger ones. There’s no need to explain that, larger companies are extremely hard to convince if you’re a beginner, and small companies usually don’t contribute too much.

Plus, there’s always a chance that your niche simply cannot branch out, and you’re stuck with one or two industry leaders.

Business loans in banks

Banks have long been a source of business loans all over the world. But every country has its limits and its interest rates, therefore it may not be the best decision based on your location.

Advantages of bank loans

Usually, all it takes is to apply for the loan and wait for the bank to evaluate your business model. If they approve the loan, that is not only a source of capital but an assurance that your business has the potential to succeed.

And it processes quite fast as well. The banks take usually takes around a week to approve a loan.

Disadvantages of bank loans

The disadvantages are that the interest rates may be quite high if you don’t want too much as starting capital. However, if you want smaller interest rates, then you will have to apply for a much larger loan than you actually need.

P2P lending platforms

These platforms allow you to directly speak with a lender. It helps provide clarity and much more control over the deals you make with the other person. Usually, these platforms are best for applying for loans, but they’ve been experiencing some changes in the past.

You see, the lenders on these platforms have ramped up their requirements, and they’re quickly becoming impossible to meet. Here’s what you should expect.

Advantages of P2P loans

The advantage of a P2P loan is that you have the option to negotiate with the lender. For example, you can divide the payments into quarterly sections, monthly sections or even yearly sections. It basically gives much more flexibility.

You can also apply for smaller loans, and don’t have to suffer through 100% interest rates over the course of paying your lenders back. And it’s very important that you keep your interest rate under control as banks are quickly becoming more and more desperate about future revenues.

Plus, this sector is the only one that provides automatic matching with a lender so that you don’t have to sift through millions of lenders just to find a reliable one.

Disadvantages of P2P loans

The P2P loans usually have higher interest rates for small loans than banks have for large loans. But overall it can be considered as a benefit for those not looking for too much in the capital.

The perfect lender is sometimes impossible to find. Somebody who is ready to give you the exact amount you want and at an affordable interest rate is sometimes non-existent.

Another disadvantage is that the qualifying criteria for applying for a P2P platform is sometimes quite high. It requires at least some amount of capital already invested in the startup. But you can simply showcase your prototype instead of this.

Is that it?

No, definitely not. There are tons more ways to raise capital, such as crowdfunding, crowdsourcing and various other means of gathering funds.

But the ones outlined above are the most effective and easy ones to go for. But be sure to look at what they offer, and what they demand in return.

Our platform, www.ideasvoice.com allows you to register your project online and partners you accordingly with your wishes. So ideally, our website can assist you with investors as well.

Thanks to the 21st century and the digitalization of pretty much everything, it shouldn’t be too hard to find capital, if your business is worth it.

by Yaseen Amod of Ideasvoice SA