The lack of funding is one of the obstacles many startups face at some point in time. And when you have decided to raise fund through external sources, you are faced with many different financing options.
Generally, funds are raised through two methods: debt or equity financing. To put it simply, debt financing is like getting a loan from the investors, with the promise of repaying the principal and interest on the loan. As for equity financing, the fund is raised in exchange for a certain stake in the company.
The public can support and contribute money towards a project they are interested in, through crowdfunding platforms such as Kickstarters and Indiegogo. Entrepreneurs will put up the detailed description of their projects to campaign for funds. In return, the supporters will get the product (depends on the amount pledged) when it is released.
This is a good method of raising funds as it doesn’t require you to give up a stake in your company. In addition, you will immediately get a rough gauge of consumers’ interests on this product. A good example would be Oculus Rift, which has raised $2.4 million via Kickstarters back in 2012 before it was acquired by Facebook at $2 billion.
Cons: It is a competitive platform with hundreds of ongoing campaigns. There are hundreds of campaigns that go unfunded each year through this method. This means that your products must be rock solid and are able to gain traction amongst the consumer masses.
VCs are usually a group of investors who provides capital and support small companies or startups. They usually invest in early-stage companies who are lacking in track record to go to a bank for funding. Due to the high-risk nature of the investment, they would expect a high return upon exiting the company. As VCs usually invest in sectors in which they have experience in, they can also mentor the business owner in making business decision.
VCs are sometimes called unicorn makers as they are good at spotting unicorns (startups worth at least $1 billion).
Uber raised $1.2b in funding back in 2014 from a group of mutual funds manager and VCs with Google Ventures investing an impressive $258m. Snapchat raised close to half a million in an initial seed round and in Feb 2015, before announcing another round of funding, which raised a staggering of $1.4b. Instagram raised $7m in Series A funding from several investors and $500 m from VCs in another round. Facebook ended up purchasing the company for an impressive $1b dollars.
Cons: Since VC funding is a form of equity funding, you might have to be comfortable with giving up a little control and compromising in some decisions.
Angel investor are sometimes affluent individuals who inject capital in exchange for ownership equity or convertible bonds. They typically invest in deals earlier than venture capitalists. However, entrepreneurs should not just present them with an idea. They start to finance the early stage of a company where there is a prototype or beta.
Cons: Again, just like any other equity financing options, you will not be in total control. While they might be leaving the company for you to run, they will certainly ask questions with regards to your business decision. Thus, it is best to look for an angel investor who you are comfortable with and is familiar with how your startup is run.
P2P Lending Platforms
Unlike equity financing, peer-to-peer lending is a debt financing option that enables you to borrow money from your “peers”. In another word, P2P platform removes the use of a financial intermediary, in most of the cases, a bank. In addition, P2P lending provides fund access that you may not have gotten approval by standard financial intermediaries. Moolahsense is one of such P2P platform in Singapore.
Cons: Due to limited funds, P2P investors are as good as banks in mitigating default risk through diversification. Thus, P2P investors would expect a higher interest rate.
Micro loans are designed to support entrepreneurs who lack collateral and verifiable credit history. Unlike traditional loans, micro loans are unsecured. This means that you do not have to use any assets as collateral.
To improve the accessibility of SMEs in getting funds, SPRING has tied up with several banks such as Maybank, DBS and UOB to finance companies that are less than 3 years old. On top of that, annual revenue of the company has to be $1 million or lesser and is having less than 10 employees.
Cons: Just like the name, the loan amount can only be up to $100,000. This means that you might have to source for other funding methods as well.
Every business is unique in its own way, thus, there is no “best financing option” out there. With the pros and cons of individual financing methods, you have to find the most suitable option for your business.