Starting a business is no easy task. With competition so massive and firms competing on a global level to capture market share wherever possible, starting a new enterprise needs conviction and perseverance. A great startup idea may not be enough to establish a sustainable venture. By contrast, even modest ideas, for example selling goods online, can evolve into great businesses when entrepreneurs take the right steps throughout the journey. Entrepreneurs usually bring on table the idea alone and quite often the technical expertise to execute that idea. But this isn’t enough. To let the wheels rolling, any business, small or large, necessitates funding, timely and adequate. Scaling up at the right time is the need of any business, and without finances, the wheels may cease, dealing a body blow to the idea of the founder.
Having noted that funds are the lifeline of all businesses, we are also to know how these get arranged in a way that the equity or debt raised is sustainable and does not take away the creative involvement of the founder/s. Yes, many startups across the world see their founding team departing when a formidable venture capitalist decides to replace the management with their team of experts. Purging of founders is nothing new in the startup space, and this demands prudent decision making by entrepreneurs when raising funds.
That apart, not all funding comes with negatives. Take, for example, an entrepreneur borrowing money from friends and family and then wisely placing these funds to establish a commercially viable venture. It is, however, is a rare feat. For most entrepreneurs, raising funds comes in a traditional manner, which involves approaching financiers, placing on table the credentials of their startup, convincing the probable backers on the future viability of the project, and then entering into a deal that is rewarding to both the parties.
Let’s discuss some of the alternative avenues available to startups when in need of funds.
Friends and Family
No, don’t underrate this avenue. It may be the best among all. When getting funds from other parties as debt or equity, startups either have to pay interest or pare their stake. With funds coming from friends and family, neither interest gets paid, thereby keeping at bay the hurry to turn profitable, and nor stake has to be lost. This funding option, however, can serve the needs of those startups that require moderate funds in the initial phases. For example, starting an e-commerce platform for B2B or B2C market or building an online aggregator that compares room rents of hotels on various other websites. For startups in the manufacturing sector or those involving highly sophisticated tech, these funds may fall short.
Secondly, raising funds from this avenue can be a wise idea only during its inception. As startups grow, they have diverse needs for funds, such as spending money on marketing and even allowing discounts to gain a more significant market share or acquiring related businesses. That may either have the same offerings (nipping competition in the bud) or can complement the operations of the business (such as e-commerce platform acquiring a delivery startup). All these tasks require a comparatively higher sum of money, and funds arranged from friends and family may not be enough. Still, in the initial phases, entrepreneurs can go for financial assistance from this avenue and build a promising small venture that can, in the later phases, attract funds from such other channels as angel investors and venture capital funds.
Angel investors are not to be confused with venture capitalists or private equity funds. Here we are talking about individuals that may not be related to you but find value in your startup. These are usually high net worth individuals seeking to place their private money in ventures for higher returns than are available in traditional investment options like keeping money in the bank. Quite often, angel investors may not be looking for lucrative returns on their investment but may only get driven by other factors such as the social impact of your startup. For example, if, as an entrepreneur, you are looking to found a news portal dedicated to busting fake news on the internet, a philanthropist can back your idea even without finding any real financial returns in it.
Finding an angel investor can be a challenge. Although we know that big-ticket investors do place their money in startups with high growth potential, approaching them can be tough. In Singapore, a platform, BANSEA, bridges this gap and helps entrepreneurs connect with angel investors. Early-stage funding needs can be arranged by finding angel investors through this platform. Founders must also know that most of the funding that comes from the angel investment route cannot suffice the need for large-scale expenditures, such as acquiring another enterprise or drastically scaling up operations. Angel investors are high profit-seeking individuals but with limited funds. To tap deep-pocket investors, read further.
Venture Capital Firms
Venture capital firms have a clear mandate – deploy funds in early stages of a promising business, acquire stake, engage for a 5 to 7-year term, and then exit by selling off the stake to another investor for profit. And, indeed, subsequently, find another investment opportunity. In the city-state of Singapore, entrepreneurs can approach more than 100 VCs, who are always hunting for new businesses with lucrative growth potential. VCs also profit out of incentives offered by the government to them, whereby their investment in startups can minimize tax outflows. VCs are more often than not highly professional and have in their team personnel that can assess the venture on technical, financial, and such other parameters.
A simple approach to VCs can only dent your prospects of having them as investors in your startup. You would need a proper business plan, an already established startup, though at the inception stage, accurate market study and reliable forecasting of growth and revenue. VCs typically engage at a later stage and only after the founder/s have something to showcase the future growth potential. Additionally, since VCs are highly technical, they may not fall for traditional startup ideas that are fast losing sheen. Instead, ventures involving new-age tech such as artificial intelligence, blockchain, nanotechnology, and others are the new interest areas for VCs. Some prominent VCs in Singapore are IDG Ventures SEA, Singapore Venture Capital Association, Sirius Venture Capital Pte Ltd, and Draper Fisher Jurvetson.
Peer to Peer Financing and Crowdfunding
Peer-to-peer financing, also known as P2P lending, is fast becoming a preferred fundraising avenue for small businesses, especially those which have a small team, and their present business structure doesn’t allow them the leverage to approach formal lenders. P2P financing can be understood as general members of the public pooling their funds, given earning some extra bucks rather than placing the same amount of money in banks, and financing businesses without having them go through uphill formalities. Of course, P2P lending can come at a higher cost since the interest charged can be higher than the prevailing interest rate in the traditional market. But the fact that securing P2P financing is faster and convenient for even small businesses with no collateral to offer makes this a viable option.
Crowdfunding, on the other hand, is also people coming together to back a venture where the founder has fallen short of resources needed to found or scale-up. Difference between P2P lending and crowdfunding, the latter invest in the company and get a stake in the business. If a business fails to perform, the backers lose their value, and the founder doesn’t have to repay. Having talked about both, let’s also know where to go for raising P2P funds for your business. CoAssets, Minterest, Seedin and MoolahSense are some of the leading P2P platforms which can be explored by small businesses depending on the type of financing, for example, long-term or short-term and the rate of interest; they are looking forward. Kickstarter, FundedHere, Indiegogo, and Fundnel are some of the crowdfunding platforms.
Invoice trading is one of the best alternative fundraising avenues for SMEs. For those who are new to this, invoice trading is nothing but a convenient substitute to factoring and invoice discounting, as is done through formal channels like banks. The difference is that here, the unpaid invoices held by a business get offered to investors via online platforms, and funds can raise for business purposes without having to pay high interest on money raised otherwise through loans. Generally, the unpaid trade receivables held by any business get auctioned to private investors who bid for them. Money gets raised, and the investor gets paid only when the original business debtor honors the invoice. Stenn and eFund SME are two market leaders in the space of invoice trading.
Based on the above funding avenues for businesses, the last word can be about being prudent when thinking of raising funds. Much depends on the awareness of various avenues available and deciphering, which one best suits the needs of your startup. One standard string is that funding depends largely on the growth potential of your startup, and no wise investor would turn down a viable business idea. Additionally, the founders must be careful of scaling up even when funds are available at their disposal. The best example can be of the ride-hailing company Uber that lost billions when placing bet in Southeast Asia. At the same time, timely acquisitions, such as Facebook acquiring Instagram and WhatsApp, need well-timed fund availability. It is needless to say that all startups, at some point or other, need funds to grow, and as a result, the avenues mentioned above, they must deliberate.
Read More: P2P lending