Presently, there are various schemes and financing options available to new businesses as it becomes easier to procure funds for new businesses with time. In fact, entrepreneurs can actually choose the source that is the most convenient and suitable according to the nature of their business and the amount they need. Let’s take a look at some of the most commonly used sources-
Crowdfunding is that the use of small amounts of capital from an outsized number of people to finance a new business venture. Crowdfunding makes use of the straightforward accessibility of vast networks of individuals through social media and crowdfunding websites to bring investors and entrepreneurs together, with the potential to extend entrepreneurship by expanding the pool of investors beyond the normal circle of householders or relatives
- Reduced financial risk– Crowdfunding enables small businesses to test the viability of their business ideas before making huge investments. With crowdfunding, you can test the market and get some feedback before spending heavily.
- Safe for investors– Investors are always searching for opportunities with big benefits and low risks. As such, investors find this option a good choice, considering it is an independent sector that is not linked to other financial markets. It remains stable even during times of economic instability.
- Tax-free– Crowdfunding decreases the investor’s tax burden as they don’t have to pay tax on these investments.
- Time and effort– Successful campaigns require a lot of personal devotion, in terms of time, effort, and money. You will spend a lot of time and money creating prototypes, convincing videos, and persuasive content to sell your idea.
- Theft of idea– Unless your crowdfunding idea is patented and you have all the copyrights and trademarks in place, someone could steal it. Some individuals could steal your idea and build a better version (or just market it more successfully).
b) ANGEL INVESTORS
An angel investor is a high net-worth person who provides capital for small start-ups or entrepreneurs, usually in exchange for equity in the company. The financial backing, they provide may only be a one-time investment, or it could be ongoing financial support to help the new company in its early stages. Angel investors are often looking for a higher return on their money than they would get if they were to invest in the stock market. However, their interest in start-ups usually goes beyond just monetary return. They may be interested in working within a particular industry, mentoring a new generation of entrepreneurs or making use of their skills and experience in a new way.
- Flexible & Less Risk– Unlike loans, there isn’t a need to pay back the funding from an angel investor because they receive equity in exchange for financing. When compared with others, Angel investors are usually negotiable, since they invest it from their own pocket. In most of the cases, many angels are successful entrepreneurs who have cashed out and understand the amount of risk involved with establishing a business.
- Offer valuable knowledge– Since most of the angels are season investors, they can provide contacts, expert support, and guidance that can support the business grow swiftly. Their insight and resources can be of tremendous value for the company’s growth.
- Loss of control– After investing the money in a start-up, most angel investors take a hands-on approach to the business and thus the founder and the company might lose control.
- Expectations of Angel investors– They may expect a substantial return on their investment, sometimes equal to 10 times their original investment within the first five to seven years. This can create additional pressure. Therefore, before accepting funding, it should be evaluated whether the business can grow at the rate that an investor would expect, and establish expectations for growth.
c) Venture Capitalists
A venture capitalist (VC) is a private equity investor that provides capital to companies exhibiting high growth potential in exchange for an equity stake. This could be funding start-up ventures or supporting small companies that wish to expand but do not have access to equities market. Venture capitalists are willing to risk investing in such companies because they can earn a massive return on their investments if these companies are a success. VCs experience high rates of failure due to the uncertainty that is involved with new and unproven companies.
- Business expertise– Aside from the financial backing, obtaining venture capital financing can provide a start-up or young business with a valuable source of guidance and consultation. This can help with a variety of business decisions, including financial management and human resource management. Making better decisions in these key areas can be vitally important as your business grows.
- Additional resources– In a number of critical areas, including legal, tax and personnel matters, a VC firm can provide active support, all the more important at a key stage in the growth of a young company. Faster growth and greater success are two potential key benefits.
- Connections- Venture capitalists are typically well connected in the business community. Tapping into these connections could have tremendous benefits.
- Loss of control– The drawbacks associated with equity financing in general can be compounded with venture capital financing. You could think of it as equity financing on steroids. With a large injection of cash and professional – and possibly aggressive – investors, it is likely that your VC partners will want to be involved. The size of their stake could determine how much say they have in shaping your company’s direction.
- Minority ownership status– Depending on the size of the VC firm’s stake in your company, which could be more than 50%, you could lose management control. Essentially, you could be giving up ownership of your own business.
Keeping in mind the pros and cons of various options available, an entrepreneur can choose the option that is easily available and suitable for their new business.
Categories: Business, Entrepreneurship