You have a brilliant idea to make a difference in the world through tech innovation. If you have an entrepreneurial spirit, you’d probably fall for the sharing economy hype and kick start an online business right away. A lot of people think that generating a unique idea seems to be the biggest challenge in building a startup, it’s not; it’s money. You need money to run a business; from creating a website to renting an office space—adequate funding will determine the livelihood of your startup. There are three popular ways for startup founders to get funding: bootstrap, crowdfund or raise capital. Let’s take a look.
Bootstrapping in building a startup means using existing resources (self-funded) in operating the business. Bootstrap is a widely used option for young entrepreneurs who are working on their minimum viable product (MVP). This method will give you full control of your startup and you have the autonomy to set your own agendas without outside pressure and influences. Bootstrap forces you to be careful and wise in making decisions since you can’t afford mistakes, a good habit to develop in running a business.
Launching a startup with your own money (which is often limited) can mean your business can’t develop as fast as desired. You don’t get as much networking opportunities when bootstrapping compared to opting to work with VCs and angel investors. You have less chance of creating beneficial partnerships, while having limited access to desired markets which reduces visibility. Although it’s not always necessarily the case, bootstrapping may reduce credibility of your startup. Having well-respected investors backing your business can boost customers’ confidence to use your product/services.
Crowdfunding is a process of raising funds using the internet and various social media channels in reaching out to the mass. Using the mediator platforms such as Indiegogo or Kickstarter, anyone that is exposed to the campaign can make financial contribution to the project. The best thing about this method is that you can get funding without having to sacrifice equity or your own savings. The convenience of social media really helps in spreading the word, and increasing visibility of your startup. Pledges and backers that you get from the campaign can serve as a validation of your idea and can attract future investment opportunities.
However, creating an attractive crowdfunding page takes time and effort. Besides a convincing story, you need to come up with creative ideas such as perks and even a video to draw attention. Most of crowdfunding platform providers charge fees for their services and you may need to pay taxes on some occasions. Lastly, by putting your startup project online, you have the risk of having somebody else copying your idea.
This is where you get the big bucks and things can 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 are not afraid to spend their cash. Depending on your industry, some businesses (like SaaS and ecommerce) require large upfront funding in making the product, something that VCs can provide. Besides financial, VCs can provide expertise and other assistance that’s advantageous in building your startup. It adds credibility and open doors to a wide pool of individuals that could potentially be business partners and future investors.
VCs don’t give you their money for charity, it’s all about profits and they will take whatever measures to ensure a return from their investment. Sometimes that could mean ejecting you from your own company. You don’t have a full control anymore on your startup. In most cases you’d have to comply in a direction that you disagree, although VCs oftentimes can see the blind side that you can’t see.
Considering all options, it’s not a bad idea to adopt each model progressively. You can start out bootstrapping to generate an MVP, followed by crowdfunding and VCs to grow and expand. You can adopt an entire model and switch when needed. Ultimately, it’s a matter of preference and identifying how each method can fit in well with your startup and your leadership style as a founder.
About: Kenneth Low is a co-founder of Arcadier, a SaaS company that powers next generation marketplace ideas. You can follow Arcadier on Twitter, Facebook, and LinkedIn for news and update.