How to Choose the Right Outside Funding for Your Business
One of my clients invested their own funds and some family funds in their local food-delivery business, and it was growing well. They realized they would grow even more if they could get into more national partnerships and distributions. But to do that, they needed more money than they had.
To operate on a more national scale, they would need staff and kitchen time and delivery infrastructure. It was time to seek outside investors. For their fundraising, they were deciding between an angel fund and a bank loan. They weighed the different options and what they could offer, as well as what the impact would be on their control and ownership, any cashflow requirements or restrictions, and how much capital they could raise.
The bank interest would need to be paid monthly, whereas an angel investor with equity ownership in the company would wait for returns, so that was a big consideration. Also, the amount available to them through the angel investor was a lot more. The angel fund put them on a better path of growth and gave them more potential access to capital from that fund or a similar fund in the future. After careful consideration, they went with the angel fund.
Different types of funding sources for different stages
Personal funding may be the right source for someone starting off and wanting full control and ownership of a business. Not so far from that is funding from your friends and family, because, again, that’s a way to keep things relatively simple. It might give you a chance to build an initial prototype or get a minimal viable product in place.
When you want to grow and scale the business or expand into different markets, that’s when you may start considering institutional offerings. Aside from traditional banks, where there are fixed interest payments and, often, covenants and other requirements in place, the opportunities are typically with VCs or private equity houses and angel funds. These are great options when you have started a business where you feel there will be very high growth, such as a technology company, and where you are willing to give up some ownership. With these sources of funds, you will be giving away ownership in your company, as well as control, so you need to have the appetite to do that. Additionally, because the expected growth is so high, there will be stringent goals you’ll need to stick to achieve that growth — and demonstrate it to the investors and the board.
There are also alternative sources. Government grants are a really good source of financing, because while they often come with terms and conditions, they may not be repayable, and that’s excellent for a business. You can be eligible for government grants for a variety of reasons: You could be in the health-tech space or in an area of policy in which the government or government entity wants to expand. The grants are typically on the small side, but they’re good for starting out, and they can be supplemental to other sources of financing.
Crowdfunding — when you go out and get funds from the public at large — is also used quite often by my clients. “This type of funding allows businesses to sell equity stakes in their company to a large pool of investors in exchange for capital,” according to SkyQuest Technology Consulting Pvt. Ltd. on Yahoo! “There are a number of reasons why this model of funding has become so popular. First and foremost, it provides businesses with access to a much larger pool of potential investors than traditional methods. Secondly, it is a relatively quick and easy way to raise capital. And lastly, it can be done with minimal dilution to the company’s ownership structure.”
Crowdfunding platforms typically require you to have a very strong case around your business and your product to be able to market to people and get them to invest. For consumer products, it also can help build anticipation.
What’s best for your business? Let’s sit down and discuss what the different sources of financing would mean in terms of impact on you in the future, impact if your business goes in different directions, and what matches your long-term goals. Please reach out to me. I’m happy to help.