by Anand Srinivasan, founder of LeadJoint.com
Aspiring entrepreneurs often see startups as their ticket to independence from the 9 to 5 work life. Make no mistake, starting your own business is indeed gratifying that way, but not all startups are an escape from a regular job. The business model and investors play a critical role in shaping the independence and work-style of an entrepreneur.
What Investors Mean For A Startup.
Investors are much more than just people putting up money in exchange for equity. Startup investors play a strategic role in terms of influencing the direction of a young company. In effect, investors may also play the role of advisors and be the devil’s’ advocate.
Of course, all investors are not the same. While some investors, especially those at the early stage of the company, tend to take a hands-off approach and let the founders take important decisions, others may prefer to play a more hands-on role. This would effectively require the founders to “report” to these investors.
Such a hands-on role has its own pros and cons. If you are a young founder with not enough industry experience, an investor who has domain knowledge could play the valuable role of serving as your advisor. But a paranoid investor could micromanage your business leading to discordance between the investor and the startup owner.
Do You Need An Investor?
If you already have advisors on board and are looking at investors primarily for their cash-input, you must know that there are dozens of ways to fulfill this need without having to approach an investor. They all come with their own risks. However, as a startup owner, you must explore all these different avenues for funding and pick one that suits your needs the best.
Business Loans: This is the most obvious alternative to getting cash for running a business. Unlike an investor who gets equity in exchange for their cash, business loans need to paid off by all means. In essence, you should only be taking on a business loan if your startup idea has the potential to start making money immediately.
Another challenge with business loans is that they need a good credit score, credit history and sufficient collateral to get through. This can be a challenge depending on circumstances. In such cases, you could go for alternatives like purchase order financing, microloans or working capital loans. Again, do note that the interest rates for securing loans without a collateral or a good credit score can be high and you should take this route only after making sure that you can repay in quick time.
Crowdfunding: Crowdfunding can be an extremely good way to raise funds for a product that needs capital investment. Crowdfunding essentially lets your customers “pre-order” your product mainly based on its promise. You may invest this pre-order money to build your product which you deliver to your customers after you are in business. Crowdfunding works well because you distribute the risks of failure among the hundreds of customers who are interested in your product. What this also means is that you risk losing their trust in case you do not deliver (which can impact your future projects). Not only that, since crowdfunding works on the basis of customer interest in a particular product idea, you may not be able to pivot your business at a later time since the money you have been provided with is solely for fulfilling the product you promised.
Alternate Funding Channels: There are several other alternatives that one could seek to fund their startup. Startup grants and funding from family and friends are common. Depending on your industry, you may also find other niche ways to raise money. If your business falls in the ‘non-profit’ category, you could make use of professional fundraisers to help you with raising money. Alternately, if your business does not have a lot of capital expenditure, you could also look at bootstrapping your business and channeling money from your own business into funding your growth.
There is no right or wrong way to fund a startup. What you should however remember is that there is a cost for every dollar that is put into your business. And when this comes from an external entity, you are liable to repay them in one way or the other – repayment with interest for banks, high valuation for VC investors and trust for customers you secured through crowdfunding. What works best for you depends on your circumstances and the kind of business you manage.
Anand Srinivasan is the founder of LeadJoint.com, an online lead generation tool for digital marketing agencies. He is also a part-time marketing consultant and has previously worked with some of the most promising Indian startups.