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Different options to get funds for your business venture

Different options to get funds for your business venture

While risk capital allows you to start a firm without taking on debt, it is probably the most expensive form of capital as you are giving away equity in exchange for the capital.

Angel Investors Consortium Co-founder Prajakt Raut Angel Investors Consortium Co-founder Prajakt Raut
While most entrepreneurs think of VC (venture capitalist) funding as the most obvious way of funding start-ups, there are actually many different ways to get the money you need to begin. It's about exploring your options.

Risk capital, i.e. angel investors or venture capitalists:
Angel investors or VCs are investors who give you capital in exchange for equity in the company. They buy equity in a company and expect to make a profit by selling it at a higher price, just like in the stock market. But, in this case, as your company is unlisted, VCs sell the stock they hold in your company privately to a third party. An angel investor may 'exit' by selling stock to a VC and the VC could 'exit' by selling the stock to a private equity firm, a strategic investor or, even rarely, by diluting their holding during or after an IPO (initial public offering).

Funds given by angel investors is collateral free, meaning you don't have to mortgage an asset to get the money. These investors risk losing the invested capital if the business fails. This the reason angel investors and VCs evaluate plans thoroughly before investing in a company.

In effect, they make a judgement that you and your cofounders are a team capable of scaling up the business, that your concept will work and that the market is large and, therefore, there is potential to build a company. It is because of this that funds raised from angel investors, VCs and, later, private equity firms is called 'risk capital'.

While risk capital allows you to start a firm without taking on debt, it is probably the most expensive form of capital as you are giving away equity in exchange for the capital.

Bootstrapping:

This involves pooling in your own resources, usually at the preconcept stage or a prototype stage, to avoid the need for external funding. Often, people who bootstrap their projects, keep their job.

Choosing between bootstrapping and external funding depends on how much money you need. For example, building a solar micro-grid is unlikely to be funded through bootstrapping as it is a capital-intensive venture. However, an e-commerce venture can be bootstrapped, for example by using SAAS (software-as-a-service) platforms.

Consider bootstrapping:

>> when your concept is to be proven and can be proven with limited capital
>> when you are unsure if you would like this to be a long-term career
>> when you already have the resources to go beyond the concept stage

Even when you don't need the capital, pitch the concept to investors as it will get you feedback. If many investors say no, evaluate the concept before diving into the venture

Consider the following before deciding on bootstrapping:

>> Evaluate your idea; speak to experts and pay attention to those who are not excited about the idea. Even if it does not cost money, you are investing time.

>> Efficient bootstrapping requires you to stretch resources. Prioritise what is critical and what can be put off till you receive more capital. 4Keep expenses as low as possible. This means having a small and efficient team and hiring multitaskers instead of specialists.

>> Consider SAAS and outsourcing. Decide if getting something out in the market more important than releasing the final product. SAAS platforms may limit your options to customise, but it can shave off a significant percentage of your funding needs.

Debt
Institutional loans require collateral that an entrepreneur might not have. Even if you have the collateral, ensure that the business concept and model is ready for you to take an individual risk. Often, external investors bring in more people to help with strategic decisions and to test ideas.

Friends and family
For start-ups that need limited capital, friends and family is an option worth considering. But, treat this as formal fund raising. Pitch the idea just as you would to an angel investor. Ensure that the paper work and other formalities are complete and issue equity shares. Once you start the venture, send quarterly reports, set up a board and keep the relationship professional.

Get strategic investors
Larger companies for whom your concept is an adjacent or related opportunity could invest in your venture as a strategic investor. For example, educational content platforms could be an 'adjacent opportunity' for a large company in the education space while health care services for the poor would be a 'related opportunity' for a microfinance company

A strategic investor, apart from providing capital, also helps validate the concept to external investors. This makes it easier to raise funds to the latter stages or get more investors immediately.

PRAJAKT RAUT
Co-founder, Angel Investors Consortium