Get Business Funding From These 6 Sources
Different businesses need different types of funding sources. Here’s some list for your consideration.
As every business is unique on its own (business model, industry, phase, etc). Different funding approach should be assessed thoroughly for your business growth.
“Company A just raised a multi-million dollar round / mega round at a billion dollar valuation!”, “…largest Series-A round in the region..”, “..doubled their valuation in a year!…”
While it may sound cool to be covered by media raising tons of funding, it isn’t necessarily the right path for your business. I’ve witnessed (and I believe you have read articles about it too) multiple startups that bootstrap and raise zero-funding all the way to IPO, raised tons of funding until IPO, (both apply for failed startups too).
Based on the illustration table above, one might argue that even though the founder’s value in Scenario A is lesser than Scenario B and C, but it achieve that value in shorter time, and the actual value might be equal/greater (time value of money). Solid argument. And that’s the point, there’s no one size-fits all approach in deciding this. There are factors such as market size, market growth, degree of entrepreneur support and the magnitude of funding needed.
That being said, here’s some list of funding sources that you might consider for your business so you can keep your options open and make sure you’ve assessed your options.
1. Angel Investors / Family & Friends
From many places to start, Family & Friends are normally the first one. It also becomes a stronger validation to your business idea, if you ever heard about Mom Test (if not, you can quick check the video explanation below). It’s an important signal that differentiates a nod and a willingness to pay for your solution / ideas. However, it’s typically a Low Support and Low Capital.
Angel investors are a more serious source of funding, in a stark contrast to Family & Friends. Although not always the case, most Angels have huge disposable income, they opted to shop for high risk investments instead. If you ever heard of the TV Show Shark Tank / Dragon’s Den (again, if not, you can quickly check a clip below), it captures the experience of pitching to Angels (in fact, you can check the infamous Chris Sacca in the clip). Angels typically have accumulated business operation or strategy experiences and have strong conviction that they could move some needles together with founders. Some of them are active executives, and more common to find among unicorn-class startups senior roles. This qualifies as High Support and High Capital, as some Angels could even stretch their funding round to Series A and above.
2. Grant
Grant are ‘free money’ obtained from applications or competitions. Well, not exactly free, because normally you need to fulfill certain requirements. The most common source is to check your local government and see if there’s any program that supports local startups. One example is the Singapore Government’s Startup SG initiative (you can check the link below). It is meant to incentivize companies to set up business in Singapore. Another example is Bill & Melinda Gates Foundation that critically aims to solve world health and development problems, if your startup has similar aims, you might be a good candidate for that grant. They also held a form of competition in the past to evaluate those ideas as you can see on the link below. This type of funding gives Low Support with typically Low Capital.
3. Loan
One of the most basic funding sources that comes to mind, even as consumers we’ve made some loan consumptions (a.k.a Credit Cards). If you own assets (typically property, cars, motors, valuable goods), you could technically fund your business with loans. The secret of loan (but quite dangerous path) is the more loan you’ve made, the higher your future loan could be, due to the increasing credit limit that corresponds to your credit history. Bootstrapping founders tend to creatively go down this path, even as far as using personal credit cards to juggle day-to-day cash flows. This could go anywhere between Low and High Capital, but definitely gives Low Support for founders.
Some Fintech startups also fill-in this category and willing to take risk given your business is not bankable enough. A caveat here, some of them are notorious in debt collection.
4. Crowdfunding
There are many websites that support this, such as Kickstarter, Indiegogo, GoFundMe, AngelList and a bit of shoutout to Indonesia’s Kitabisa. There’s legal limitations when it comes to crowdfund equity stakes, so most crowdfunding websites only focus on selling pre-order and donation. It comes down to how compelling your storytelling ability is, because most top funded businesses on those websites definitely gives that vibes. Two examples of companies on this path. The tragic one, Pebble once raised USD 10–20 million and shipped 2 million units of Smartwatch in the mid-2010s, only to shut down the company in 2016. The successful one, Oculus once raised USD 2.4 million in 2012 for Oculus Rift, the early adopter of Virtual Reality technology. Then 2 years later, it was bought by Facebook for a whopping USD 3 Billion valuation. Mind the catch that you should give back part of your campaign proceeds to the platforms.
It may not be for everyone, but also note that these days crowdfunding can be done through the infamous ICO (Initial Coin Offering) in Ethereum platform. Due to the retail investors (or customers) nature, this type of funding counts as Low Support and Low Capital.
5. Venture Capital Funding
The idea to raise venture capital funding justify the importance of learning how they work. Venture Capital makes money from the next funding round or liquidity event, meaning they have a tendency to favor hyper-growth startups that could at least grow by double-digit percentages every month. To see how it works in a nutshell, watch the clip below.
Not many businesses fall to that category, which is why you should consider whether it’s worth it to get or not. Entrepreneurs also need to pass Term Sheet, layers of legal agreement and setup to get VC funding. So, you have to not only convince a VC to invest in your business, but also know the nitty-gritty of VC fundraising terms. There are many cases of first-time founders going down this path successfully, but the high-flying unicorns we’ve seen on news tend to have seasoned executives on board. That means, if you’re inexperienced and your idea turns out to be a hit, you might need to step down and let pros run the show sometime in the future.
That being said, Venture Capital in expected to be in High Support and High Capital category. Always look for value-add to the VC dollars, it should be worth more than what the paper says (for example, help to open market access, partnership, talent hiring, growth strategy)
6. Customers
Last but not least, the best sources of funding you can get, the customers themselves. Businesses operate with different models, but arguably the healthy one could rule the cash flow. It is the blood that runs the startup engine, positive cash flow. A startup might have negative performance by accounting definition (profit & loss), but as long as the cash flow remains positive, it will live to fight another day.
With that said, the one that can front load customers’ spending will sit comfortably. Pre-order is the natural choice to go here, but it takes customers’ trust to charge it. Remember the crowdfunding section above, Pebble raised USD 10 million from customers and yet could still fail to deliver their promise. By this logic as well, SaaS or subscription-based companies could easily have a cashflow advantage, given their unit economics make sense. If you ever wonder how Netflix got valued exorbitantly high on Revenue Multiple, this cash flow is one of the reasons.
You can strategically put Customers as High Support and High Capital bucket. How? Get their honest constructive feedback, and eventually you’ll find yourself power users that spends multiple of other users on your product / service / platform.
Conclusion
Going full circle here, there is no one-size-fits-all funding type, but do notice that any businesses can mix and match all these funding types based on their specific circumstances.
Remember to choose the right fit wisely and don’t forget the Customers.
Article is co-written by Aditya Hadiputra (@adityahadiputra).
