7 Ways To Fund A Startup – VC, Angel Investor, Crowd Funding, Lean Startup, & Bank loans (FULL)
Modern business is difficult, but starting your business from scratch without funding can sometimes be impossible. The statistics are stunning, 4 out of 5 businesses will fail due to the selection of the wrong business model during its startup. This article will compare the Pro’s and Con’s of the main business startup models. Depending on your business or eCommerce experience level, some of these models may apply while others will just be educational. These models are the most modern online business models used today and will address either your current needs, present needs or future needs.
1. Venture Capitalist: (Pro's & Con's)
Venture Capitalists (VC’s) are people, businesses, or groups that provide funding to startups and/or launched businesses in exchange for either royalties or ownership percentages. VC’s traditionally have tight wallets, but more recently, in spite of strong economic times and TV shows like Dragons Den / Shark Tank; VC’s have become glamorized and made to be seen as much more attainable.
Provide funding to grow your business.
Royalties based on per unit sales.
Investor has connections to help grow the business.
Provide funding to purchase business assets. (Not cars)
You will not be allowed to make basic business mistakes by your VC’s.
Help stream line manufacturing and distribution processes.
Lose some or all equity in your business
Royalty payment plan will take money out of your pocket
You can be voted out of the business (board of directors) once the business grows
Can be a financial burden on your business
Lose decision-making ability to the capital provider (VC).
Funding provider will take a hand on approach with owners (micro manage).
If the business goes bankrupt they can buy your income generating business at a loss.
**NOTE** - When selecting a VC make sure you choose someone who offers more then just funding. Understanding fully the market and what you as an owner want to achieve!
2. Angel Investor: (Pro's & Con's)
Angel investors have been all the topic in the modern Tech Startup Age. Someone with a million dollar Tech idea turns to an Angel investor (Someone who essentially came from the heavens to get your idea off the ground). An Angel Investor is someone who has what the average person would consider extreme disposable income. They use their excess money to invest in multiple ideas in the hopes the return will be 10x their investment. This miracle idea has been very popular over the last 20 years. However, we have seen a steep decline in Angel Investing because of the extreme competition in modern business.
Have enough money to hire the right team to bring your idea to reality
Angel believes you as a person will have everything you need to grow the business
Hands off funding style
Allows for exponential growth
Gain credibility based off investors
Most frequently offered as IPO’s to generate more income.
Lose some or all equity in your business
Can be voted out of the business (board of directors) once the business grows
Only get a small piece of the pie
Very difficult to find Angel Investors
3. Business Partner: (Pro's & Con's)
The most common type of business arrangement is a business partnership. This has been a very popular option because of its deal optimism. The best definition is; a business partnership is two or more people who come together with different skillsets that they believe will be effective together in starting and growing a business.
Multidisciplinary approach to decision making
Multiple sources of funding
50/50 business distribution so decisions have to be 100% agreed upon by everyone (or majority)
Distribute work evenly across different people to get work done quicker and more effectively
Each owner utilizes his or her strong suit.
Great accountability for work.
Difference of ideas can lead to deadlock and halt business growth.
When it is time for someone to exit the business things can be very complicated.
If someone does not pull their weight, it can cause the relationship to be stressful.
You may resent your business partners based on their lifestyle choices. (cars & houses)
May lose steak in company in exchange for work early on
4. Crowd Funding:(Pro's & Con's)
Crowdfunding is the idea of having people pledge money in return for your first product or service. The most common type of Crowdfunding is found on websites like Kickstarter or Indiegogo. This only applies when you have a working prototype of your product. Similarly, the products that historically to do the best are those who present a social cause.
Gain Internet credibility.
Jumpstart your business growth.
If you get fully funded your business can explode.
Will not receive funding until items are shipped.
Need capital to build and ship your orders.
If your campaign doesn’t reach its goal it can be bad PR.
May be difficult to generate a working prototype.
5. Lean Startup: (Pro's & Con's)
With the reemergence of minimalism, many modern business models have leaned on the idea of starting a business with little to no capital or resources. However, many of these models forget to mention you are required to have at least basic business knowledge in order to succeed. It is close to impossible to start a scalable business (With no experience) or with less then $500. You will need enough money to pay for a website, pay for advertisements, and/or products. Here are some pro’s and con’s to the Lean Startup Model
You have complete ownership
Minimal risk to you personally
Great opportunity to test the market before committing
No support or team to work with (Unless you subcontract people)
Long hours and hard work
Build your own network
Large chance you will make mistakes as you go
6. Bank Loan: (Pro's & Con's)
Many startup companies turn to the bank for loans during the design, development and deployment phases of a new product. In situations were someone has an idea and a go to market strategy, we often see people take lines of credit or home equity loans to fund their business. Below we will briefly discuss the pro’s and con’s of using banks loans to grow your business. Here are some pro’s and con’s to Bank Loan Models.
Provides an opportunity to grow your business.
Allows you the ability to invest in real-estate and other assets for longterm leverage (Not Cars)
Purchase larger orders of products to decrease your per unit cost.
Can help create a nest egg of capital to expand your business long term.
Charged interest on your loans for the duration. You lose money until you pay it back.
Puts you and your family personally in debt.
The risk of over leveraging your business with debt can put the future of your business at risk.
Should your business be sued, your business worth includes any equity paid towards a loan.
Require higher margins on a product for it to be feasible.
7. Flipping Product (Pro's & Con's)
The hottest trend of 2019 has been flipping products.
What is flipping products?
Flipping products is when you purchase 1 product and sell it for a profit in order to fund the purchase of your next product. In essence you are trading up and accumulating capital in-between transactions. Depending on your eCommerce business this might only apply if you operate an eBay store or sell on Kijiji, let go, or Facebook marketplace.
Provides an opportunity to grow your business with zero risk.
Start with Little $
Money can me used to fund other ideas
You may not make money on every transactions
Need to have Market Research.
In conclusion it is safe to say, there is no such thing as the perfect business model. We at My Ecommerce Startup believe that using a hybrid approach to the following 6 strategies will give your business the upper hand. By offering a custom tailored business model you can ensure you are not over leveraging by but still offer a sustainable competitive advantage
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