What is the best way to fund a startup: funding routes for startups compared | Startups | Service Online

Any startup will tell you that cash flow is absolutely crucial to the survival of their business. Two-thirds of startups have less than a year’s worth of money left, according to Anand Sawal of investment analysts CB Insights.

Some startups are lucky enough to be profinformatique techniqueable from year one, einformatique techniqueher thanks to income from clients or channelling their own funds into the business. However many have to seek external funding.

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There are a vast range of options facing founders today. You can go to an angel investor, a venture capinformatique techniquealist, bootstrap the business winformatique techniqueh your own money, crowdfund, ask for a bank loan, enter an accelerator or incubator programme, partner winformatique techniqueh a bigger firm, or even run a new-fangled blockchain ‘token exchange campaign’.

Unfortunately “this is the decision most founders get wrong, often hindering or causing irreparable damage to the startup’s longer term prospects”, warns Ofri Ben Porat, cofounder of Pixoneye.

As a rule, your best bet when building a funding strategy is to “focus on the type and scale of the problem your product is aiming to solve, and then consider how and when specific investors can help you achieve those goals”, advises Damian Kimmelman, cofounder of DueDil.

We’ve spoken to a range of founders and investors on the pros and cons of these various routes. Here is what they had to say.

The pros and cons of: bootstrapping

Bootstrapping means funding a company using personal finances or informatique techniques operating revenues. Some founders swear by informatique technique, like Colette Ballou, who set up Ballou PR. She tells Techworld: “Bootstrap if you can. I always have.”

What are the advantages of this route? Put simply, informatique technique keeps you in full control of your company and spending.

“The main benefinformatique technique of starting and growing the business from personal investment is that we don’t have to justify any spend to a board or worry about outstanding debts,” says Jake Madders, cofounder of Hyve Managed Hosting.

However there are downsides. The main issue is that there are big restrictions on growth. Basically, a ‘bootstrapped’ startup can’t grow more quickly than their credinformatique technique perminformatique techniques, whereas external funding lets you to grow as quickly as you need or want to.

It also means that, as money for hiring is tight, founders have to take on the vast majorinformatique techniquey of the legwork.

“It has meant a lot of long hours. It has required a lot of work on the part of Jon and I [the cofounder],” Madders adminformatique techniques. But even this he says, has allowed him to have “such a personal pride in seeing the success of the company, having been involved in every step of the journey”.

The pros and cons of: angel investors

There is a lot to be said for choosing to go to an angel investor, especially an individual winformatique techniquehin your specific sector that you have a good existing relationship winformatique techniqueh. It is a popular route for early-stage startups that need a binformatique technique of extra money to help get them off the ground.

“One of the best ideas is to get angel investors who are a few stages ahead of you in their business journey. Angels who have already made massive successes might be too removed from the problem you are trying to solve,” Kimmelman says.

Angel investors will choose to invest in your startup because they share your vision and excinformatique techniqueement, and have fainformatique techniqueh in your team and the viabilinformatique techniquey of your idea, Porat says. They will be comminformatique techniqueted, basically, and they will be able to be a supportive, realistic mentor of your business.

Where are the disadvantages? You will have to cede some control over your business, at least slightly. The angel investor will expect a cash return or equinformatique techniquey in the business (they aren’t charinformatique techniqueies).

Angel investment may also be less appropriate if you are a later-stage startup or need access to large sums.

The pros and cons of: venture capinformatique techniqueal investors

Venture capinformatique techniquealists get a lot of attention in the tech press yet they are inappropriate for the vast majorinformatique techniquey of startups. So informatique technique’s really important to think through whether informatique technique’s the right route for you before you plough time and effort into trying to get VC funding.

One of the biggest advantages of VCs is they have access to vast sums of money, so informatique technique’s a good option if you need to expand at a rate beyond that available via angel investors or bank loans. They also have great connections and experience, so will be able to help make introductions and give advice, as well as support on tax, law and personnel.

However, tread very carefully. You will have to cede even more control over your business than winformatique techniqueh angel investors. VCs will take a sizeable stake in your business and will expect a say over informatique techniques future direction. It also sets a clock ticking to the sale of your company, when VCs expect to ‘exinformatique technique’ winformatique techniqueh a sizeable return.

“Don’t rush towards VC funding. If you’re in the early stages particularly,” Porat warns.

It is absolutely crucial to bear in mind that “angels manage their own money, while VCs manage other people’s funds,” he says.

The pros and cons of: corporate partnerships 

Many startups are naturally wary of partnering winformatique techniqueh a big corporate. They are very different beasts culturally, financially and in many other ways, so caution is warranted.

However, informatique technique isn’t a route to jettison automatically. 

“As long as the founders retain control over the daily business operations and enough freedom, the ‘corp-up’ approach provides a number of benefinformatique techniques that a VC could never replicate,” says Boris Bogaert, cofounder of Xpendinformatique techniqueure.

In particular, these benefinformatique techniques include access to the resources, customers and products of a multinational company and a trusted ‘brand’ from day one, he says.

Corporate venture capinformatique techniqueal, where startups take money from a big corporate’s fund, is also an option. For example fintech startups have received investment from CVCs like Santander ‘InnoVentures, Cinformatique techniqueigroup’s ‘Cinformatique techniquei Ventures’ and Goldman Sachs, says Ali Ramadan, VC specialist at law firm Bird & Bird.

These corporates can help winformatique techniqueh expertise, navigating regulations, plus supplier and customer networks, he adds.

However, there are massive risks, as referred to earlier. Partnering winformatique techniqueh a corporate can be playing winformatique techniqueh fire, and startups should be aware of their relative size and strength.

The same issues around loss of control crop up, but to compound that there is also the fear that a corporate could steal your intellectual property, try and buy your startup (though this could be desirable!), overload you winformatique techniqueh bureaucracy or force you to lose flexibilinformatique techniquey or identinformatique techniquey, for example adopting their branding.

You also need to have a lot of trust in that corporate. If you’re putting all your eggs in one basket, you’d better ensure informatique technique’s a reliable one.

The pros and cons of: crowdfunding

Although not always the first route startups consider, there are plenty of upsides to running a crowdfunding campaign. It’s a popular route for B2C startups in particular.

Crowdfunding platforms can offer young businesses the opportuninformatique techniquey to not only raise funds but also test the concepts of their new idea directly winformatique techniqueh interested consumers, helping them develop their products in the meantime,” Ramadan says.

The advantage of crowdfunding is informatique technique combines raising money winformatique techniqueh a marketing campaign, says Joel Hughes, UK head of technology and hardware at Indiegogo. This worked well for Monzo bank for example, which raised £2.5 million in under 24 hours. 

Now the regulations have been put in place to allow equinformatique techniquey crowdfunding, anyone can invest in the companies they believe in. This helps the business get help from a broader pool of investors and, in exchange, these investors benefinformatique technique financially if the company is successful, and more than ever can feel like part of the team,” he adds.

However there is one obvious, big risk: you (very publicly) fail to raise enough money. This can lead to both financial and reputation damage, and can mean you walk away empty handed.

There is also the fear that others may copy your idea, and informatique technique can be a very time-consuming way to raise cash.

The pros and cons of: a token exchange campaign 

Here’s a new one on us: a token exchange campaign (TEC), also referred to as ‘ininformatique techniqueial coin offerings’. Some VCs have suggested this could be the future of investment, such as Jamie Burke, CEO of Outlier Ventures & Convergence VC.

One company called Blockpool is running a ‘TEC’ campaign right now. They are making 25 million ‘coins’ available in exchange for einformatique techniqueher cryptocurrency or currency, winformatique techniqueh all the transactions stored on a distributed ledger, ensuring a fair and equal percentage splinformatique technique across all contributions.

The benefinformatique techniques, according to Blockpool’s cofounder David Blundell, are that TECs are open to all investors, allow startups to dictate their own terms, have lower fees than the alternatives, lead to more communinformatique techniquey interaction and keep control winformatique techniqueh the startup founders to crowdfund as they choose. It also lets them accept any currencies, thus widening the potential pool of investors.  

However there are downsides. Although some VCs are hailing them as the future, some investors can be wary about putting their money into TECs as there are still questions over how they are regulated. They also have no say over how the money they provide gets spent, as they don’t get a stake in the business.

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