Startup Funding – A Closer Look at the Key Options

25 Sep 2014

Gaining access to initial funding and maintaining a workable cash flow situation are two of the biggest challenges that newly established and fledgling businesses face. There are of course no guarantees of sustainable success even when a new company is able to generate investor interest and raise the cash they need to get started.

Here we’ll take a look at some of the pros and cons of three key types of funding for startups and then outline new ways in which small firms are accessing cash to keep their companies in business.

Angel investing

As if sent from heaven, angel investors arrive on the scene to provide cash injections to startups in return for equity stakes in a business that appears to be going places. Typically these investors will aim to get involved at a very early stage of a company’s development in order to maximize the potential returns they can secure if the relevant ideas take off and are turned into tangible earnings.

Getting the backing of angel investors, whether it’s an individual working alone or a group of people whose interests are being represented, can be a very significant and positive moment for a startup company. However, it is important to realize that none of us are in fact angels and that some would-be investors are more reliable and trustworthy than others.

So, rather than succumbing too easily to flattery, startup bosses should focus on doing their homework on any angel investors they come into contact with. What matters most is making sure that your company and your investors are a good fit and have compatible goals in mind.

Venture capital

Securing the support of venture capitalists can make a massive difference to the prospects of a startup company but, again, some investors are more reputable than others. Ideally, a VC organization will provide funding, follow on finance, business know-how and guidance to startup companies that they work with.

What’s important for the startups involved in a VC arrangement though is to figure out whether all that is being offered is genuine and if the respective interests of both parties are properly aligned. One potential downside risk is that a VC deal might overvalue a small business and pile on too much pressure for rapid progress and developments to be made.

Crowd funding

Crowd funding takes the communicative capacities of the internet and brings them right to the heart of how startup businesses can find ways to finance their ambitions. The process relies on the engagement of large numbers of users and the persuasive potential of startup operators and their ideas.

All of which sounds great and in many ways it is but success in raising money by selling equity through crowd funding should not be confused with real-world market success. As a means of raising cash at an early stage, crowd funding can be useful and important but, under these circumstances, the real tests often lie ahead as ideas are turned into practice and products enter markets to succeed or fail.

Invoice finance

Another emerging finance option enabled in part by new internet platforms is invoice financing, which allows small businesses to leverage their sales books to raise cash based on future income. The process is based upon selling the rights to invoices issued to clients at a pre-agreed price. The latest platforms mean invoices can effectively be auctioned off to the highest and/or most reliable bidders.

It’s no secret that the early stages of small business development can be beset by cash flow and funding problems and invoice financing can provide a vital lifeline at crucial moments.

In an ideal scenario, there would be no need for a company to sell its future earnings in return for an immediate cash injection but when a small business sees its finances being squeezed, the option can be much better than other alternatives.

Getting it right

What matters most in all this though is making sure that a particular set of funding arrangements is right for your circumstances as a small company looking to grow and develop in a sustainable fashion.

No startup is precisely the same as any other and while the big trends to have emerged in recent years are around for good reason, it is crucial to assess each case on its merits and to figure out what will work best for your business in the longer term.

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