The most common form of startup funding is bootstrapping which is starting a company by yourself or with a partner and investing your own money into the company to get it off the ground. This feat is how many famous companies like MailChimp and AirBNB got their start.
Usually the company gets its funding from the founders having other sources of income like day jobs, investments, or from family and friends. This option is the most flexible for startups because they don’t have any outsiders weighing in on company decisions or wanting to steer the company in a different direction than the original founders intended. This funding type has the greatest limitation in that funding is usually limited and requires serious creativity to make sure cash flow is adequate to cover the expenses of the startup long enough to make it profitable.
Many times companies will start out funding through bootstrapping and after they have a track record of success they will seek outside investors like angel investors or venture capitalists to help them scale to the next level.
There’s a really good chance that if you glance at your smartphone right now you’ll see an app that was marketed and built with venture capital. Venture capital is defined as financing that investors provide to startup companies and small businesses that are believed to have long-term growth potential. A venture capitalist (VC) is an investor who either provides capital to startup ventures or supports small companies that wish to expand but do not have access to equities markets. Typically because with new ventures or startups there is no incentive for traditional banks to help them. They see the new ventures as too risky and could likely cause them to incur losses.
VC’s invest in startups because the opportunity may return very large returns on their initial investments if the startup becomes a success. VC’s also experience major losses when the startups they invest in fail, but typically these investors are wealthy enough that they can afford to take the hit.
The downside of receiving venture capital is that the venture capitalist who invests in the company will usually have a say in company decisions. This isn’t always bad because often times a startup will accept venture capital to also gain the technical or managerial expertise of the VC. Often times getting investment means gaining access to the VC’s network as well which can be very beneficial in the early days of a startup because you’ll need manufacturers, distributors, and more. The main selling point of working with a VC is typically they are backed by a firm of VC’s who have pooled their resources to help the startups they invest in succeed.
One of the most famous venture capitalists is Chris Sacca, who invested in early-stage technology companies such as Twitter, Uber, Instagram, Twilio, and Kickstarter.
Angel investing is very similar to venture capital but with a few key differences. The first being the amount being invested. VC’s have pooled resources and are managing a large sum of money typically. While angels on the other hand are usually individuals investing their own money and have less to give. Angels are more likely to give to early stage startups while VC firms are more likely to invest in startups that have proven themselves through well documented growth. Angels are typically as hands off or hands on as you want them to be. Compared to VC’s who usually won’t invest unless they have a seat at your board and a say in the company’s decisions.
Finally, many startups main goal is to grow large enough to warrant an Initial Public Offering (IPO) which is the first time the company’s shares are sold on the stock market to the public. The main reason a company will want to go public is to raise money. Going public will allow anyone in the world to buy stock and can give the company a huge investment boost allowing themy to grow much faster. Another reason is because all the people who invested in the company so far, including the original founders, are holding a “restricted stock” meaning you can’t simply sell it for cash even though it is likely worth a lot of money. Going public allows investors and founders to cash out some or all of their stock for a much larger return than their initial investment. Some famous IPOs you should read more about is Facebook and Alibaba.
Whether your plans are to build a lifestyle business through bootstrapping or seek investment to one day cash out big with an IPO you should take a moment to think about which direction you plan to go. Having a destination will help guide your daily decisions and give you much needed insight into where your company is headed.
What ways are you funding your startup? Let us know in the comments or contact us! We will see you there.