How to Choose the Right Financing Model for Your Startup?

If you are short of cash or expect to be short of cash, you may take any kind of funding for your startup, however, you must know that each kind of financing has different characteristics and demands. To avoid hassles in an emergency situation you should have a plan for emergency startup funding ready right in the beginning, but in case, if you do not have one, get it done on a priority basis. If you are planning fundraising for your startup, you must know the basic characteristics of these three primary forms of funding.

First of all, be sure about the amount of control you can surrender. It’s obvious that an equal partner may demand approximately equal control. When it comes to the amount of control, the different funders may have following demands.

  • Venture capitalists often demand significant input into management decisions, i.e. placing one or more people on your board of directors, business strategies etc.
  • Angel investors depending upon their personal style may be very much involved in your startup or else not involved at all.
  • Bankers won’t offer advice as long as you make payments of principal and interest on time and are not violating any other terms of your loan.

Now, it’s not just about the control you lose, but you also need to consider the amount of money you need.

  • Venture capital investors normally invest amounts of $250,000 to $3 million.
  • For angel investors, only the richest angel investor will put a few hundred thousand.
  • Banks have various guidelines about the size of financing, and they vary bank to bank.

how to choose the right financing model for your startup

The third factor to consider is the cost of financing.  Yes, as everything has its cost, startup financing has its costs too. You can measure the cost of financing as:

  • In terms of interest rates.
  • Shares of ownership
  • Cost of time.
  • Costs of documentation & other formalities.
  • And of course the efforts.

Start with setting financial goals for your startup first and by the time you know, how much control you are ready to surrender, how much money you need and what it will take to generate that amount of funding, you know the right funding option for your startup!

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