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.

Know the Level of Control You can Surrender

When you have someone onboard to fund your business, it’s obvious that an equal partner may demand approximately equal control. When it comes to the level of control, the different type of funders may have different demands.

Knowing these different types of demand will help you prepare yourself and be sure about how much control you are ready to surrender!

VCs

Venture capitalists often demand significant input into management decisions, i.e. placing one or more people on your board of directors, business strategies etc.

Angels

Angel investors depending upon their personal style may be very much involved in your startup or else not involved at all.

Banks

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.

So, you know who you are approaching for funds and what they may demand, you are almost ready to make a decision. But wait!

Now, it’s not just about the control you lose, but you also need to consider the amount of money you need. A venture capitalist may seem to be more demanding than the angel investor, but the amount he is offering you is really big and your startup does need that much right now.

The next step is to know who can fund you how much!

Know Who Can Fund How Much

  • Venture capital investors normally invest amounts of $250,000 to $3 million. So yes, that can change the fate of your startup entirely!
  • For angel investors, only the richest angel investor will put a few hundred thousand. Most of the angel investors will invest little money! But yes a well thought and planned crowdfunding campaign can at times offer way more than VCs.
  • Banks have various guidelines about the size of financing, and they vary bank to bank. But normally, your chances of getting a business loan without a working prototype are not much higher!
how to choose the right financing model for your startup

Know the Cost of Financing

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.

Having a solid business plan for investors, especially the one tailored to pitch particular type of investors is a great idea to reduce some of these costs. In order to create such a customized business plan, you must know how investors value a startup!

Wrapping it up….

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!

Most startups go for more than one rounds of funding and careful evaluation of round one can give you real time lessons for the next round!