Businesses need money to build and run. For any start-up, this is one of the most critical elements and worries.
The amount of capital an entrepreneur puts in is an individual call. Every entrepreneur has to put in money as nobody funds an idea; people fund businesses or prototypes. If someone has all the money needed to build a start-up and make it profitable, there is nothing like it. There is nothing comparable to owning 100 per cent of your own business, especially when it is successful. When the proof of a concept is ready, but there is no money on the table yet, one has to study various investment options.
For start-ups, the investment options are angel funding, loan, venture capital and strategic funding. This is apart from the money the entrepreneurs themselves might put in and soft loans from family and friends. Other than loan, in all the other three options, the investor buys shares of the company, expecting a premium return by selling them when the company gets bigger.
Angel funding is where an individual or a group of individuals invest, while venture capital is when firms make an investment. The main difference between the two is the amount of the investment. In most cases, an angel investor comes in very early into the company and this is often called the seed round or the angel round.
In strategic investments, another company invests in your company by buying shares because your activities are aligned to their core business. Their primary reason for investment is not a financial return, but to get a market share, to have access to technology that is related to their business, or for blocking competition.
For example: If your start-up sells photographic equipment online, like cameras and lenses, a large company that manufactures these cameras might buy a stake in your start-up to gain a market share in online sales of camera equipment.
I am not a banker, so I won’t be able to tell you much about loan options, but it is very unlikely that a start-up would be able to raise a structured loan because that needs collaterals. It’s a kind of guarantee whereby, if you are unable to return it, the investor can sell the collateral and recover his money. Moreover, a loan is given to companies which have a proven track record of making revenues or profits.
Before we go on, let us clear a few points. Beggars cannot be choosers. When you are in need of capital, in all probability, you will pick up the first option you get. There is nothing wrong in that, but you might realize at a later stage that it did make sense. How your start-up shapes up will also be determined by whom you decide to take the investment from. Learn more about how to invest only at the University Canada West, one of the renowned universities in Canada, offering various business and management related programs.