Sources of business funding

A while ago while having lunch with a technical entrepreneur in the creative industry, he shared some details about an exciting new project he was looking to undertake and then said to me:

"Tochi, the challenge I'm having now is how to justify the initial investment to VC investors"

"What do you mean?" I asked

"Well, the investors would want to know how the project would pay them back. The truth is, I don't see how it will. The market opportunity in my country is limited and I need help on how to take this to a global platform"

For some reason, I haven't been able to shake this conversation off my mind. And I don't think this challenge is peculiar to founders in the creative industry - it can be abstracted to other fields as well. Two things are important here:

1. Understanding the sources of capital available to your business - consider all options and make sure you are speaking with the RIGHT TYPE of investors.

2. Information search on revenue streams for businesses. Creativity is needed here. Very few successful businesses get revenues from one source - an undiversified revenue portfolio is a risk in itself. The average number of known revenue streams for tech companies as an example is five ( more on this later).

Remember, venture capitalists are only a subset of one category of investors (equity investors) and the more popular VC firms didn't exist 60 years ago. Know your options and find investment partners that are aligned with your mission. Building a business is a marathon and not a sprint. The wrong partners at any stage could be detrimental to your business' long-term growth/expansion potential.

Below is a list of funding available to your business, depending on factors such as size, stage, industry, and financial needs. Have a read, and let me know what you think. Rooting for you as always. Good luck!?

* Equity Financing: Equity financing involves raising capital by selling ownership shares or equity in your business to investors. Angel investors, venture capitalists, private equity firms, and even friends and family fall under this category. In exchange for their investments, investors typically receive ownership stakes in the business and may have a say in decision-making. This group of investors are motivated by returns and control.

?Pros: Risk sharing, no debt or interest incurred

Cons: Potential dilution and loss of control

* Debt Financing: Debt financing involves borrowing money from external sources, such as banks, financial institutions, or alternative lenders, and repaying it over time with interest. Common forms of debt financing include business loans, lines of credit, and business credit cards. This type of funding typically requires collateral and/or a strong credit history, and businesses are usually required to repay the borrowed amount along with interest.

Pros: Control retention, tax savings

Cons: Risk of default, potential dilution of future equity (if contracted)

* Crowdfunding: Crowdfunding is a method of raising funds from a large number of individuals, typically through online platforms – Kickstarter is one of the more popular ones. There are different types of crowdfunding, including donation-based crowdfunding, reward-based crowdfunding, equity-based crowdfunding, and debt-based crowdfunding. Each type has its own rules and regulations, and businesses may offer various incentives or rewards to attract funders.

Pros: Market exposure for product/brand, broad and diverse investor base

Cons: All-or-nothing reward system e.g., Kickstarter

* Self-Funding/Bootstrapping: Self-funding, also known as bootstrapping, involves using personal savings or other personal assets to finance the business. This approach allows business owners to retain full ownership and control of their business, but it can also be risky as it relies on the owner's personal financial resources.

Pros: Owner retains control and returns

Cons: Strain on personal finances, business expansion is limited

* Government Grants and Programs: Governments across various levels (local, regional, national) often offer grants, loans, or other programs to support small businesses in certain industries or locations. These funding options may come with specific eligibility criteria, requirements, and application processes.

Pros: No repayment or dilution of ownership is required

Cons: Competitive

* Trade Credit: Trade credit refers to the credit extended by suppliers who allow businesses to purchase goods or services on credit and pay at a later date, typically within a specified timeframe. This can be an informal source of short-term financing for businesses, allowing them to defer payment while maintaining inventory or fulfilling orders.

?Pros: Improves cash flow and working capital management

Cons: Failure to meet payment obligations can strain supplier relationships

* Business Incubators and Accelerators: Business incubators and accelerators are programs that provide funding, mentorship, resources, and support to startups and early-stage businesses in exchange for equity or other forms of participation. These programs are typically industry-specific and offer additional benefits beyond just funding, such as access to networks, expertise, and facilities.

Pros: Guaranteed cornerstone investments

Cons: May be exclusive, Terms and conditions apply

* Strategic Partnerships and Joint Ventures: Strategic partnerships and joint ventures involve collaborating with other businesses to pool resources, share costs, and access funding. This can include joint product development, marketing collaborations, or shared investments in new ventures.

Pros: Can open new markets or opportunities through collaborative efforts.

Cons: Requires careful negotiation to ensure benefits are not one-sided

* Business Competitions and Awards: Some organizations and institutions host business competitions or offer awards with cash prizes or other types of funding for winning businesses. These competitions and awards may require businesses to submit business plans, pitch their ideas, or meet specific criteria.

Pros: Can provide recognition, publicity, and validation for winning business

Cons: Winner-takes-all competitions may leave other participants empty-handed

I hope this helps in your fundraising efforts, please share your thoughts in the comment section.