Funding your startup: Conventional vs creative ways

Innovative funding approaches are suitable for those seeking flexibility and speed, while traditional methods fit those requiring a significant investment, writes Deepakk Kummar

Starting a business is a bold step, and financing it is probably the biggest concern. While entrepreneurs have various options to access funds, there are two broad divisions of funding: traditional approaches (e.g., banks and venture capitalists) and the more innovative (crowdfunding and angel investors).

Both options have pros and cons, so it is important to understand what works best for your startup. You should analyse them based on ease of access, processing time, flexibility, investor involvement, and reach to a global audience.

Ease of access

Traditional approaches: Banks and other financial institutions are often considered the most conventional and prevalent places to seek capital when dealing with early-stage startups. These are the first options for everyone to access capital. However, the traditional approach may be challenging to follow. The first problem is that they usually require a much longer verification process, more documentation, and thorough checks on one’s creditworthiness before offering a loan. Consequently, obtaining funding through these methods is challenging for new entrepreneurs who probably lack the credit history or assets that banks require.

Innovative approaches: Modern funding methods, such as crowdfunding and angel investors, are exciting because they enable startups to gain funding easily. Such platforms would allow entrepreneurs to connect directly with millions of people worldwide who can provide support and funding. From Kickstarter and Indiegogo to many other platforms, entrepreneurs can showcase their ideas and receive funding from supporters and fans. This kind of connection makes funding far easier to obtain and eliminates the hurdles placed by traditional funding systems.

The gestation period

Old techniques: The time it takes to receive funding is one of the biggest headaches with traditional financing. If someone were to seek a business loan from a bank or extract funds from a venture capital investor, they’d frequently face arduous hurdles in the form of approvals. For example, going through the traditional ways of securing venture capital funding for a business usually takes months. These methods are painstakingly slow and can stagnate a startup’s progress at every level of operation, from pitching the idea to completing the necessary paperwork.

New techniques: In contrast, innovative approaches to funding can be significantly quicker. For example, crowdfunding allows business people to raise funds in just a couple of weeks. The ability to set up a campaign quickly and the fast inflow of funds are huge benefits. Similarly, streamlined platforms for peer-to-peer loans and angel investors allow for eliminating much of the red tape associated with traditional funding. With these modern options, startups can make money faster than they ever dreamed of.

Adjusting to business demands

Traditional approaches: These funding sources come with rigid repayment options, which may not suit a startup’s business model. For instance, banks and venture capitalists loan money, but they expect a certain amount to be repaid every month without fail. These terms can be exceedingly painful during a stagnant revenue period, causing default or a growth stall.

New approaches: There are innovative funding models that are far less stringent. Revenue-based financing is an example. Unlike traditional funding, revenue-based financing allows startups to repay investors through a percentage of revenue. Instead of fixed repayments every month, repayments vary according to the company’s income. During months of lower income, repayment drops, allowing for a cushion to make it through these months.

Investors’ involvement

Traditional approaches: When a startup seeks funding from a bank or a venture capitalist, the founder is sometimes forced to give up a vast amount of equity. This can sometimes result in the founder losing control, as so much funding can require reporting to the investors regarding the firm’s operational plans. This degree of investor involvement can, at times, restrict the startup’s self-governance.

Innovative approaches: On the contrary, funding using crowdfunding or community-backed ventures usually comes with little to no interference in how the startup runs. This is primarily because most crowdfunders or community investors simply wish for the business to flourish and do not want to dictate decisions. Instead, the aim is to maximise the returns on investment and enjoy the satisfaction of funding a desired project. In addition, many investors today, particularly those who belong to angel networks, would rather support by providing guidance than owning shares with decision-making powers. This helps them share insightful guidance without infringing upon the startup.

Global reach

Economical methods: These startups’ operations are often geographically limited, as the breakout funding sources are limited to local financial institutions and investors. This is a major disadvantage for businesses, especially those operating in niche segments or developing locations. Companies looking to grow internationally or enter foreign regions find these methods inadequate.

New methods: The most pronounced benefit that emerges from the new age funding opportunities is the ability to leverage global networks. Digital platforms enhance the opportunity for startups to pitch their concepts and ideas to potential investors around the globe. Whether through crowdfunding or looking for investments in international angel networks, the internet’s reach has greatly amplified the chances of funding. There is a plethora of opportunity that comes with global reach, as it helps startups identify suitable investors regardless of their locations.

Each funding type has its advantages and disadvantages. Always analyse the various factors as you try to fund your startup. Innovative funding approaches are suitable for those seeking flexibility and speed, while traditional funding methods are appropriate when you need a significant investment and looking for a more long-term solution.

(The author is the founder and chairman of a Bengaluru-based Business School)