Entrepreneurs today have numerous funding options available to them. Outside of the traditional funding avenues, there is crowdfunding, VCs, angels, P2P, and multiple equity exchange options that should be considered. Each alternative has certain advantages and disadvantages to it, so here is a more in-depth look at what funding options might be right for your next idea.
Crowdfunding Brings Instant Cash
Most crowdfunding campaigns take 30-60 days of live fundraising to complete. The hidden time cost in this funding option is the 3-4 months of planning that happen before a campaign goes live and the 3-4 months of fulfilling the requirements of a campaign after it ends. The benefit here is clear: you raise money quickly and can scale up rapidly. When rewards-based crowdfunding is used, you don’t sacrifice equity either.
The disadvantage with crowdfunding is the regulatory nightmare that some entrepreneurs will have. Equity crowdfunding is ruled by Regulation A+ and SEC oversight, which means only high-value entrepreneurs are likely to give this funding option a try.
Private Equity Keeps Everyone Close
Private equity should never be ignored when it comes to a funding option. Close family and friends make for great investors and they’re generally willing to let an entrepreneur make their own decisions. Another advantage with this funding option is that you already know the investors on a personal level, allowing a business or idea to grow naturally.
The disadvantage with this funding option is the personalized nature of it. If the business should fail, then the close relationships may fail as well.
P2P Eliminates the Traditional Financial Institution
Peer to Peer lending (P2P) is a developing option for entrepreneurs who want to have more of a traditional experience, but don’t qualify for it. P2P lending happens on several platforms like crowdfunding does and offers loan terms that are of a fixed period of time – usually 3-5 years. Customer bonds are also an option. This allows an entrepreneur to grow their business at their own pace without the influence of investors or equity holders wanting to do something else.
The disadvantage here is that if a loan default occurs, an entrepreneur is hurting their own industry. Interest rates are better in the P2P world generally, but not always, and the fact remains that lending means debt.
Venture Capitalists Like To See Fast Growth
If you’re looking into VC funding as an entrepreneur, then you can get some huge infusions of cash very quickly. This allows a business to scale up very quickly. It’s a perfect solution for an entrepreneur who has a lot of orders that need to be filled, but may not have the capability of filling them. This means the advantage here is that a lot of cash and experience may be instantly available.
The disadvantage is that venture capitalists want to have a quick exit from an investment that they’re making. Part of the typical VC agreement usually involves an exit that occurs within 3-5 years, requiring a full payback of the initial investment plus any agreed upon returns. If that payback can’t happen, an entrepreneur could potentially lose everything.
Angel Investments Provide Long Term Stability
Some angel investments have no exit timing on them at all thanks to equity crowdfunding. When a traditional investment is made, an exit might be planned for 7-10 years in the future. Many angels are also directly involved with the entrepreneur as part of the business opportunity and help it to scale up to size. This means entrepreneurs get more than a quick infusion of cash. They also receive experience, access to the angel’s distribution channels, and other advantages that are agreed upon at the time of the deal.
The disadvantage here is that once again, the investor is looking for a return and expects to have it. Many entrepreneurs expect their angels to do most, if not all, of the work to get that return, so angels are often leery of new investments into new entrepreneurs. Some may also want to take the business in a specific direction. Depending on the amount of equity that they hold, the entrepreneur may be along for the ride instead of making their own decisions.
Entrepreneurs have numerous funding options available to them today. Crowdfunding might be taking many of the financial headlines these days, but it isn’t the only way to receive a cash infusion if one is needed. Consider all of your options and then choose the one that is best for you based on how fast your business needs to scale up to size.
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