Starting up sounds cool, sounds trendy but once you have taken the plunge into it, you get stranded very easily. One of the most complex things to handle in a start-up is, finance. Being financially sound, many a times, proves to be the key to making money. But before that, before the proverbial plunge, there is one thing you simply cannot start without – funds. Without sufficient funds, there isn’t anything you can do, even though you have a great idea or a brilliant plan of operation.
For any start-up, the first and most convenient option is to tap into their personal financial reserves. This keeps the total control of the business with the owner. But if loss incurs, all savings have been compromised and the person has to start from zero. Most of the times, entrepreneurs start off by using personal funds and then continue getting funding from the operating revenues of the company. This is known as bootstrapping. In the words of Vembu, founder of Zoho,
“Go outside your home and see the coconut vendor or the chaiwallah. They are bootstrapped.”When friends and family help, the process is faster and payments are flexible but the feasibility of the idea is unknown. Nurturing Green, a venture by Annu Grover, which revolutionised the idea of gifting bouquets also started off by bootstrapping.
When bootstrapping is found to be insufficient, start-ups go for crowdfunding, where a small capital is taken from a large number of people in exchange for equity or rewards in service or products. Imagine you giving small donations in the temple, in hopes of blessings as returns. Similarly, people give small amounts to help you achieve your project in hopes of some return. One of the examples of crowdfunding is ‘Printajoy.com’, based in Gujarat. The motive of this company basically being, India’s first affordable, online printing tool that converts Instagram pictures into print copies. This company raised a crowdfunding of a total of Rs. 102,500.
An investment, on the other hand, is an asset or item with the goal of generating income or appreciation. In an economic sense, an investment is the purchase of goods that are not consumed today but, in the future, create wealth. A house for an instance, is an investment, as it has the capacity to earn you money as rent or when you sell it.
Now, if the start-up wants to scale up it requires more funds. This is when the venture capitalists and angel investors come into the picture. Venture capitalists are companies that invest in firms or start-ups that have high growth potential. They invest in these firms for equity or ownership stake. Angel investors enter into a start-up as an angel, as their name suggests. They help them financially as well as give them the advice to grow.
Mark Zuckerberg, the founder and CEO Facebook, in 2016 invested about $50 million in an Indian based company BYJU’s along with four other venture capitalists from the Chan-Zuckerberg Initiative. Seeing a high growth potential in the company, these venture capitalists invested in it. Interestingly, Facebook itself received an angel investment of $500,000 from Peter Thiel back in 2004, the days of its beginning.
Loan facility from banks is another option. Other means being, bonds, stocks, and investment funds. A bond is a loan lent by the investor that is to be paid back along with interest in a specified term. Shares are offered on the stock exchange, these give the buyer a small ownership in the company with specified returns.
Here, we see that even though you are a Zuckerberg, you are going to need funding. Although bootstrapping seems like the most convenient option, it does have its drawbacks. It is not always advisable to run through your personal reserves. Finding investments remains essential. Investment, which is a part of funding, can be obtained through various means. Which way to opt for is in your hands and whether you like it or not, it’s going to make huge difference.