5 ways to finance your business in 2019
People who want to try a business idea and receive money from their family or a millionaire friend are really a minority. If you are one of these people, fantastic, you have an important advantage, but if you belong to the vast majority you will have the challenge of getting the money by your own hands. The excellent news is that there are many options to achieve it. Let's be honest, the lack of money to stop starting an endeavour is a lazy excuse.
In this post we will leave aside the classic ways to obtain initial capital, like the one I just mentioned - family, friends and crazy people who believe in your idea (Family Fools and Friends) - and bank loans, to focus on showing alternative methods which have become popular in recent years, and others, very new, that are revolutionizing the way to get money to give life to your venture.
First of all it is worth remembering the bases that facilitate achieving any type of financing:
Product or service
In this category enter: the degree of clarity that you have about your client, the problem that you solve and the solution that you deliver; the income model that you have; the size of the market, that is, the potential number of clients that your business could cover; the growth strategy or how you are planning to approach that market; and the knowledge of your competition.
Why are you and your partners the best combination to move your business forward? Keep in mind that undertaking a project alone is not the smartest option. It is always good to have co-founders that compliment you and share life values with you.
Validation: social tests or traction
What are the guarantees that your business has high growth potential? Traction is the evidence for the world that a product or service adds value (or not) to those who use it. The ways to check traction are; profits, income, registered users, active users, loyalty level with your brand, alliances or customers and traffic on your website.
This is the most efficient way to give life to your venture with your own resources, actually. In fact, one of the principles of financial intelligence suggests that when you start a business you should only invest your time and talent, not your savings. And it is also recommended that the business should be profitable from the first month.
An example of bootstrapping could be starting a room rental business through Airbnb. If you have a house and you occupy only part of its capacity, you can organize a space to look harmonious and visually attractive, take some pictures and start offering it on that platform. By investing only your time and your resources you could begin earning money. Then, you can reinvest a part of the income to improve the interior design in order to raise the price and increase your profit margin.
Let's see another example. Imagine that you travel to a place where clothes are very cheap, you buy some pieces with your money and when you return, you increase the price a little, invent a brand and start selling it on your social networks. Then you grow little by little, using the profits to consolidate your business as a virtual store. This is also Bootstrapping.
The advantage of this form of financing is that you do not depend on third parties, you have the freedom to make decisions and the ability to move quickly.
An interesting case of Bootstrapping Monitor, IoT (Internet of Things) Solutions. In their first years, they survived with the profits generated by the business and only raised investment when they needed to develop technology and the risk was too high to assume it alone. Is it possible to move forward an enterprise only with Bootstrapping? Maybe, maybe not, this will depend mainly on the type of technologies you use and how quickly you can start selling.
If your business is selling a physical product, the best way to finance it is to make a pre-sale, which means that you offer it before you have the product in your inventory. Take the case of the trip. If you are going to the United States and you know that you can bring products with high demand and little supply in your country, you can upload photos of what you want to offer, people pay you in advance, with that money you buy the merchandise and at the same time you generate utility.
An eCommerce business model that is compatible with this type of financing is Dropshipping, a form of selling online, where the store serves as an intermediary between the man who makes or has an inventory of products and the buyer. Who operates the system is only responsible for promoting and selling but does not manage the inventory, or packaging or shipping.
Although this form has the advantage that you can validate if people are really willing to buy your products at the lowest possible cost, it also carries risks associated with factors that can get out of your control. For example, quality defects, that your suppliers are delayed in delivery and the worst would be that they could not even deliver them due to lack of inventory.
To protect yourself from these scenarios, the recommendation is that you test your supplier or manufacturer before selling, or ask for a prototype to evaluate the quality. Once you have the product, certify its functionality. You can do it through organizations that are dedicated to this as well as your own experience, using it.
The need to do it in a more technical way will depend on the type of product you are going to sell. For example, if you want to sell food products in Chile, you should go through the Institute of Nutrition and Food Technology (INTA), which certifies food in order to ensure an adequate nutritional composition and microbiological quality.
Finally, a tip to prevent the consequences of these unexpected events is to calculate 20% more in any budget and delivery times.
These are calls made by private organizations, such as incubators, accelerators and companies or public organizations - such as the government - to finance projects in various categories.
The list of possibilities is huge, so I recommend starting filtering according to the type of business you have, if you are a startup or an SME and if you fit into a special call - for example, those that are only for women- and if you have contacts with people who have already applied and won something, to guide you in getting it.
Here is a list of the most important calls worldwide.
It is recommended that before looking for angel investors or venture capital funds you exhaust all the possibilities of public financing or organizations that do not ask you for participation, such as Equity free grants.
Crowdfunding is about receiving funding from the crowd for a cause, a product or a company. For the entrepreneur it offers the advantage of increasing the popularity of the brand for two reasons; the first is that the more people involved in the campaign, the greater the positioning; The second is that a good campaign could attract the press.
A famous case is that of Bluesmart, intelligent suitcases, which raised USD $ 2,261,193 funds through Indiegogo, one of the most famous crowdfunding platforms in the world. The key to spreading the message and appearing in the press was the promotional video.
For the investor crowdfunding is also an interesting possibility since it can reduce the risk, investing small amounts in several companies.
There are 4 types of crowdfunding
1. Crowdfunding of rewards: where the contributors give money to the cause in exchange for a reward, for example, the delivery of the product that is being financed. In general, small amounts are invested, between USD $ 1 and USD $ 1000. Examples of this type of platform:
- Kickstarter: special for artists, musicians, film producers, designers. Your agreement is all or nothing, so you have to achieve the goal of 100% financing. If not, you have to return the money to the investors.
Creating the project is free, but if you achieve the funding goal Kickstarter charges a commission of 5%.
- Indiegogo: in addition to allowing collective financing campaigns, the platform is a marketplace of innovative products. The advantage is that there are no funding goals or campaign closing dates. In addition, you can offer equity - sale of shares of your company - and make cryptocurrency transactions
Indiegogo charges a 5% commission for all projects.
2. Crowdfunding of donations: Backers - those who contribute the money - deliver funds without needing to obtain a reward for it. It is the best format for non-profit causes. Examples:
Gofundme: There are no penalties if you do not reach the goal, there are no mandatory deadlines and there are experts who advise you day and night any day of the week. In some countries, they charge 5% commission on the amount collected and in all of them a commission for payment processing that is below 3%.
Crowdrise: The platform was acquired by Gofundme. It allows to create campaigns faster and monitor with better analytics, management of social networks and tools to plan fundraising events.
3. Equity Crowdfunding: with this kind of collection, investors contribute from USD $ 100 up to thousands of dollars in exchange for an "equity", participation in the company.
It is ideal for technology companies because if you can scale the business, you can deliver interesting returns to backers. In the event that your venture does not have a scalable model and/or consists of the sale of a physical product, it is better to choose crowdfunding for rewards. Examples of equity crowdfunding:
Founderlist: investment platform in high impact Latin American startups. They work with companies that are between the validation and growth stage that look for between USD $ 30 K and USD $ 200 K. The investment model is that of Syndicate, groups of people who invest in a startup of everyone's interest, under the leadership of an expert investor.
Startupxplore: Works with the same Syndicates model but is focused on European startups. Its base is in Spain.
4. Crowdlending: in this model the contributors are called Lenders. They make loans to the company in exchange for interest. Examples:
LendingClub They have solutions for personal loans, loans for companies from USD $ 5 K - $ 300 K and ways to finance health treatment. In the case of companies, you can pay in terms of 1 to 5 years in fixed monthly charges.
Cumplo In this platform people join, who want to invest their savings in SMEs that need financing to grow, at a fair rate. They have several products, among which the invoice credit stands out, which consists of a short-term credit where the company gives in domain to Cumplo invoices to be collected and among the investors they finance them. They also offer direct loans but only to companies with a positive payment history on the platform.
ICO's: Initial currency offers
To understand this model it is useful to make an analogy with the sale of tokens at a fair. In order to buy the products, you must purchase the tickets issued by the organization of the event. That is the only unit of value that will be accepted in the stands.
In the case of companies, they create virtual currencies, called tokens, which will be used for customers to buy the company's products or services. So the company is financed from the beginning, thanks to the sale of them.
When people buy the tokens through the initial offer of the company, it does so with the expectation that it will increase its value in the future based on the demand for the product or service in the market. In this way, as the popularity of what the company offers grows, so does the value of the tokens. The best example of this is the case of Ethereum, which after its initial offer managed to collect 18 million dollars.
How to create a digital currency to finance your venture
The best-known platforms for writing smart contracts about blockchain technology are:
Counterparty: an open source platform that allows users to create and trade any type of token. Counterparty allows anyone to write Smart Contracts and execute them on the Bitcoin blockchain.
Ethereum: In 2015 one of Ethereum's chief designers wrote a blog post on how to create your own cryptocurrency through this platform.
How to know which is the best way? Be curious and study the pros and cons of each one. Just remember that the most important thing is not the way to finance an enterprise, but the roots for there to be one: an integral team, a relevant problem in the eyes of a clear niche, a functional product or service, an intelligent execution and a vision to the future.