Any startup will tell you that cash flow is absolutely crucial to the survival of their business. Two-thirds of startups have less than a year’s worth of money left, according to Anand Sawal of investment analysts CB Insights.
Some startups are lucky enough to be profitable from year one, either thanks to income from clients or channelling their own funds into the business. However many have to seek external funding.
There are a vast range of options facing founders today. You can go to an angel investor, a venture capitalist, bootstrap the business with your own money, crowdfund, ask for a bank loan, enter an accelerator or incubator programme, partner with a bigger firm, or even run a new-fangled blockchain ‘token exchange campaign’.
Unfortunately “this is the decision most founders get wrong, often hindering or causing irreparable damage to the startup’s longer term prospects”, warns Ofri Ben Porat, cofounder of Pixoneye.
As a rule, your best bet when building a funding strategy is to “focus on the type and scale of the problem your product is aiming to solve, and then consider how and when specific investors can help you achieve those goals”, advises Damian Kimmelman, cofounder of DueDil.
We’ve spoken to a range of founders and investors on the pros and cons of these various routes. Here is what they had to say.
The pros and cons of: bootstrapping
Bootstrapping means funding a company using personal finances or its operating revenues. Some founders swear by it, like Colette Ballou, who set up Ballou PR. She tells Techworld: “Bootstrap if you can. I always have.”
What are the advantages of this route? Put simply, it keeps you in full control of your company and spending.
“The main benefit of starting and growing the business from personal investment is that we don’t have to justify any spend to a board or worry about outstanding debts,” says Jake Madders, cofounder of Hyve Managed Hosting.
However there are downsides. The main issue is that there are big restrictions on growth. Basically, a ‘bootstrapped’ startup can’t grow more quickly than their credit permits, whereas external funding lets you to grow as quickly as you need or want to.
It also means that, as money for hiring is tight, founders have to take on the vast majority of the legwork.
“It has meant a lot of long hours. It has required a lot of work on the part of Jon and I [the cofounder],” Madders admits. But even this he says, has allowed him to have “such a personal pride in seeing the success of the company, having been involved in every step of the journey”.
The pros and cons of: angel investors
There is a lot to be said for choosing to go to an angel investor, especially an individual within your specific sector that you have a good existing relationship with. It is a popular route for early-stage startups that need a bit of extra money to help get them off the ground.
“One of the best ideas is to get angel investors who are a few stages ahead of you in their business journey. Angels who have already made massive successes might be too removed from the problem you are trying to solve,” Kimmelman says.
Angel investors will choose to invest in your startup because they share your vision and excitement, and have faith in your team and the viability of your idea, Porat says. They will be committed, basically, and they will be able to be a supportive, realistic mentor of your business.
Where are the disadvantages? You will have to cede some control over your business, at least slightly. The angel investor will expect a cash return or equity in…