Very frequently traditionally-structured startups find themselves in need of liquidity and turn to investment to give themselves a boost. In this blog post, we’ll explore the different options available to entrepreneurs and discuss when they’re appropriate.

VC investment

Many entrepreneurs see VC funding as the be all end all for their startup. But it’s not necessarily the best path to success. Hardware startups, for instance, have a shockingly poor failure rate of 97%. On top of that, only 1% of seeded ventures end up as unicorns (>$1Bn valuations) such as your Slacks and Ubers etc. It’s also very easy to become obsessed with getting VC funding and not pay attention to your cashflows and customers. In fact, in an analysis of over 200 VC backed startup failures, the recurring story was one where cashflows were forsaken for growth and the startups ended up in a cycle of continually chasing finance to stay afloat for another few months. Survive all that and you still have to make it past some of the harvesting strategies that investors use to reap their rewards… A pretty tough route to take.

Investment from VCs can be a great thing though, particularly if you’re running a startup which has little potential to produce cash inflows or if you require extraordinary growth to make your business model viable.

When is VC investment valuable

• Need large sums of capital
• Low forecasted cash flows, but need rapid growth

When to avoid VC investment

• Want a longterm, sustainable business
• You’re risk averse
• You need flexibility
• Want a quick process
• Want to do it part-time

Debt financing

Debt is a great way for businesses with consistent, positive cash flows to give their growth a boost with a cash injection. The key here, though, is that you should only really take on debt if you’re certain that you’re inflows are going to remain positive and your liquidity healthy throughout the period of the loan. If you’re unsure, seek financial advice. You’ve also got to keep in mind that loan amounts are generally smaller than the amounts from other sources so it may be the case that it’s not suitable for the kind of expansion you’re after. Grants and innovation centric loans can make a big difference here too, so do your research on what’s available to you in your locale.

When debt is a good idea

• If you’re an established, sustainable business
• Need a quick injection of cash

When debt is a bad idea

• Need medium or large sums of capital
• Low, volatile or negative forecasted cash flows
• You’re heavily risk averse

Crowdfunding

Crowdfunding is relatively new to the financing scene. It’s filled a hole in the funding gap and allowed indie and small companies to attain finance by going directly to their customers. It serves the benefit of either not giving up equity (which you do in VC investment) and only having to pay back when you’re finished, or alternatively – in the case of sites like crowdcube.com – give equity away on your own terms. What’s great about crowdfunding is that you can get the customer feedback and validation that all products need and in some unique cases, even do so before you’ve risked anything more than some spare time.

When to crowdfund

• Need customer validation
• Need medium to large amounts of capital
• Low forecasted cash flows

When not to crowdfund

• Want to run your business part-time
• You’re heavily risk averse
• You need a quick cash injection (crowdfunding campaigns can be lengthy)

Sweat equity

Sweat equity is a new and upcoming method for building your product out. It entails giving equity away (as in VC investment and equity crowdfunding) not for money but for expertise, time and development. In that regard, it’s quite similar to equity crowdfunding the only difference being that people donate their time instead of money. The real difference occurs if you’re able to do this using the crowd, rather than friends, business partners or colleagues. If you use the crowd you no longer have a need to buy office space, form colocated teams or for that matter quit your job and take on your business full time. Why? Because the online crowd is contributing to your project in their spare time too. This opens up a very flexible, quick and sustainable route for starting up your business. It’s also the only truly risk-free route when used in this way, as in all the others you’re either exposing yourself to financial risk (as with loans) or required to invest in your business before receiving extra finance (crowdfunding, VC investment).

When sweat equity can work for you

• You’re a little, through to heavily, risk-averse
• Want to work part-time (or full time)
• Want longterm, sustainable business development
• Need customer validation
• Want to produce your product quickly
• Have any forecast of cash flow be it positive, negative etc.

When sweat equity won’t work for you

• You need any amount of cash

That’s all for now folks. I hope this brief overview of different financing routes has provided you with some interesting insights and alternative angles for looking at financing your business. Interested to learn more about everything from starting up your business to the Fintech world? Stick to this blog!