Empowering entrepreneurs to launch, grow and scale their businesses in Nigeria
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Most often, the entrepreneurial journey for startup founders is bedeviled with the need for “money and more money”. Consequently, the ultimate challenge has always been ‘where to get the needed funds’? How do you go about convincing people to invest in you, your idea/startup?
Whether you want to build your first prototype, hire employees, buy equipment, travel to meet with prospective partners/investors or even scale your business; capital is a sine qua non, to the achievements of these goals. This means that without capital, even if you have a great idea, it will be nearly impossible for you to get it off the ground or (for existing businesses) grow at a reasonable speed.
In this article, we’ll review some ways through which founders can raise money to ship their first prototype or scale their business.
Here are a list of feasible fund sources that easily come in handy for founders;
Using personal finances/savings to fund a startup (which is a form of bootstrapping) is a major route taken by most founders. It is a usual practice by most founders (especially in this part of the world) to engage in side hustle while working on their startups in a bid to save up and support their businesses and themselves (after all, they still have to be alive to run the business) and as such over 90% of founders start their business with their personal funds before seeking for outside funding. This is actually a good source of funding once you utilize it well.
Ease of access: Since it is your own money, you don’t have to spend time applying for funds nor be faced with uncertainty of your business take-off due to lack of funding. This in turn saves you a whole lot of time and energy which will be channeled into increasing business growth.
Full Ownership: As the sole contributor to the business, you enjoy 100% ownership of your business without having to split ownership or share profits or dividends with an investor.
Full Control: This gives you the space to promote the business interest and make decisions solely for the benefit of the business as some investors tend to put their interest above the business interest.
Proper Management: When your money is at stake, there are higher chances you’ll manage the business better and avoid unnecessary and excessive spending as you will be forced to live within your means.
Limitations of resources: There is always an issue of having enough money to cater for unexpected expenses which can in turn limit your business growth.
Higher risk: Because your business is run from your own savings, you stand a risk of losing money for personal life and family. Also in the event of a business collapse, you’ll be losing all monies already spent on the business.
Limited Connections: One major advantage of having business partners or investors is that they bring to the business not only money but access to networks, mentoring and several different opportunities. This is what you’ll be missing if you own your business alone.
Poor credit history: In the future, collecting loans from banks or other sources will be a daunting task and may attract higher rates since you haven’t created a good credit history prior.
Also called bootstrapping, this method is a usual and easier fund raising source for many entrepreneurs. It’s like the usual first stop for founders majorly because family and friends, having known you (the entrepreneur) all their lives or for a very long period, naturally believe in your skills thus, without much convictions/evidence, can buy into your idea. It can be a great way for founders to get cash because most of the funding comes without interest or any form of financial encumbrance. But before you decide to tour that path, first review the pros and cons of such financing options.
Ease of access: Loans from family and friends are usually easy to access and mostly do not require security (or require less security than loans from banks).
Interest Free: Most financing from family and friends come as interest free or low rate interest loans.
Flexible Options: Securing and repayment of loans come with flexible options as you are free to discuss the payment and repayment options. Even when you default in repaying due to some circumstances, it is easier to explain and renegotiate repayment options with family and friends without attracting extra fees or sanctions.
Already established relationships: Since you are familiar with them, you don’t have to reintroduce yourself and your capabilities.
Broken relationships: Misunderstandings may arise which can damage already existing relationships.
Lack of clarity: Most times, loans received from family and friends are not accounted for and often lack paperwork. This can lead to misalignment of expectations.
Social strain: Taking loans from family can be burdensome especially when the lenders pry unnecessarily into your business and daily life trying to find out how you go about your daily expenses. This can cause misunderstanding and friction between two close people.
Here is another fast growing financing option where you get a small amount of funding from a large number of individuals to finance your startup or launch a new product/service; either in form of a donation (donation based crowdfunding) with some perks, or in return for a stake/equity in your startup (equity crowdfunding). There are many crowdfunding sites like Crowdfunder, Kickstarter, Naijafund, Gofundme, Appbackr amidst others, all of which differ on how they operate. Before you choose a crowdfunding platform, you’ll have to research and find the one that suits you and of course, you’ll have to check the benefits and risks of using a crowdfunding platform as a source of financing.
Large network/traction: One of the most important advantages of crowdfunding is that it gives you access to a large and diverse number of audience, supporters, potential customers, investors and even fans; who are interested in your products/services.
Product validation: It is a good place to gauge public opinion on your product and also validate your new product/service.
Funds access: Access to funding you may not get, through other traditional financing options.
Greater efficiency: More efficient than traditional fundraising like getting loans from banks and from investors, as it saves you a whole lot of time searching for those.
Cumbersome: It’s usually not an easy process to go through and sometimes might return unproductive.
High risk: There is a likelihood of concept/idea stealing, especially when it is not protected with a copyright or patent.
Bad public image: Damage to your startup’s reputation in cases of failed projects or for just resorting to crowdfunding.