Money, money, money, bloody money. It’s all anyone ever talks about in startup land (and the world at large!) Funding is an essential part of the cash flow process in startups because, unless founders are fortunate to be very very rich, they arguably need to find other sources of funding. However, is there a way startups can function effectively without it?
Why do startups need funding?
Whether it is essential to startups or not, funding can be hugely beneficial to many areas of the business. When you get an investor, you’re also opening your business up to the support and expertise of a wider, experienced and more resourced team. Essentially, you’re not just getting investors’ money, but their advice too. Their opinions could be the reason why your startup gets off the ground!
But an investor's actual money, as well as their expertise, can be essential for startups. Investment can help startups buy equipment and get business premises; all things that founders can sometimes overlook in their quest for success! Many startups tend to hire voluntary employees or interns, but funding can help founders find people with the best skills and expertise for the job!
Funding also gives startups much more freedom to play. Trying and testing ideas is a huge part of the learning process in business, and not worrying about how every decision you make is another penny out of your own pocket allows startups to innovate effectively.
What happens to investors when a startup fails?
No one wants to think about their beloved business going under, but it does sometimes happen. The good news is unless agreed otherwise, startups do not have to pay back the money they’ve been given by investors. Investors know the level of risk they are taking when they choose to fund a startup, and they know there’s a chance it won’t work out for them. Investors may, however, have the rights to some remaining assets in your startup, so it’s important to read through the agreement so you’re aware of any losses you might have!
Do startups really need funding?
So, we know that funding can be useful for founders. But here’s the real question: do you really need it? Bootstrapping is the keyway of avoiding funding. It tends to get a bad rep but is arguably more effective than it gets credit for. Many successful startups have bootstrapped their way to success, including MailChimp, GoFundMe and SurveyMonkey. If you do decide to bootstrap your startup, you must keep a keen eye on your finances. It’s all too easy to lose track of how much money you actually have. If you’re not careful, you could lose all your business finances and your own money!
One other source of money without investment is family and/or friends. If you are fortunate to have family members that are willing to support your exciting venture, it can be a reliable way of funding your startup - and you’ll be keeping it in the family! However, unlike investments, there doesn’t tend to be a contractual agreement in these scenarios. This means it’s even more important that you agree with them on what their expectations are. Are they expecting you to pay them back? Do they want a share in the company?
Ultimately whether you choose to self-fund or seek investment completely depends on your startup. Some factors may be out of your control, however. For example, there may be a piece of equipment that’s essential to your business that you cannot afford without financial support. If you do choose to find an investor, make firm decisions about why you need the money. Remember it’s not free money - these investors are expecting a return on their investment!