One of those make or break questions that you need to decide on which will impact the future of your startup idea or efforts “What is the best funding option for my startup?”. The decision doesn’t just determine how much money you have as capital for your startup venture, it determines the role you’ll play, the way you work and a lot more. Not surprising…it’s a question that needs some serious thought put into it before moving ahead. Here are just some of the pros and cons of the various private equity funding models you have available to you when you’re weighing your funding options:

Sweat Equity / Bootstrapping

Pros

• You are and you remain your own man / woman. You are accountable to yourself and don’t have the added pressure of having someone else’s funds invested in your venture and the burden of their expectations to carry
• Lower operating risk profile for the business since you’re relying on generating revenues and building cash reserves before re-investing it in growing further
• You could end up building a leaner and most cost effective operation since you’re not used to having excess funds to throw at issues and make a habit of looking for alternative solutions instead
• If it succeeds, you retain the largest possible share in your venture and stand to gain from it’s success or exit in the long term

Cons

• Sometimes it could actually help to have advisors and the pressure of other investors in your business to keep the momentum of the growth
• You personally stand to lose both financially and in terms of time if the startup fails so the personal pressure to perform is high
• You risk a slower growth map since you are restricted by your own abilities to fund and execute on your plan and end up losing market share to others who have the capacity to move quicker
• If your idea needs a significant investment right at the start then it’s unlikely that this option would be an option at all
• You need a good track record and reputation before other join you in this mode. A bit of a catch 22 because many who rely on bootstrapping are also first time entrepreneurs and seasoned entrepreneurs look for VC’s or a form of Angel funding to speed up their growth.

Crowdfunding

Pros

• More closely related to angel funding so those who invest in you do it because they believe in your idea or business plan. Effectively it’s a multitude of angel investors pooling together to give your business the financial push it needs. Relatively lower pressure while still having a healthy pressure of having to communicate where the business is headed
• The investors themselves may not get directly involved with the day to day running of the business which gives you the freedom to operate as you will but you still have the option of seeking advisors and getting help from the community which has experts and mentors within it
• You can raise enough money to support your business through its early stages while not so much money that you stop working in a resourceful and lean way and have money to spend on issues taking the easy way out rather than finding solutions
• You can decide how much equity you want to give up in your business and how you would like to structure it and then list your proposal for the crowd to see and decide
• You gain a large audience to begin with (in the form of investors). That way you could have say 10 000 customers when launching. Investors in your venture are also fans of your business and will help evangelize your startup adding ‘word of mouth’ marketing as an added benefit

Cons

• Not suitable for very large capital intensive funding requirements beyond $1million or so and also for startups looking towards expanding in the growth stage through capital injection
• The funding may be all you need to build your product, go to market and start generating revenues but it may only carry you to the next stage where you need to seek another funding round
• You need to sell your idea and convince more than one investor in order to reach your target funding amount and it’s not a matter of getting one person to sign a check so campaigning is important in the process

Angel Funding

Pros

• Angel investors can often make quicker decisions about funding and often invest out of their belief in you. They are more likely to invest at a much earlier stage while still only a concept than others
• They often take bigger risks, they tend to have lower expectations in terms of rate of return or equity as compared to VCs
• While some may take up non-executive advisory roles in the business, most would have a comparatively lower direct involvement in the way the business is run which is a pro so it’s less external pressure on the entrepreneur
• Suitable for early stage startups that don’t need very large amounts of initial startup capital and grow the business to a level where other funding options may then be explored

Cons

• May not be a suitable source if the amount of capital required is very large and the break even period is expected to be longer
• The level of involvement may not be as high as VC funding for example and this can also be considered a con if more guidance and advisory is what you’re looking for
• It is extremely important to be able to find the right angels. You must be able to live with those people, and typically entrepreneurs and angels are strong personalities. So if there is no match, it can make things extremely difficult. You should have enough potential angel candidates to be able to select the right one

VC Funding

Pros

• Is more suitable for larger amounts of capital when the business is looking at growth and a significant amount of capital is needed to be injected in order to grow your market share and expand
• VC’s will take a more active involvement with the management of the business playing a pivotal role in setting targets, milestones as well as advice on how to get there since returns on their investment is a primary lookout for them
• They make the top rung of private equity funding so if you can find the right VC who will support your specific plans, you may have all the capital you need at your disposal

Cons

• Perhaps not likely to entertain smaller investments since there is a minimum amount of they need to invest in high potential ideas so if you don’t need that much capital, you’re better off exploring angel or crowdfunding instead
• VC’s don’t live only from the success of companies, but from the management fees and how much they own. So, it could mean a lot of dilution for you as an entrepreneur. Something to consider!
• Since the VC are likely to play a more involved role in the direction of the business and it’s growth plans there can be a feeling of “loss of control” over your business or some compromise in the direction you would like to take it
• VC’s can define your operations, as they may get a good position in your startup and may get to lay terms for your progress pushing you for the financial return. The exit may well become the primary focus
• VC’s have a profile of the type of ventures they would like to invest in and would prefer companies that have some traction and would like to see more than just an idea before investing

Once you’ve had the chance to weigh the pros and cons along side your own objectives and business plan, you then have to ask yourself some important questions to understand what kind of a business model you have and where does it fit best in terms of funding options. But more on that later!