Funding is one of the most important considerations for any business plan, as it determines the amount of capital available to start and grow the business. There are several funding options available to entrepreneurs, each with their own advantages and disadvantages. In this article, we will explore the most common funding options for a business plan, including definitions, examples, and case studies.
Bootstrapping:
Bootstrapping refers to starting a business with little or no external funding. This is often done by using personal savings, credit cards, or loans from family and friends. While bootstrapping may seem risky, it can also be an effective way to test and validate a business idea before seeking external funding. Bootstrapping can also give entrepreneurs more control over their business and allow them to avoid taking on debt or giving up equity.
Example: Spanx
Sara Blakely, the founder of Spanx, started her business with just $5,000 in savings and no outside funding. She used this money to create a prototype of her product and to manufacture her first batch of inventory. By bootstrapping her business, Blakely was able to maintain control over her company and eventually grow it into a billion-dollar empire.
Friends and Family:
Another funding option is to seek investments from friends and family. This can be a good option for entrepreneurs who need capital but don’t have access to traditional funding sources. However, it’s important to approach these investments as professionally as possible to avoid damaging relationships in case the business doesn’t succeed.
Example: Airbnb
Airbnb founders, Brian Chesky and Joe Gebbia, were struggling to raise funding for their business in the early days. They turned to their friends and family for support, and were able to secure $30,000 in seed funding. This early funding helped Airbnb get off the ground and eventually raise more than $4 billion in venture capital.
Crowdfunding:
Crowdfunding is a funding model that allows entrepreneurs to raise money from a large number of people, typically through an online platform. Crowdfunding can be used to raise money for specific projects, products, or services, and can also be a way to gauge market interest before launching a business.
Example: Pebble
Pebble, a smartwatch company, raised more than $10 million through a Kickstarter campaign. This crowdfunding campaign allowed the company to bring its product to market without the need for traditional funding sources.
Bank Loans:
Bank loans are a traditional funding option that entrepreneurs can use to secure capital for their business. Banks typically offer two types of loans: secured and unsecured. Secured loans require collateral, while unsecured loans do not.
Example: Warby Parker
Warby Parker, an eyewear company, raised $37 million in debt financing from a group of investors that included JPMorgan Chase and American Express. This funding helped the company expand its product line and open more physical retail stores.
Angel Investors:
Angel investors are individuals who invest their own money in early-stage businesses. Angel investors typically invest between $25,000 and $100,000, and may provide additional support such as mentorship or access to their professional network.
Example: Uber
Uber received its first investment of $200,000 from angel investor, Chris Sacca, in 2009. This early funding helped the company expand its operations and eventually raise more than $24 billion in venture capital.
Venture Capital:
Venture capital is a form of financing that is typically provided by professional investors, such as venture capital firms, to high-potential, high-growth companies. In exchange for funding, venture capitalists usually take a percentage of the company’s equity.
Example: Snapchat
Snapchat raised more than $2 billion in venture capital before going public in 2017.
Corporate Venture Capital:
Corporate venture capital is similar to traditional venture capital, but it is provided by established corporations rather than independent investors. Corporate venture capital can be a good option for entrepreneurs who are looking for not only funding, but also access to the corporation’s resources and expertise.
Example: Google Ventures
Google Ventures (now GV) is the corporate venture capital arm of Alphabet Inc. It has invested in many successful startups, including Uber, Nest, and Slack.
Initial Public Offering (IPO):
An IPO is the process of offering shares of a private company to the public for the first time. This allows the company to raise large amounts of capital from the public markets, but also requires significant regulatory compliance and public disclosure.
Example: Facebook
Facebook went public in 2012, raising $16 billion in its IPO. The company used the funds to acquire other companies, invest in infrastructure, and hire more employees.
Private Equity:
Private equity is a type of investment that is typically made by private equity firms in more mature, established companies. Private equity firms may buy a controlling stake in a company, and then work to improve the company’s operations and financial performance before selling it for a profit.
Example: Toys “R” Us
In 2005, private equity firms Bain Capital and KKR acquired Toys “R” Us for $6.6 billion. They later sold the company for $6.9 billion in 2018.
In conclusion, there are many funding options available to entrepreneurs when creating a business plan. Each option has its own advantages and disadvantages, and the best option will depend on the entrepreneur’s specific goals and circumstances. It is important to research and carefully consider each funding option before making a decision, and to seek the advice of financial experts when necessary.
