Funding is the backbone of successful start-ups these days. An innovative idea is not enough for an entrepreneur if they are looking to grow and scale their business. Funding is essential for various activities and especially for newly established ventures. There are many ways to finance a start-up, many business owners use a self-funding approach while others seek funding from external sources. Most start-ups start with a large amount of capital to finance their business. However, many of them are not able to do so due to plenty of reasons. Some lack investors and others lack a proper business plan which leads investors away from their business ideas. So, is funding really necessary for new start-ups? The answer simply depends on your situation.
A self-financed or bootstrapped company is one that is funded by the business owner’s personal finances rather than external sources. This means that the owners have full control of their start-up and are only answerable to themselves. There are many benefits when it comes to bootstrapping. You are less likely to overspend as all the bills are financed by your personal wealth. Moreover, bootstrapping gives you much more freedom and flexibility to experiment with your products and services. Furthermore, it’s cheaper in the long run as no investors will have to be repaid.
Why External Financing
Money is extremely important for newly established start-ups, in fact, lack of funding is the second most common reason for the failure of start-ups. However, money isn’t the only important factor, start-ups need more than that. They require smart money. Smart money involves getting investors to not only bring their money to the table but also their networks and their wisdom on business matters. The Financial Times describes “smart money” as “sophisticated investors who tend to pick the right moment to buy or sell assets because they can identify trends and opportunities before others do.” Start-ups can have all the finances in the world but would eventually fail if they lack proper business direction and market placement.
A newly established start-up backed up by a big-name investor will get the benefits that a self-funded group will not be able to receive. There are significant advantages to this as the company will receive access to advisors, PR, and more money. Funding of this sort can make a company popular even before they have launched and will also help in quickly scaling a business and launching it in the market.
3. Reduced Personal Risk
Many start-ups do not want to shoulder the risk all by themselves so then they lean on the investors to share the risk with them. Similarly, when there are investors who are making significant contributions to your start-up then there is no point in emptying your bank account. Raising capital through personal means can be quite a difficult task and if you’re clueless about what you’re doing, then it can backfire adversely. Moreover, having a good relationship with your investors has many benefits in itself. If a start-up fails, then the investors may be able to help out in finding other investors or projects through their networks.
Reasons For Failure of Start-ups
Start-ups fail all the time; however, it is important to understand the reasons for their failures. Lack of finance is the main reason for start-up failure as discussed above. However, it’s not the only reason. The top reason for start-up failure is the lack of market need. Similarly, the third reason for start-up failure is the collapse of team composition. Each of these reasons can be addressed with smart money through the right business and management structure. Smart investors can identify the right people for a team and can help in hiring staff who would take the business to the next level. Start-ups may think money is key however it is not the end-all and be-all for their potential success.
Is Funding Necessary?
The short answer is yes. Start-ups cannot survive without proper funding therefore it is imperative to have a well-thought-out business plan along with a financial plan to subdue the consequences of an unforeseen business failure. However, it is also important for start-ups to have the right knowledge and networking skills to ensure their businesses stay afloat.
- Fund Raising