An Overview of Fundraising Versus Bootstrapping

According to Small Business Trends, a third of small businesses get started with less than $5,000, and 58% got started with less than $25,000.[1]

Your requirements for funding will be dependent on the costs associated with getting started, which you will have researched, validated, and outlined in your business plan. As part of a discussion with an accountant during this process, you may have also discussed options for funding the initial costs of setting up your business.

Almost every successful entrepreneur will caution that overspending in the early stages of building a business can be perilous. This is why you need to understand the concept of bootstrapping, a concept introduced in the book The Lean Startup.

Author of The Lean Startup, Eric Ries, demonstrates that irrespective of whether you raise or borrow money to start your business, you should also consider how you can best achieve your goals by spending as consciously and as efficiently as possible. Critically, you should also take your product or service to market as quickly as possible to ensure that there is a true demand for it.

Ries says, “the fundamental activity of a startup is to turn ideas into products, measure how customers respond, and then learn whether to pivot or persevere. All successful startup processes should be geared to accelerate that feedback loop”.

Increasingly, investors want to see evidence of this fast feedback loop, rather than simply spending months or even years just talking about or developing a product or service that has never been seen or experienced by a consumer.

When it comes to funding your idea, there are some primary options available for you to consider. Depending on where you are in the world, these sources of funding may be readily available. They are:

• Self-fund – this means using your own savings or investments to fund your business idea, and the primary benefit of which is that you own the business in its entirety.
• Family and friends – you might have family or friends who are financially in a position to lend you money to start your business either as a loan or as an investment (in exchange for a share of your business).
• Bank loan – this means approaching a financial institution like a bank for a small business loan.
• Grants – take some time to research grants that are offered by either the government or private organisations. Sometimes they’ll be focused on a particular industry sector or area of innovation with certain criteria which, if your business qualifies, could provide substantial assistance.
• Crowdfunding – an increasingly popular form of fundraising where people (often potential or existing customers) come together and invest small sums of money which, when combined in significant volume, can be a great option. Take a look at some examples of companies in the wellness industry who have used Crowdfunding successfully – including Pollen & Grace, Mindful Chef, and 1Rebel.
• Cash advances – if you’re already trading or have guaranteed debtors, you can use cash advance services to receive money upfront before invoices have been paid. There is a certain risk involved here and you will have to provide evidence that the debtor is unlikely to default on payment.
• Asset finance – for example borrowing money against an existing asset like property. This is a risky option but there are many examples of entrepreneurs who have risked their own homes to fund a business that they believe in.
• Peer-to-peer loans – these come from dedicated organisations that can put you in touch with private lenders.
• Institutional investment – where money is exchanged for a share of the business in the form of private equity funding or venture capital funding.

Deciding on which avenue to take when funding your wellness business requires dedicated research, consideration, and specialist advice. Talking to a qualified accountant is a good first step, as well as other entrepreneurs who have successfully used these methods of fundraising.

One important consideration, regardless of which fundraising path you take, is to ensure that the amount you need is substantiated and that you have a clear plan for how you will ensure a return on that investment through sales of your product or service.

What do you think?

Of these fundraising options, which do you think is most suited to your business idea?

Also, who do you already know in your existing network that may have some insight into one or more of these funding strategies?

References

[1] Small Business Trends