You have an idea and a business model. You want to implement it, but lack something fundamental: funding. And the question crops up: what are the best options available to me to fund my project? We collect some fundamental points here including their pros and cons.
Funding can be the main barrier to entry for the entrepreneurial ecosystem. So you have to be clear about what the alternatives are and see which are best suited to the project. Let's take a look:
Bootstrapping, when there is no money
There is no money and there aren't any possibilities (or even will in some cases) to look for it. Is it possible to be an entrepreneur in this situation? Not in all sectors, but it is possible. And this is called bootstrapping. This is about taking those first steps of the project with few economic resources.
This method can be useful for the obvious reason: there is no need to expose yourself to external funding or indebtedness. But this is bound to another thing that is also intrinsic to the lack of money for everyday needs: it will sharpen wit and boost creativity to achieve objectives. Although it certainly has one fundamental drawback: future growth of the initiative will be mortgaged through this lack of funding.
The three F's: the immediate environment
There may be no money and the ability to access traditional funding routes are also scarce. This is when you have to look around: the immediate environment. What is known as the three Fs: Friends, Family and Fools.
It's ideal for the first steps and has great advantages:
– These are the investors who, in theory, will be easier to convince to take on your project.
– Better conditions. The agreement to return those borrowed financial resources will almost certainly be more advantageous than the other routes, given that personal connection.
But like everything it has a downside entailing some major difficulties. One of these is the scarcity of resources due to the inability to gather everyone from this immediate environment and also the extra pressure because of the personal connection. Nevertheless investors in venture capital funds sometimes carefully considered this as a first step before putting funding on the table for a mature project.
Seed capital: funds without revenues
And after starting with total self-financing or through the immediate environment, the possibility arrives to get seed capital. This is what is invested in startups or companies in their infancy, where no clear business model or steady revenue structure is in place yet. This is initially very risky for those paying out, so the amounts are not usually very high.
These investments in the early stages of companies are typically made by business angels, although there are also funds for this. The total amount invested is usually no more than 200,000 euros as the needs are no greater than this figure and a higher amount is normally not available because of the unstableness of the projects.
VC and Private Equity step up
The next step has a common denominator: less control by the entrepreneur. It is formed by venture capital funds and those dedicated to Private Equity. The former are particularly focused on technology-based companies with growth potential and high risk, and the latter on all types of businesses but, in many cases, with much higher amounts.
The advantages are clear: we are talking about funds that are willing to put a significant amount of capital on the table that is essential to move forward. This capital is linked to an obvious risk (more pronounced in Venture Capital). But the downside may be the loss of control by the entrepreneur. In both cases, funds or investors that show up will do this with a part of the shareholding and, in some cases, and given the urgent funding needs, with a central part.
That can be a crucial help in some cases, but it can also result in a loss of control over the destiny of the actual project. So you have to assess needs very carefully and, especially, the limits marked by the founding team.
And apart from the private sector, the public sphere also offers other investment alternatives. El Centro para el Desarrollo Tecnológico Industrial (CDTI – Center for Industrial Technological Development) and la Empresa Nacional de Innovación (Enisa – National Innovation) are two of the most important options. The first is part of the Ministry for the Economy and the second is under the Ministry for Industry. Between both of these 533 operations were completed throughout 2012, with more than 90% of them injected with capital of less than 250,000 euros, according to a report by Webcapitalriesgo.
Now the implementation of Fondico, the private equity fund promoted by the Official Credit Institute (ICO) will significantly increase the weight of investment with public money in entrepreneurial projects over the next four years.