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Starting a new startup often hinges on securing adequate funding, which can be one of the toughest challenges for entrepreneurs. Traditional routes like bank loans or individual investors may not always provide the needed capital, prompting startups to explore alternative financing options. Among these, crowdfunding stands out as a popular method, connecting startups with numerous potential investors, though it requires building trust and demonstrating project viability. Another common approach is seeking investments from friends, family, and acquaintances (FFF), which, despite potential personal risks, can work if handled professionally with clear communication about risks and plans.
Public subsidies and aid also play a role, especially for startups focusing on innovation, technology, or sectors favored by government policies, though these resources come with specific criteria. Bootstrapping offers a path based on self-funding and gradual growth through cash flow, granting full ownership but posing risks if expenses outpace income. Bartering enables startups to exchange services or goods without cash, fostering partnerships but potentially creating dependencies. Lastly, factoring allows companies to improve cash flow by selling invoices to third parties at a discount, although it may distance startups from their customers, which can be detrimental to long-term business relationships. Each of these alternatives offers unique advantages and challenges that startups should carefully consider when planning their funding strategies.
Having a person or institution that invests is always a good help for startups. However, there are alternatives that make it not always essential.
When you have made the decision to start a new startup, you need to be aware that one of the most difficult steps is to raise the necessary capital or avenues to fund the startup. Early searches are usually directed at traditional bank loans or individual investors. However, it is not always easy to achieve what we are looking for in these sectors.
As a result, sometimes it is necessary to consider alternative options that explore other different avenues, and even ways to launch your new business without it. Here are some of the most interesting formulas.
1. Crowdfunding
Crowdfunding has become a popular way to get initial investments. In fact, one of the most interesting conclusions of the report “Investment Trends in Spain Q3 2020” is that crowdfunding for startups maintains a very positive evolution. The advantage of crowdfunding is that there are thousands of potential investors to connect with. However, getting them to contribute is another story. For this to work, you have to earn their trust by showing that the project is viable and that it will be possible to repay what was borrowed. There are different forms of crowdfunding, each with its own characteristics and advantages, as we explain in this article.
2. FFF (Friends, family and fools)
It’s true that it’s never easy to ask family and friends to become the first investors in a project. “Father-in-law money, lawsuit money,” says the Spanish proverb, in a clear reference to the fact that it is better to leave relatives away from business.
However, and despite this, sometimes there is no choice but to do so. In these cases, the ideal is to follow the same rules as with any other source of funding. Offering detailed information about the business, its objectives, its risks and how it plans to return them, will be a good step. In an article published in Forbes, Martin Zwilling, founder and CEO of Startup Professionals, wrote some advice along these lines:
1. Proactively involve each potential investor by asking them for advice.
2. Sell the idea in a way that makes business sense and shows that homework has been done with respect to customers, competition, and costs. And that, therefore, is realistic.
3. Provide details on how the requested funds are intended to be used.
3. Subsidies and public aid
Public administrations can also play an important role in the creation and development of startups. It is true that the Public Administration does not finance business projects directly. However, there are resources for entrepreneurs through subsidies and aid aimed at facilitating the financing of the business. Depending on the nature of each of the resources, there are different criteria and requirements that must be met by those who apply for them. As a general rule, they are aimed at innovation and technological projects, which seek internationalisation or which belong to a sector that the Administration wants to promote with public funds, such as green companies.
To facilitate the search, there are tools such as the search engine of the National System of Publicity of Subsidies and Public Aid. Useful information can also be found at the Directorate-General for Industry and Small and Medium-sized Enterprises, as well as at other national, European or regional bodies.
4. Bootstrapping
It is true that it is always good to have a significant sum of money. However, it doesn’t always take a lot of cash to get a business off the ground. Sometimes it just takes hard work, the right idea, and the right contacts. This is where bootstrapping comes in.
This concept is based on operating on a small budget at the beginning and growing through cash flow. That is, it is about starting to walk without external financing, only with own resources and work, a lot of work. Its main advantage is independence in decision-making and that it allows you to own 100% of the business.
However, it is important to know that it also has risks. One of them is that the chances of survival are slim in a scenario of excessive spending before having the opportunity to develop the business. It should also be taken into account that it is more difficult to grow without the ability to invest in marketing and product development.
5. Bartering
Bartering, in reality, is nothing more than a kind of barter system. This means the possibility of making exchanges, so in turn it means the need to reach commercial agreements with other companies. All this implies obtaining a series of benefits, but, of course, without any type of monetary exchange taking place. It is true that, in essence, it is not a direct financing system.
But, like everything else, it also has some negative aspects, such as that it can favour the emergence of a relationship of dependency between companies or that, when it comes down to it, one of the parties involved does not comply with the agreement.
6. Factoring
Factoring is an alternative way for companies to finance cash flow by selling invoices that we have to collect from a third party (a factoring factor or company) with a discount or commission. Invoice factoring can be provided by independent financial providers or by banks. In exchange, the beneficiary will not only be in charge of the management, but will also assume the risk of the operation in exchange for a commission and interest, depending on the time remaining until maturity.
A related problem is that it pushes customer relationships away. And, on many occasions, it is something that may not be of interest, since direct contact and maintaining healthy relationships in all phases is, on many occasions, very important for the development of startups.
