Lesson 4: Funding
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Workshop Scenario:
Please think of yourself in the following scenario as you complete this workshop.
You have spent your entire career working in corporate environments, but you've always had a burning desire to start your own business. You recently had an idea for a new business that you're passionate about, but it's in a completely unrelated field. Despite lacking experience or expertise in this industry, you're determined to make your vision a reality. You feel certain that your business idea can be profitable while making a positive impact in the community.
After planning your marketing strategy, you know that you can reach your target customer base and stand out from competitors.Your next step is to secure funding. Which method of financing will be most effective, considering the risks associated with starting your business? You will need to explore all options and weigh the benefits before making a decision.
Lesson Objective:
By the end of the lesson, you will be able to cite one or more funding sources to finance your business venture and explore potential benefits and challenges.
Important Questions to Answer While Reading:
In order to be successful in this lesson, you must be able to answer these important questions.
What are the most common sources of funding to support entrepreneurs?
What are the financial risks associated with starting a business?
4.1 - Sources of Funding
Funding is critical as an entrepreneur. Without it, you cannot turn your business idea into a reality. More than likely, starting your business will require significant financial resources to cover costs such as equipment, marketing, employee salaries, etc. Without adequate funding, many entrepreneurs struggle to get their business off the ground in the first place.
In addition to financial resources, the process of securing funding can also help entrepreneurs with networking. Investors have expertise, experience, and connections that can help navigate the challenges of a new startup.
Entrepreneurs often pitch their business ideas to investors, such venture capitalists, in hopes of securing funding in exchange for equity in their business. Other options include bootstrapping (self-funding), bank loans, grants, and crowdfunding. Let’s explore some of the sources and how each is best suited for specific business needs.
4.2 - Venture Capital
Venture capital is a form of private equity financing that is typically provided to high-potential, early-stage companies with innovative products or services. Venture capital firms invest in these companies in exchange for an ownership stake in the business, and they provide expertise and support to help the business grow and achieve its goals.
This is similar to the popular television show “Shark Tank”, in which entrepreneurs pitch their business idea to a panel of investors (“sharks”) in hopes of securing funding in the form of equity financing. The amount of funding and equity stake varies and is negotiated between the entrepreneur and the sharks. The difference between Shark Tank funding and a traditional venture capital investment is that the sharks are investing their personal funds rather than those from a venture capitalist firm. However, the process of pitching to the sharks and negotiating funding terms is similar to the process of securing venture capital funding.
It's important to note that securing venture capital funding can be a lengthy and competitive process, and not all businesses are suitable for venture capital investment. Venture capital firms typically look for businesses with a high potential for growth and a clear path to profitability. If you are considering venture capital funding, it's important to do your research, prepare a strong business plan, and be prepared for the negotiation process.
4.3 - Bootstrapping
Bootstrapping is a term used to describe a business that is self-funded, without external investment or capital. In other words, bootstrapped businesses rely on their own resources such as personal savings, revenue generated from sales, and reinvesting profits back into the business. Bootstrapping is often used by entrepreneurs who want to maintain control over their business or who may not have access to outside funding.
Bootstrapped businesses often start small and focus on a niche market, rather than trying to compete with larger, established competitors. They may also outsource certain tasks, such as accounting or marketing, to reduce overhead costs. For efficiency and maximizing resources, bootstrapped businesses typically utilize lean operations - for example, using free open-source software wherever possible.
While bootstrapping can be a challenging way to start a business initially, it can also lead to greater control and flexibility for the entrepreneur.
4.4 - Crowdfunding
Crowdfunding is a method of raising money for a project or venture by soliciting small contributions from a large number of people, typically via the internet. The process usually involves posting a campaign or project on a crowdfunding platform and inviting people to contribute funds in exchange for a reward or ownership stake in the venture. Examples of crowdfunding platforms include Kickstarter, Indiegogo, and GoFundMe.
There are several types of crowdfunding, including:
Donation - Based: Backers contribute money to support a cause or project without expecting anything in return.
Reward - Based: Backers contribute money in exchange for a reward or product, such as a pre-order of a new product or a discount on a service.
Equity - Based: Backers are given ownership shares in a company.
Debt - Based: Backers provide loans to be repaid with interest.
Crowdfunding can be a great way for entrepreneurs to test the market as well as build a community of supporters and future customers.
Lesson 4 Assessment:
Now that you have reached the end of this lesson, please respond to the following:
Compare and contrast venture capital and crowdfunding as sources of funding for a new business.
What are the advantages and disadvantages of bootstrapping as a method of financing a business?
Participate in the 24/7 Discussion Forum
Please answer the following prompts in the comment section below and interact with learners from around the world:
How can you determine which source of funding is best suited for your business?
To what extent do you believe that the source of funding impacts the success of a startup, compared to other factors such as the quality of the idea or the expertise of the founding team?
Created by 24/7 Instructional Designers: Laura Campion & Vivi Ma
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