What Type of Funding Works Best With Your Startup

By Fernando Berrocal

When it comes to fundraising, it's important to remember that you have several options to choose from. You've certainly heard of equities, loans, and convertible debts, but do you understand what they are? Aside from these conventional methods of financing, new options emerge all the time. Let's explore a bit further to see which type of fundraising is right for you.

Types of Funding for Startups

Types of Traditional Fundraising:

  1. Loan: The easiest approach to acquiring finances is to take out a loan. You just request money and then repay it with interest.  When you only need a small quantity of money (generally less than $100,000), a loan is an ideal option.  This is usually secured, which means you must put up collateral to protect investors in the event you are unable to repay the loan. When you need money urgently and don't want to give someone a share in your business, a loan is also a possibility.

  1. Equity: This is a type of funding that is particularly appealing to entrepreneurs who have big goals and a clear vision for their organization's future but don't have any collateral. Investors obtain a share of your business in exchange for their investment. If you use equity fundraising, you must properly value your business since investors will buy a stake based on your valuation.

When you have equity, it means that your business has a lot of potential, but it will take time to grow. If there are opportunities, equity investors are willing to wait. You probably have a solid strategy and believe in yourself; investors will not take a chance on you if you aren't confident in your own abilities. 

The benefit of equity is that it has nothing to do with making timely payments. However, keep the following considerations in mind:

  • Finding an equity investor takes time. Many entrepreneurs are looking for funding, but there are far fewer investors. Be prepared for your business to be examined from every angle.
  • There's practically no going back: once an investor has a piece of your business, he or she is unlikely to give it up. Find an investor with whom you can have a pleasant working relationship.

Initial Coin Offerings (ICOs) is a new method of financing: These are also a relatively simple way to raise funds. ICOs are a type of crowdfunding in which small businesses sell digital tokens to investors in return for fiat currency (euros, dollars) or another popular cryptocurrency. ICOs are made possible by Distributed Ledger Technologies (DLTs), such as the Blockchain, which allows for value exchange without the need for a trusted central authority or intermediary, resulting in significant efficiency advantages.

ICOs allow for wealth generation by using the blockchain's potential for network effects and efficiency advantages. It appeals to start-ups since they do not have to give up any stock and any retail investor may join in the fundraising, making it a far more straightforward method of generating funds. There are other sorts of ICOs, such as IDO and IEO.

  • When a startup offers a token through a decentralized liquidity exchange, it is known as an Initial Dex Offering (IDO).
  • When crypto projects debut their tokens and raise funding through a controlled exchange, this is known as an Initial Exchange Offering (IEO).

Types of Fundraising

Both kinds of fundraising have advantages and disadvantages, and it is up to start-ups to decide which is best for them. Although an ICO may be the way to go, there are several reasons why you should not: It's critical to determine whether your product needs a crypto token; if it doesn't, it's best to avoid an ICO. Many projects develop a cryptocurrency for the sole purpose of obtaining funds, which is unnecessary. It not only diminishes a business's reputation but also creates a mismatch between the project and investors, which is inefficient for a startup in the long run.

Raising money via stock from established investors, on the other hand, provides you a high trust score due to their extensive due diligence procedure, which aids with future expansion. Traditional equity investors also bring a wealth of knowledge and a vast network with them, which aids in the development of business strategies and the formation of valuable contacts.

Ready to bring your startup to the next level? Apply to MassLight’s next batch. MassLight supplies capital and a dedicated tech team. We take equity in return. Have questions? Refer to our FAQ page.

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