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Being in control of financing requirements, could possibly be one of the key elements in an entrepreneurial journey. Growth, for startup founders, can imply the need for seeking external funding. Having clear visibility of funding requirements at the start of the journey, can help entrepreneurs chart out their growth plans meaningfully.
From preparing a powerful pitch deck that will pique the interest f the right VC, to reaching out to investor networks, to preparing term sheets and negotiating the terms of the investment relationship, the entire process can be time-consuming, and sometimes even daunting.
A startup entrepreneur, an investor wants to see fast growth. The market too requires a quick solution to current challenges. Rapid growth usually means a great idea has been unleashed in a very potent market. Funding is what helps startups take their ideas to the market quickly and create impact and reach.
Equity v/s non-equity funding is usually the first question that a startup entrepreneur and his advisors, will probably need to decide at an early stage. Incubation centres, with their access to expertise from investors and funders, can help guide a startup entrepreneur to make this decision by carefully weighing the pros and cons.
Most companies use a combination of debt and equity financing to raise capital for their businesses. Each has some distinct advantages.
The choice often depends upon which source of funding is most easily accessible for the company, its cash flow, as well as how important it is for the founder to maintain control of the company.
Equity financing carries no repayment obligation and provides extra working capital that can be used to grow a business. Debt financing on the other hand does not require giving up a portion of ownership. It allows start-up founders to retain control of company stock while raising the necessary funds.
New age tech startups, that are providing solutions to new-age customer expectations, or industries that require quick revival through intense technological intervention, like Tourism, may prefer equity funding. The main advantage of equity financing is that there is no obligation to repay the money acquired through it. Of course, every startup entrepreneur wants to be successful and gladly provide a good return on their investment, to equity investors, but the risks involved in developing a new tech idea can be significantly higher.
The cold hard truth is that nine out of ten startups are slated to fail – unless they offer the right product to the right market at the right time and the team has resilience and guarded optimism.
Advantages of Non-Equity Funding:
– A founder who receives non-equity funding can scale their business while maintaining ownership. Some business owners prefer non-equity financing because it allows them to retain full ownership of the businesses they have worked to raise.
Non-equity funding enables founders to maintain the integrity of their brand and original vision for their company. Sometimes, an investor might not share the same level of enthusiasm or passion for the specific solution you are developing. Venture firms and angel investors may have very different views on customer segments, human resource and marketing strategy. With access to non-equity capital, founders can put their financial worries behind them during an unstable scaling phases.
To summarise, the benefits range from higher ownership and control, flexibility, lower conflicts to increased profitability (since most non-equity funds are provided at a fixed rate of interest, it allows the start-up to scale up its benefits as the profits rise)
Disadvantages of Non-equity funding
– If a company have already availed of non-equity funding the past, a venture capitalist might offer less money in exchange for a stake in the company when founders use some forms of non-equity capital that call for upfront payments.
A brand-new, unproven business idea is risky from the bank’s perspective. Before applying, it’s important to understand the terms of the loan, including the interest rates, costs, and repayment plans. Here is where the good-will of an incubation centre could come in useful. Incubation centres that have strong affiliations and support from government organisations, academia and industry can help in smoothing out the process of obtaining funds from non-equity sources.
Non-bank financial institutions are also fast emerging as a non-equity funding option for startups. Since funds are more easily accessible to businesses and startups with strong commercial potential, non-bank lenders may have an advantage over their competition. Peer-to-peer lending is gaining popularity in India as a non-equity lending option for small businesses.
Other forms of Non-Equity Funding include:
ARR (Annual Recurring Revenue) : Here, the principal amount for funding is agreed without a fixed date of payment. The loan repayment is agreed as a percentage of the annual or monthly revenue that the start-up generates.
Businesses can use crowdfunding websites to reach out to potential customers. This is seen to be more prevalent in start-ups that sell physical goods. Before their products and services go live, business owners can use these tools to spread the word about them.
In cases of non-equity funders like Banks, based on a sustainability purpose for the business, there may be relaxed terms for financing, which can be leveraged by the start-up.
Sometimes, businesses that have started with non-equity financing progressively look at equity funding at a later stage. FiiRE, Forum for Incubation, Innovation, Research and Entrepreneurship, specifically works with TourismTech startups not only to help them perfect their pitch decks, upskill them on critical entrepreneurial essentials, provide them facilities for product testing, but also fund them a proof-of-concept stage, as well as later stages of business growth. With the Goa startup community, gaining in momentum over the last two years, access to funders and funding options have become easier.
FiiRE guides and leads start-ups with access to various forms of financing – including non-equity financing. Various government schemes can be availed through FiiRE. In the end, a balance needs to be maintained in the way businesses approach equity and non-equity forms of financing.The founder’s vision, temperament and well as medium to long term requirements of the start-up, should be considered before making investment decisions on the next significant expansion project.
An industry expert as well as an incubator who has built expertise and partnerships with industry-specific organisations and mentor networks will be a strong “partner” to guide startups to achieve the success they want.