Financing alternatives for startups: boostrapping, angel syndicate funding or crowdfunding
Category: Understanding startup investment
European startups have a wide variety of financing options, from traditional Venture Capital firms to new alternatives such as syndicates, crowdfuding or even P2P lending platforms. As we’ve mentioned in the past, these alternatives are more or less useful depending on the stage a startup finds itself in.
In this article we want to focus on three specific financing options: syndicates, crowdfunding and boostrapping. These alternatives are very different from each other, but all three could be of interest to early stage startups.
Bootstrapping: I don’t want investors’ money
Many entrepreneurs consider fundraising as a milestone, especially at an early stage. Mistakenly, they think that raising money from business angels, accelerators or Venture Capital funds is a must to get started and scale. This is not totally true.
Some startups are able to create a business from day one, making money and having real revenues. These revenues can then be invested in the growth of the company, avoiding having to give a stake of the business to external investors. This is what bootstrapping is all about.
The term bootstrapping was first used in a business context in the US in the 19th century, and it usually refers to starting a self-sustaining company without external input. The technology revolution that we have witnessed in the past few decades has allowed certain startups and companies to boostrap themselves and grow with no external funding.
The advantages are clear to the entrepreneur:
- Full control of the company.
- No stake -small or large- of the company has to be given to investors, which means that founders and employees can have a better sense of ownership.
- Spending is limited by the company’s business, avoiding high burn rates that can be encouraged by abundant capital.
- No time is spent on looking for funding, thus being able to devote more time to the business itself.
- Company will be customer-focused from day one.
And there are also some disadvantages:
- Not all kinds of companies can be bootstrapped. Some need large sums of capital to start.
- Founders might use their own money and personal assets to start the business, thus increasing their own personal risk.
- Institutional money can help accelerate growth in ways that boostrapping can’t.
It’s important to note that the fact that a startup chooses bootstrapping over other financing alternatives at a certain stage doesn’t mean they can’t change in the long term. GitHub is a clear example of a bootstrapped company that, after a few years of operating independently, raised money from Venture Capital firms to accelerate growth. Other examples of successful bootstrapped companies are Mailchimp, WooThemes, AppSumo or Basecamp (formerly known as 37 Signals).
Crowdfunding: the power of the masses
At an early stage, crowdfunding can be an interesting and viable fundraising alternative for startups. When it comes to crowdfunding, it’s worth noting that there are different types:
- Reward-based crowdfunding: the main examples are platforms such as Kickstarter or Indiegogo. Selected entrepreneurs can pitch their products or services on these sites, offering users the chance of participating in the evolution of those products by providing capital. In exchange, users will get something material in return. No equity is exchanged between backers and entrepreneurs.
- Donation-based crowdfunding: the same as above but backers don’t necessarily need to receive anything in return.
- Equity crowdfunding: this type of crowdfunding is significantly different from the rest. Basically, it allows entrepreneurs and startups to pitch their businesses on platforms that will connect them to investors. These investors can then put money in those startups and get equity in return, becoming an alternative to family, fools and friends or even traditional business angels.
- P2P lending platforms: in this case startups can borrow money from investors or individuals that have the necessary resources to provide such capital.
All forms of crowdfunding have something in common: they rely on the power of the masses -big crowds of investors, users, etc- to finance their operations. Interestingly, in the past few months crowdfunding has been in the crosshairs of many European legislators who are trying to regulate the industry to “protect investors”.
Angel syndicate funding: you lead and I back you
Last but not least, there’s syndycate funding. A syndicate is a financing option that allows investors (backers) to co-invest with relevant investors (leaders). The idea is that leaders with notable dealflow and significant know-how of specific industries let backers invest with them in the startups they choose.
The benefits for all parts involved are clear:
- Leaders can invest more money per deal, reaching certain startups that might have higher minimum commitments. They also get paid a carry in return for their ‘leadership’.
- Backers have access to dealflow and startups they wouldn’t have otherwise.
- Startups get more capital than usual and don’t have to deal with numerous and different investors. The leader takes care of the fundraising process and they’re responsible for managing its relationship with his or her backers.
Syndicate funding is often done via online platforms that connect startups and investors. US-based AngelList was one of the first companies in the world to do this and our very own Startupxplore is also focused on providing this kind of services to the European ecosystem.
We believe that as a platform we can provide greater transparency to the ecosystem and facilitate life for startups and investors by investing via syndicates.
As we’ve mentioned, financing alternatives for early stage startups are vast and diverse. Each can be a better or worse fit depending on the nature of the startup and its objectives. In the case of syndicates, we believe its importance will only increase in years to come and we want to be right in the middle of this startup financing revolution.