The Hidden Costs of Startup Funding Sources
No matter how great of an idea you have for a new type of product or service, turning that vision into a reality is impossible without funding. So it’s vital that you know ahead of time the different kinds of hidden costs you might run into when dealing with investors. Here are a few different types of funding and the hidden costs to be aware of for each:
Bootstrapping / Self-funding
- This is when you don’t get outside financing, you get it for yourself. If you can bootstrap then that means you have total independence to move forward without interference. The downside to this autonomy is that you will most likely be underfunded and therefore less able to adjust to changes in the marketplace. Ultimately, the most detrimental aspect of bootstrapping is the effect it could have on your own personal finances, and in turn, your health and well-being. If you feel you’re overextending yourself, this could lead to a lot of stress, which won’t help your new venture in the long run.
- If you build a product people really want, or a piece of media that people will want to consume, one option is to finance it through reward-based crowd-funding such as Kickstarter. This is a great way to connect with future customers without having to deal with loan terms or equity. The catch with this method is you have to deliver the product you said you would deliver exactly when you said you would deliver it. This can turn out to be problematic if you encounter any unexpected variables during your development process. You have to be 100% certain that your data is accurate and that you can deliver when you say you’re going to deliver, otherwise you risk alienating your grassroots customer base which could turn into a major PR problem.
Friends & Family
- This is the most common source of funding. If you have friends and/or family members who can afford to finance your vision, great. However, it’s best to proceed with caution even with your loved ones. You’ll want to clearly define their roles in your business before moving forward with them, or you risk having them overstep some boundaries. Do they expect to be employed? To have creative input? And, worst case scenario, how will this affect your relationships in the event that your venture doesn’t succeed? Keep in mind that approximately 90% of new businesses don’t make it, so is that something you can weather with friends or relatives who have invested money?
By keeping the above items in mind, you will be better equipped to plan and strategize how best to acquire funding, what to do with those finances once you have them, and how to prepare for the event in which you lose that money.
Anna Barber, Strategy Coach at AnnaBarber.com, reveals the hidden costs associated with bootstrapping, crowdsourcing and personal loans.