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Financing Strategies

From the inception of a start-up company until the point where it becomes a consistently profitable business, all companies have something in common – the need to finance operations and growth.

Here are the various ways you might finance a new company:

Bootstrapping

Generally “bootstrapping” occurs when a company is funded solely by the founders without assistance from external sources of capital. Doing so provides founders with the greatest amount of flexibility in terms of running the business but also requires the founders to take on additional financial risk. At the same time, there can be a downside to bootstrapping if it leaves the company without enough cash to spend before a fundraising event (e.g., making it difficult to offer cash compensation to a key hire). There are pros and cons of bootstrapping and each company is unique, so careful consideration should be given when deciding whether or not this is the correct path for your company.

Stages of bootstrapping 


Beginner stage

The beginner stage starts with saved money or borrowed/invested money coming from family, friends or business partners.

Customer funded stage

The customer funded stage is when money from customers or clients is used to keep the business running and helping fund its growth as time goes on. 

Credit stage

The credit stage is when an entrepreneur focuses on funding certain areas of the business such as upgrading equipment, hiring staff or even paying for a larger workspace.

Advantages of bootstrapping

This approach allows the entrepreneur to gain extensive experience while running and growing their own business. 

The bootstrapper has ownership of all developments within the business, as well as any new ideas that can contribute to the growth of their business. 

If the founder is the sole owner of the business, then the founder is able to operate free from investor opinion, direction, and oversight. 

Disadvantages of bootstrapping

The entrepreneur will take on all financial risk and form the business with little to no support.

Business growth can be difficult with little to no support during the early stages an no ability to leverage the networks gained from seed or institutional/VC investors. 

Recruiting may be harder without being able to point to outside investor support.

VIDEO: New York Angels Chairman Emeritus Brian Cohen Discusses Smart Financing for Entrepreneurs

Seed Financing

A seed financing typically involves a relatively modest amount of capital invested to fund the investigation of a market opportunity or the development of the initial version of a product or service. Seed financings are typically provided by the founders themselves, “friends and family” and angel investors. Typical seed financing structures include:

Note Financing  An investor will receive an interest-bearing promissory note in exchange for their investment, which is either repayable upon demand by the investor or upon a stated maturity date.  A note financing is often the simplest investment structure and is often used by founders or “friends and family” investors to allow a company to maintain its operations for a short period of time before an anticipated influx of capital.
Convertible Note Financing  An investor will receive an interest-bearing promissory note in exchange for their investment, and while such note will include a maturity date for repayment like a traditional note, it will also include the option/requirement that it be converted into equity (sometimes at a discounted rate or subject to some maximum value) at the time of a priced equity financing. 
Safe Financing  An investor will receive a simple agreement for future equity, called a Safe, in exchange for their investment. The Safe will convert into equity at the time of an equity financing, usually at a discounted rate and/or subject to some maximum value. Unlike a convertible note, the Safe does not accrue interest or have a maturity date. 
Series Seed Financing  Investors receive preferred stock in exchange for their investment in the company. Among other things, investors who hold preferred stock often receive the right to get their investment back (plus an additional return in some circumstances), called a “preferred return,” before holders of common stock are paid upon the sale or liquidation of the company. These rounds are led by a variety of investors, including venture capital investors, angel investors, family offices, “friends and family”, etc. 

Advantages of seed funding

Seed funding can be easier to secure at an early stage than institutional/VC fund with fewer “proof points” required.

It is easier to develop relationships, networks and a sense of community by leveraging your seed investors’ networks to expand your reach.

There is a chance for extremely rapid growth for the business.

Raising a seed financing (typically involving larger amounts) can provide the company with more time and resources to determine product-market fit.

Disadvantages of seed funding

There is a high risk of losing your entire investment with little to no protection.

There is a lack of mandatory reporting governance mostly for this type of funding.

It is largely unregulated.

It can take a lot of founder/management time and many discussions and outreaches to round up sufficient funding from smaller seed investors.

Many seed investors’ investment theses revolve around generating some multiple of return within a certain period of time following the investment, which may conflict with the desired timeline for the founders or the company.

Venture Capital Financing

A venture capital financing typically results in a larger investment in the company from one or more venture capital firms, in exchange for preferred stock of the company.  In addition to receiving a preferred return like in a Series Seed Financing, venture capital investors also typically receive important corporate governance rights (such as a seat on the Board of Directors and approval rights on certain transactions). VC financing typically occurs when a company can demonstrate a significant business opportunity to quickly grow the value of the company but requires significant capital to do so.

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