When we talk about new businesses, there is a specific financial vocabulary that forms the language of entrepreneurship: seed-stage funding, early-sta
When we talk about new businesses, there is a specific financial vocabulary that forms the language of entrepreneurship: seed-stage funding, early-stage funding, equity, Series A–and especially venture capital.
But what do each of these terms mean?
Venture capital is a form of private equity provided by investors to startups and emerging companies with high-growth potential. In exchange, the investor receives equity (ownership) in the company.
Sounds great, right?
It can be.
Venture capital is often essential for a startup to grow at a rapid rate. Google wouldn’t be Google without venture capital. Same with Facebook, Twitter, and LinkedIn. Pretty much everything on your smartphone, including the phone itself, exists because a venture capital firm plowed millions of dollars of private investment into the company during its infancy.
Venture capital comes with a price, though. Founders must be willing to reduce their ownership stake, which can result in reduced control over strategic decisions. Venture capital is also relatively scarce. Despite the huge size of investments often covered in the media, the overall amount of venture funding available to new businesses is relatively small.
The good news?
Venture capital is far from an entrepreneur’s only option.
Bootstrapping essentially means starting your business without any external funding. Rather than getting funding from VCs (the slang term for venture capital firms), an entrepreneur uses his or her personal money, as well as whatever initial revenue streams are available.
Despite venture capital receiving all the attention, bootstrapping is far more common. Simply put, even if your idea for a single restaurant is the best idea the restaurant industry has ever seen, the return on investment (ROI) for an investment in a single restaurant is usually not large enough to warrant the attention of investors.
If venture capital and bootstrapping represent opposite ends of the spectrum, there is a middle ground.
Small Business Loans
Obtaining a loan for your small business does not require giving up any equity in your company. When you walk out of a bank, you still own the exact same percentage of the business that you did when you walked in. At the same time, small business loans can provide the capital your business needs to grow–because while bootstrapping can seem like a wise decision, it can starve your business of the resources it needs before you even have a chance to test the validity of your idea.
But getting a small business loan is not as easy as walking into a bank and telling them your next great idea.
You need a business plan.
You need knowledge of your industry.
You need a good idea.
You need a go-to-market strategy.
You need good credit (in its infancy, your business credit will depend on your personal credit worthiness).
A loan is not free money. It will need to be repaid. You will need to have a strategy and a plan in place that ensures you can repay your loan and still run a profitable business. Venture-backed startups can be unprofitable for years. Amazon–the world’s largest retailer–can consistently suffer massive losses in a play for growth over profitability because of its ability to continually attract venture capital.
That isn’t the case for the owner who bootstraps her restaurant.
And it isn’t the case for the owner who gets his first business loan.
If you are an entrepreneur, there is a variety of ways to finance your new business.
Pick the one that’s right for you.
This article is from Inc.com