INNOVATIONS IN FUNDING E-COMMERCE START-UPS
The article elaborates on newer ways of raising capital available for E-commerce Start-ups. Most of these methods are famous and commonly used in the west, however, are still uncommon in India.
Equity Crowdsourcing:
Imagine your company requires $100,000 worth of financing. At times it becomes difficult for a single Individual or entity to contribute the entire amount of fund required by the business. In such scenarios, entrepreneurs can turn to Crowdsourcing. Instead of taking the money from a single source, you can take $1 from one lakh people. But asking so many people for money sounds cumbersome. But platforms like Kick-starter, Indiegogo, and Fundable provide an interface between such investors and companies.
Investors can choose how much they want to give you. Crowd funding sites currently use a reward base model where investors are given some form of reward like the product produced by the firm.
Campus based investment funds
Most of the start-ups are usually started on campuses of B-Schools or Technology schools. Campus based investment funds are run by and for student entrepreneurs. Students invest in the start-ups of their college-mates. These funds also provide access to mentoring from peers and VCs.
Examples of student-run venture funds include 'Rough Draft Ventures' which funded $20,000 in Balbus Speech which create apps for speech therapy.
Dorm Room Fund which includes a mix of students from Penn and Drexel University.[1]
Micro loans
Many a times, the start-up may not require heavy funding; Just a small amount to create a prototype. In such cases the entrepreneur can look for microloans. Microloan firms provide small amount of funding. For example a firm called Accion USA makes smaller loans to entrepreneurs. Average amount of microloans is about $12000 to $13000). The downside of microloans is that the rate of interest may be high.[2]
Here is where you can find a simple guide to Microloans
www.entrepreneur.com/article/52724
Royalty financing
Royalty financing is another unique, creative way of generating funds for a business. In this method, an investor gives the entrepreneur or small business owner money for financing an asset they want to sell in return for a percentage of the proceeds of the sale.[3]
The process is less formal and is different from Angel investors and Venture Capitalists as it does not involve a business loan or direct shareholders equity.
Such creative ideas have immense potential but are yet to hit Indian shores.
Donations via Social Media
Another creative and innovative way of raising funds was adopted by twitter when it organised a campaign 'The Tweetsgiving drive' via Twitter. Twitter managed to raise over $10K in under 2 days or 48 ours. The Donations were made either in of $5 or $10 denominations. They leveraged the payment mechanism of PayPal to for processing online payments from hundreds of users.
However, if Twitter can manage this, then it does not imply that every start-up can do the same. The risk involved here is that you should have a large network and a stable customer base. This condition is highly unlikely in the initial few phases of a start-up. And thus this method may not be applicable to all firms.
Factoring companies
Factoring companies are those companies which buy accounts receivables from your balance sheet and in return give you cash. The factoring company takes the entire risk of collecting the receivables and thus charges a fees for this service. Still this method can provide a good source of funds when there is a short term liquidity crunch in the firm. The drawback is that you may end up losing some profits that might be crucial in the future.[4]
Bootstrapping
Bootstrapping by definition means 'get (oneself or something) into or out of a situation using existing resources'. Thus when no other options is left a business should try to bootstrap its way to success. In other words, every penny generated by the business should be put back in the business. This should be done till the business becomes self-sustaining.
Here, try motivating the employees to defer the salaries. However, this can feel like a thankless activity to some and can break the spirit of some people.[5]
Business Incubators
Business incubators like YCombinator exist in various industries, but more likely for tech niches than anything else. They tend to be more accepting of a promising idea and a smart entrepreneur. This type of funding is sometimes known as "seed financing."[6]
The below image is quite useful in understanding the growth of an E-commerce start-up company as it summarises the various stages of Funding by taking an example of a hypothetical firm.
[1] Source: Susan Johnston,(2013)"Students Funding Students: A Look at Campus-Based Investment Funds", Site: http://www.entrepreneur.com/article/227136 (Last accessed: 30.11.2013)
[2] Eve Tahmincioglu(2009), "Launch Your Startup With Microloans"
Site: www.entrepreneur.com/article/204410 (Last accessed: 30.11.2013)
[3] Rosemary Peavler, "Royalty Financing - An Equity Investment in Future Sales"
Site: www.bizfinance.about.com/od/equityfinancing/qt/Royalty_Financing.htm (Last accessed: 30.11.2013)
[4] Source: www.brainz.org/startup-funding/
[5] Source: www.brainz.org/startup-funding/
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