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Writer's pictureKayan Shah

Start-Up Financing

Public Stock Issue

Credit: Investopedia

The advantages of using public stock issues to fund a startup include:

  1. Having access to a lot of money: A startup can raise funds from a wide range of investors, including individual and institutional investors, by issuing public stock. The business can use this as a significant source of capital for expansion and growth.

  2. Enhancement of visibility: A company's visibility and prestige can increase when it goes public, which can help it attract new partners, employees, and customers.

  3. Shareholder liquidity: Shareholders who wish to sell their shares can do so with ease on the open market thanks to the liquidity provided by publicly traded stock.

  4. Possibility of appreciation: Shareholders can get a return on their investment by investing in publicly traded stock because it has the potential to rise in value.

The disadvantages of using public stock issues to fund a startup include:

  1. Stricter regulations: There are a number of regulatory requirements and reporting obligations that a company must comply with once it goes public. Compliance with this can be costly and time-consuming for the business.

  2. Short-term focus: Companies that are publicly traded may be under pressure to produce results in the short term, which may result in a focus on quarterly earnings at the expense of innovation and growth over the long term.

  3. Control loss: When a company issues public stock, it runs the risk of losing control of the business and diluting the ownership of its current shareholders.

  4. Volatility risk: A stock that is traded on a public market can be highly volatile, which poses a threat to the business as well as its shareholders.


Venture Capitalism

Credit: Investopedia

The advantages of using venture capital to fund a startup include:

  1. Having access to seasoned investors: Venture capitalists (VCs) are seasoned investors who have a thorough comprehension of the startup ecosystem and can offer the management team of a startup valuable guidance and mentoring.

  2. Capital in large amounts: VCs typically put a lot of money into their investments, which can help a startup grow and expand significantly.

  3. Strategic alliances: Startups can benefit from the strategic partnerships and collaborations that VCs can help them establish thanks to their extensive industry contacts.

  4. Credibility boost: A startup's credibility can be improved by receiving funding from a reputable venture capitalist, making it simpler to obtain additional funding or to attract customers and partners.

  5. Opportunities for exit: Venture capitalists frequently make investments with the intention of eventually selling or buying their stake in the company through an initial public offering (IPO). Both the venture capitalist and the startup stand to benefit greatly from this.

The disadvantages of using venture capital to fund a startup include:

  1. Control loss: Startups frequently have to give up some ownership and control to VCs in exchange for funding. The founders and management team may be very worried about this.

  2. Short-term focus: Venture capitalists may prioritize quick exits over long-term growth because they frequently have a shorter time horizon for their investments.

  3. a lot of pressure to succeed: The management team of startups that receive funding from venture capitalists (VCs) may feel pressure to meet high growth targets and deliver returns to the VCs, which can be stressful.

  4. Equity dilution: Equity is diluted among shareholders whenever a startup receives new funding, which can be a significant source of concern for the founders and early investors.

  5. Limited investment options: Venture capital is typically only available to startups with high growth potential and a certain stage of development, which can be a constraint for some startups.


Commercial Banks (Loans)

Credit: Investopedia

The pros of financing a startup using commercial banks include:

  1. Familiarity: Because most firms are familiar with commercial banks, a conventional source of capital, the lending process is quite simple.

  2. Credit History: Banks usually need a credit history, which can be advantageous for startups that have been in operation for some time and have built a reputation for creditworthiness.

  3. Flexibility: Banks provide startups with the flexibility they need to meet their unique funding requirements by offering a range of loan instruments, including term loans and lines of credit.

  4. Long Term: Banks frequently offer long-term financing, which is helpful for businesses wanting to buy property or equipment or to support long-term expansion.

  5. Relationships established: Banks have connections with other financial institutions that provide them access to extra funding options like SBA loan programs.


The cons of financing a startup using commercial banks include:

  1. Rigid requirements: Banks may have severe lending requirements, including high credit scores, collateral, and guarantees. This might make it difficult for startups who are just getting started and may not meet these requirements.

  2. Slow Process: The approval and funding of a loan application may take several months due to the bureaucratic and lengthy loan application process.

  3. Limited resources: Banks might not be eager to assume the risk involved in financing a new business because of their limited resources for beginning loans.

  4. Limited adaptability: Banks could have rigid loan terms and be unwilling to change them to accommodate the startup's particular demands.

  5. Strict repayment terms: Banks sometimes have strict payback requirements that could not be compatible with a company's cash flow, which might put pressure on the firm to fast increase revenue to make loan repayments.

Conclusion

Although all three are very good options, if I had to choose one of the three methods of financing above I would prefer to choose Venture Capitalism. This is because it provides the best benefits for the start-up. It has seasoned investors that can give good insight and guide the business toward success while also providing money to help the business reach its heights. Also, it does not have strict rules like banks do and the risk is much less than IPOing a company. I know many say that giving up a piece of their company is not worth it but, typically VCs have such amazing connections that your business can grow to heights that were not reachable beforehand.


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