How to Raise Funds for Your Online Marketplace Startup
Raising funds for the online marketplace startup can be a challenging task for business owners. But having effective strategies and tactics at hand will help you build out the right process.
1. Crowdfunding
Crowdfunding is a way of funding by means of using special Internet platforms. As a rule, this way you get small sums from a large number of people.
Advantages:
- A crowdfunding campaign is not only a way to get funding, but also to draw attention to a business idea.
- In addition, even if the money could not be raised, it just has to be returned to the sponsors without interest.
Disadvantages of this financing method include the necessity to attract investors through third-party sources and to invest a certain sum, like commissions of the platforms themselves and taxes.
Here are examples of platforms that provide crowdfunding opportunities.
Kickstarter
At the moment it is the leading crowdfunding platform in the world.
The advantage of working with the company is the following: if the Kickstarter team has selected you as Project of the Day or Staff Pick, this will significantly increase the flow of people to your project page.
The disadvantages of working with the resource include:
- the most stringent requirements – with the rest of the sites, you will not have any problems when publishing a project;
- “all or nothing” – if your project has not raised the full amount of money, it will not be funded;
- not every project will go through pre-moderation;
- Kickstarter practically does not provide you with backers, you need to attract them yourself.
Patreon
The advantage of the resource is that it uses somewhat more interesting financing schemes. The original idea was to help aspiring art creators. The investors became patrons and released a certain amount of money every month, the artists continued to create with these monthly receipts. At the moment the platform is popular among digital creatives and bloggers.
The disadvantage of the resource is that there is no opportunity to review new projects. The only way to find any of them is to browse the featured list, which is very difficult to get into.
2. Pre-sales of B2B and B2C products
In B2B (Business to Business) pattern another company is the buyer, in B2C (Business to Consumer) pattern the final consumer is the buyer.
The advantages of these schemes are:
- the mechanism is similar to crowdfunding, but does not require special platforms;
- it’s a chance to test the product before real expenses.
The disadvantage is – large funds cannot be collected this way.
3. Raising Capital from FFF (Friends, Family and Fools)
The last item is not something critical, it’s about people who have no venture experience but want to invest in a startup.
Advantages:
- funding raising is easy – you will not have to return the interest rate;
- it may be enough to form a minimum viable product (MVP) and test the business model.
Disadvantages:
- you can seriously ruin your personal relationships;
- lack of documentation in this case can make problems during the capital repayment phase.
4. Incubators and accelerators
If you are looking for a place to implement your ideas or you do not have enough teammates, a business incubator is the right choice for you. If you already have a team and you need support in entering the market, an accelerator may help you.
Incubators have the following advantages:
- they help present the project to the investor by means of consulting;
- they provide minimal infrastructure;
- incubators do not set up strict rules for the selection of projects.
The disadvantage is – a business incubator will not assist in finding investors.
Y Combinator
Experts consider Y Combinator the best incubator. Financing sessions are held twice a year during 2-3 months. A Demo Day “Going Out” organized for startups attracts hundreds of investors.
Techstars
Only 10% of the companies that received this incubator’s investments did not succeed. Mainly Techstars provides support to IT projects. But the company cannot boast of a similar impressive list of “star” mentors, who can make the acceleration program attractive to both entrepreneurs and investors.
If you already have a team and you strive to move forward, you need accelerators.
The advantages of their services are:
- they work individually with every project that has passed the competition and use financial resources and experienced expert mentors;
- Often, such projects subsequently receive venture funding from funds that work directly with this accelerator;
- projects receive extensive press coverage even at the time of entering the program.
The disadvantage is that the ideas are selected rather scrupulously, and it’s not that easy to prove one.
500 Startups
500 Startups is one of the most famous startup accelerators in the world. You have to have a very serious idea to qualify. It is more important than the founder’s profile. 500 startups give preference to clients with a product, a team, and revenue.
Plug and Play
This is one of the largest accelerators, more than two thousand startups have already gone through it. About 50 programs in various industries have been proposed. Plug and Play is represented in the most developed countries of the world, so you can take the program relatively close to home.
5. Angel investments, venture capital and direct investment
These contributors are interested in a strong team that has proven its competence. That is, this may concern the biggest online marketplaces, too.
Angel Investments
The advantages of business angels are:
- even your neighbor can be a business angel, besides most cities even have business angel groups;
- they carry out the due diligence of the project quickly and invest in one sum.
The disadvantages are:
- angels invest in startups in order to achieve higher rates of return than those obtained by investing in stocks, bonds or real estate market, they often expect 25% or more;
- an angel can claim participation in making the key decisions in your company.
Venture Investments
Advantages:
- venture capitalists invest in startup companies that offer a profit opportunity but do not guarantee it;
- investments are larger than those of angels.
The disadvantages are the following:
- their investment rates are generally higher than those of business angels;
- they take on a managerial role in the project, so you risk losing control of your company;
- venture investors expect up to 50% of annual profit.
Direct Investments
The advantage of the resource is as follows:
- the fact that a well-known private equity fund has invested in the business can have a positive effect on the image of the recipient of funds.
The disadvantages are:
- direct investors buy not only and not so much in order to receive part of the current income from owning a block of shares in the company, but in order to then resell it;
- such investments can provide a yield of about 40% per annum and higher;
- the company must be ready to go through a complex procedure of legal, financial, technological and marketing verification.
6. Grants
In this case, funding is not necessarily received from the state, it can be commercial companies, institutions.
The advantage is that no payment is required – no share, no grants themselves, no interest for their use.
The disadvantage is you have to win the competition to raise funds.
7. Pledge of your own property
Well, everything is clear with this method of fundraising. It is the most radical method. It will work fine for those who are confident in the success of their startup.
Of course, the choice of startup funding depends on its characteristics. But it is possible to combine methods or try different ones, depending on the phase of the startup.
In any way, nothing should stop you on your way to becoming the biggest online marketplace in the world!
