If you’re an entrepreneur at heart, you would have probably seen the surge that online marketplace business witnessed during the Covid era, taking shopping to a whole new level. Better yet, you might have even tried your hand at starting a similar business. In the era of digital consumerism, marketplaces have emerged as the primary destination for individuals to begin their product searches and explore new offers. They continue to continue to thrive and soar, despite consumers returning to traditional shopping. It’s no wonder why there’s a big push to start new marketplaces. Now if you’re someone who wants to build an online marketplace business and is looking for ways to get funding, or if you’re confused regarding making a decision about it, then this article is for you. Read on.
Understanding Business & Funding Goals
Before you start deciding on the type of funding you need, it’s essential to understand and clarify your objectives and milestones. When we speak about ‘funding’, we simply mean the initial investment required to bring the marketplace business to a point where it can sustain itself through generated revenue. The kind of multi-vendor shopping cart (marketplace) that you want to build will determine the type of funding suitable for you.
Here are a few things that you should know and ask yourself first before getting into the funding part:
- How much money do you require?
- How quickly do you need the money?
- What are you seeking financial support for?
- What is your end goal with the marketplace business?
- What are the milestones that you need to achieve?
The answers to each one of these will depend on the outcome that you have in mind. When you first launch an online marketplace business, you need to verify whether it solves a genuine problem better than other existing alternatives. This is called problem/solution fit. Then, you can move on to figuring out the product market fit. This is a phase where you validate that there’s a big enough market for the business that you’re going to launch.
Finally, as you pass through the first two stages, comes the final stage of scaling. This is the part where you expand your business and also the one where you’d need a lot of funding. If you’d like to know more in detail about building a successful online marketplace, check out our blog on 5 Steps to Build a Successful Online Marketplace.
So now that you have a better idea regarding these fundamentals, it’s time to look at the various options available to fund your business.
The funding Options
If you were to ask us, “So, what’s the absolute best way to fund my online marketplace business?” the honest, annoying answer would be that it depends. There are multiple options that you can avail and generally speaking, there are 8 different approaches to fund your marketplace:
3. Venture Capital
4. Business Loans
5. Angel Investors
6. Incubators & Accelerators
7. Strategic Partnerships
8. Revenue-based Financing
Let’s take a careful look at each and you can weigh the pros and cons yourself.
Otherwise known as self-funding, bootstrapping can be a great way to get started with your online marketplace idea. You may invest your personal savings, income, or assets into your venture to lift it from the ground up and manage the operating expenses of the business. For most start-ups that are still finding their way in the problem/solution phase or are trying out different ideas, this could be a preferable choice as it does not leave you with debt.
When you choose this approach, you should also consider the benefits and drawbacks when building your multi-vendor shopping cart. One distinct advantage that you will have is that you won’t have to carry the burden of debt associated with your business. Secondly, you retain complete ownership of your business and everything works under your control as there is no investor pressure. It also saves you a lot of time and pushes you to create a profitable business model.
However, you will require a lot of money if you are planning for an extensive and complex MVP. Since the weight of investment lies on a single source, there are possibilities that you may run out of funds. Additionally, you’ll also lack the support of investors on business advice, networking, and their knowledge base.
In case you’re bootstrapping an online marketplace, it’s best to start out with a software solution. Check out our iScripts MultiCart which is a one-of-a-kind software for building your online marketplace with multiple sellers, just like Etsy or Amazon, with a user-friendly multi-vendor shopping cart system.
Recently, crowdfunding has grown to be a very popular model for fundraising for various businesses, especially for new tech startups like online marketplaces. This is a method of securing funds by leveraging the collective support of individual investors by establishing a campaign on various crowdfunding platforms. Rockethub, Kickstarter, and GoFundMe are a few examples of platforms that have made the idea of crowdfunding startups acceptable. You may offer rewards or equity in your business in exchange for their financial support.
Perhaps the biggest advantage of crowdfunding is the flexibility and security it offers. Simply put, you don’t lose your own money in case the startup fails. It also offers funding in a much shorter period, allowing you to save a lot of time. Another significant advantage is that it also draws attention to your online marketplace business, which can be a no-cost marketing campaign in itself.
Coming to the cons, the chances of raising the money that you expect can be a very challenging task. Moreover, if you require additional funding, it can be a daunting challenge. Donors also expect some kind of rewards/incentives in return so if the perk doesn’t seem exciting, there are chances that you will miss out on individual investors.
3. Venture Capital
Now this is meant for startups with groundbreaking ideas and very high funding needs. Ideally, this is most suitable if you’ve already launched your online marketplace and is looking to take it to the next level. This is an equity-based fundraising method, where venture capitalists receive ownership stakes and the authority to shape the course of your company’s business operations in return for their investments. Approaching Venture Capital firms can be a long road, so it’s very important to prepare a solid business plan and pitch to convince them of your marketplace’s potential for significant returns on investment.
The biggest advantage of venture capital is that it can cover very high capital requests and there is no other fee involved, i.e., you don’t have to pay anything to investors with this marketplace method. It can also help you expand your business operations rapidly as VC firms have a rich and extensive network. All of these can give you a strong edge when building & expanding a multi-vendor shopping cart business.
However, this method will take away a large part of your equity in your online marketplace business. It also takes away your freedom to make choices independently as VCs will have the authority to actively engage in critical decisions regarding the growth of your company. Moreover, it can be a daunting, time-consuming task to pitch VCs.
4. Business Loans
Explore traditional lending options from banks or credit unions. Although this can give you a good start ahead to launch your online marketplace, you will have to present a comprehensive business plan, financial projections, and collateral to increase your chances of securing a loan. There are several loans that are specifically designed to provide financial support to small businesses, including startups and entrepreneurs.
Such business loans offer flexibility in terms of loan amount, repayment options, and usage. You have the freedom to utilize the funds as you see fit, based on your business needs. It also aids in building a good business credit profile which makes it easier for you to secure future funding. And unlike equity options, they allow you to retain complete control over your marketplace business. If you’re looking to start your multi-vendor shopping cart business soon and is prepared to handle the amount of paperwork that will come along the way, then this can be a viable option for you.
Of course, this comes with a price. These loans come with the obligation to repay the borrowed amount along with interest and fees. Failure to meet the repayment terms can lead to financial strain and potentially damage your creditworthiness. Additionally, most lenders often have strict eligibility criteria for small business loans, which may include a strong credit history, collateral, and demonstrated ability to repay. And all the documentation & time required make up the icing on top of the cake.
5. Angel Investors
These are the individuals who are already looking for profitable ventures to invest in. This is more ideal if you are still in the problem/solution stage or have just passed it. Often, angel investors provide early-stage funding to startups and small businesses, which can be crucial for launching or expanding your online marketplace business. Generally, an angel investor is usually a successful businessperson who is looking for new opportunities to invest in.
Perhaps the biggest advantage other than the capital, comes down to the support you will receive. These investors give their own money and so, will genuinely want your marketplace to succeed. Moreover, they understand how business works and can offer tremendous advice on financial decisions, operations and industry insights. If you’re fortunate to find an angel investor from the same industry, you have the opportunity to receive great guidance on shaping and expanding your multi-vendor shopping cart business.
To balance the pros with the cons, this will also mean that you would lose control and a portion of your ownership. Equity investment from angels dilutes your ownership in the company. Plus, engaging with them requires constant communication and reporting, which should be managed carefully to avoid a potential conflict situation. A difference in opinion between you and the angel investor could sometimes go a long way in damaging your marketplace business.
6. Incubators & Accelerators
As an aspiring entrepreneur, participating in an incubator or accelerator program can be one of the most viable options you could take to build & establish your online marketplace business. These are organizations or groups that offer assistance to startups and expanding businesses by working together with venture capitalists, universities and government agencies to guide emerging companies during their initial phases. These programs provide support in various forms, including marketing, networking, infrastructure, and financial aid, to help entrepreneurs navigate the early stages of their ventures.
This allows you to get practical help regarding growing your online marketplace, in addition to the capital. It will also connect you to important people who will guide you through entrepreneurial hardships. Moreover, there’s a sea of opportunities for you to meet with potential investors from various VC firms. Overall, an incubator/accelerator will help you navigate your multi-vendor shopping cart business in the right direction.
Now, all of these benefits can seem very exciting but here’s the hard part: most incubator/accelerator programs are very hard to get into. Since startups receive a lot of help from these programs, the competition is very high. In addition to that, you’ll also have to surrender a stake in your company and may also be asked to relocate.
7. Strategic Partnerships
This can be a tricky funding to get by, but if you can manage to pull it off, it is a valuable avenue for funding your online marketplace business. These partnerships involve collaborating with other companies or organizations to leverage their resources, expertise, and network to support your business growth. Let’s say you’re launching an online marketplace for handmade crafts. You establish a strategic partnership with a well-known craft supply company that shares a similar target audience but doesn’t compete directly with your marketplace, who covers your funding, networking, and supplier network in exchange for a share of revenue/equity.
What’s brilliant about this possibility? Well, partnering with established companies or industry experts can give you access to valuable insights, guidance, and best practices. Not only do you make the best of their experience, but you also enhance market reach by tapping into their existing audience base. Now considering the fact that you’re building a multi-vendor shopping cart business, this will be a goldmine.
And what’s the catch? You lose your autonomy over your marketplace business. Moreover, you have to ensure that all parties have the same interest. It also builds dependency. Any difference in opinion or interests can completely halt your business operations, which is a huge risk.
8. Revenue-based Financing
Revenue-based financing is a funding model where a company gets capital in exchange for a portion of its future revenue. The repayment is based on the company’s revenue, and the investor gets a share of the revenue until a set repayment amount is reached. Since the repayment is tied to the company’s revenue, it allows much more flexibility compared to fixed loan payments. During slower revenue periods, the repayment amount adjusts accordingly.
The biggest difference to understand here is that there’s no equity exchange involved and does not require giving up ownership stakes in the company. Entrepreneurs can maintain control and ownership over their online marketplace business. However, this can have a potential impact on your cash flow and often comes with higher costs compared to traditional loans.
Building An Online Marketplace Business
Now that you understand the various choices available to you, it’s time to engage in action. While you embark on your journey to create a really great online marketplace business, it can be a tough job finding the right resources and getting everything started. You’d need to develop a multi-vendor shopping cart platform, design a user-friendly interface, create a system to manage seller onboarding and buyers, and integrate a secure payment processing system.
It’s a lot of hassle, we know. Now, we’ve something which will help you get all of this in one single package – iScripts MultiCart. It is a multi-vendor shopping cart software that offers a one-of-a-kind solution for building your own online marketplace business. With iScripts MultiCart, you can easily launch a dynamic online marketplace, similar to renowned platforms like Etsy or Amazon.
In short, it empowers you to bring your marketplace vision to life. Perhaps you had also been planning on building a mobile app too. Well, here’s the fun part: we have separate Mobile apps available for sellers and buyers too.
Want to take your first step towards turning that idea that had been in your mind into an exciting reality? Start here, check out our free demo!
Additionally, we also have a premium solution called iScripts MultiCart Enterprise for entrepreneurs who are looking to hit it big. The MultiCart Enterprise allows you to gain access to a complete solution that simplifies the management of multiple storefronts, vendors, affiliates, sales representatives, warehouses, and automated merchandising logistics.