How to fund your startup

It goes without saying that you need funding to get your startup off the ground. This can come in a few different forms, such as Bootstrapping, Grants, Debt and Equity. At the beginning of your venture, the most likely way you’ll raise funds is through bootstrapping.

Bootstrapping

It would be nice if investors believed in your startup as much as you do, but that usually isn’t the case. That’s why you’ll have to raise money from your own pocket, through friends and family or through crowdsourcing to get your startup up and running. This is usually referred to as a ‘seed investment'.

The money you raise will be used to meet the basic costs of starting a business, such as incorporating your startup, a website domain, office supplies, etc.. The longer you can sustain yourself using nothing but your bootstrapped money, the better. Usually this means you will be putting in a lot of extra hours. That being said, make sure you’re not losing your competitive edge by relying too much on your seed investment particularly when it's starting to wear thin.

If your bootstrapping efforts don’t yield as much money as you’d hoped, remember that your time is free to you. So you should do the things that lead up to launching your company. These will include market research, crafting a business plan, or chatting to potential customers about your idea etc..

As an entrepreneur, you should definitely have your own money invested in the company. Any investors you approach will ask themselves why they should invest in your startup if you, the founder, haven’t put any money into it.

Once you get to the point where you need more money to keep the business going, or to take it to the next level, you’ve got three options: debt, equity or grants. Lenders are usually more indiscriminate about what they invest in, as long as you can offer them some security and they get their money. And security is the key here - Lenders, especially in early stage businesses will only Lend IF there is something it can be secured against or a guarantor exists.

Debt

Debt is a scary term, and most of us try to avoid being in debt as much as possible. But if you’re in the business of running a business, you might have to ask for a loan at one point or another. Generally speaking, it is easier to find a lender than it is to find an equity investor - and also easier to get an investment from. Lenders are usually more indiscriminate about what they invest in, as long as you can offer them some security and they get their money.

Debt is a good solution if you have upfront costs that you need to pay in order to get your business going, like purchasing an expensive piece of equipment for example. However, if you’re taking out loans for payroll or rent purposes, you might be digging yourself into a hole you can’t get out of. Unless you know that the money you’re borrowing can be paid back, don’t put yourself in debt.

You don’t always have to go to a bank or fishy loan shark to secure a loan either, there are plenty of government-funded initiatives that will lend you money with decent interest rates, but you might have to work a bit harder to secure such loans. So make sure you have all the assets and information you need to blow them away with your startup.

Equity

Unlike lenders, who expect their money back (with interest) when they lend you money, equity investors will want a share of your company in exchange for their money. Equity investments are most valuable to business that operate in high-risk market, or who need a significant amount of time before they can generate a significant amount of income. That’s because these investments don’t need to be paid back immediately in instalments. Another advantage is that equity investors will usually have a well-connected network that you can tap into, for both additional funding and routes to market.

The downside is that you have to give up a portion of your business in return, and depending on how much you give away, you might lose the ability to make executive decisions for your startup if you don’t own enough equity anymore. Furthermore, it is extremely rare to recover equity once you have sold it. That is why it is very important that you strike a deal for the right price and with the right investor.

Speaking of early stage investors, there are two kinds: Angel Investors and Venture Capitalists. What’s the difference? Angel investors invest their own money, whereas Venture capitalists invest other people's money. There are pros and cons for whichever type of investor you decide to go with. The best choice depends on your startup - what sector you operate in, whether your end goal is an IPO or to build a lifetime business, etc..

Pros & Cons of Angel Investors

Angel investors have access to substantial capital, which they invest in business ideas they believe will succeed. Coming to an agreement with such an investor can thus offer benefits that extend beyond simple business financing.

A smart angel considers their investment opportunities carefully. If one chooses to fund your business, it’s a good sign they feel strongly about its potential. That means you have someone on your side who may be as passionate about this venture as you are.

This often makes it easier to forge connections in your chosen industry. After all, angel investors have a financial interest in your success. They frequently choose to invest in businesses they can actively help grow. If an angel comes across an entrepreneur looking to start a business in a sector they’re familiar with, they’ll be more comfortable making an investment, knowing they can introduce said entrepreneur to other important industry figures.

However, you have to remember that an angel investor is still an individual person. The amount of money they can justifiably invest is somewhat limited compared to other options.

Pros & Cons of Venture Capitalists

Venture capitalist firms aren’t individuals. They’re entities that consist of numerous professional investors, board members, executives, business management specialists, and more. Additionally, the money they invest comes from a wide range of sources.

This means they have greater capital to invest in your business than angel investors do. That’s the main benefit they offer. On top of that, because they specialise in helping businesses succeed, venture capitalists can offer valuable resources and guidance.

That doesn’t mean there aren’t downsides to working with VCs. Again, angels choose to invest in your business because they are passionate about it. As a result, they are often more willing to remain loyal if they don’t see immediate returns.

VCs, on the other hand, make investments with the primary goal of making a profit for their firm. This means they are more aggressive about demanding results. Because of this, VCs often take on enough equity in companies to play major roles in their growth. If their ownership share exceeds 50%, VCs can even get rid of the company’s founders. It helps to carefully determine how much money you need to raise to avoid giving away too much of your company in order to justify larger investments.

These are all factors you need to consider when deciding where to seek investments. Do you want the benefit of major funding, in exchange for less control over your business, or can you accept less capital in exchange for more freedom? Answering these questions honestly is key to making the right decision for your business goals.

Grant Funding

A great source of early stage finance, you apply in a set format a bit like a competition. The process is similar to that of Accelerator or Incubator programmes - you are in competition with other startups to “win” a share of a pot of money. It always makes sense to use a professional grant writer, ideally one with a small up front fee and a contingent amount based on success (makes them linked to a successful application). Make sure they have experience in your sector and have written similar applications before - find out what their success rate is and ask for references. A grant often comes on a “matched funding” basis that will requires you to raise a certain (matching) amount - typically 30% but it can be as high as 50%. Startup Gurus have a unique way to help you raise this amount - ask for details £1 for every £1 the grant provides.

R&D Tax Credits

R&D tax credits are a useful source of funding for businesses that have been trading for more than one year and have spent a significant amount on research and development. A professional company will work on this for you contingently (ours does, and if not, don’t use them), and you get cash back from the Government.

Introducing… the Introducer

The market for fund raising has an intermediary called an introducer - they will find finance for you in many different categories, help with structure, advice on presentation documents, support during presentations, vet the investors and so on, and they do so for a percentage of the investment raised.

For early stage businesses looking for between (say) £500k and 2.5m you should consider between 15% and 5% to be paid in commission - higher for a lower amount usually on a sliding scale. This can be negotiated, and sometimes the introducer will take shares as part payment. You will need to sign an agreement with the Introducer ahead of them working on your behalf. Check their history of introducing investors and seek to speak with other companies they have worked with.

The Steps on the Funding Road:

The type of investors in the order you will need them (typically):

1. Friends and Family;

2. Grant Writers - always with a professional Grant Writer

3. Angel investors (early stage, wealthy individuals who’ve previously been involved in startups themselves - investment range is usually £10,000 to £500,000) who very often work together resulting in several small Angel investors putting in a meaningful amount.

4. Venture Capitalists (from about £250k up to £5 million). Make sure you understand their terms of investment, so triple check everything. You will probably need decent legal advice at this point.

5. Institutional - anything from Banks to Funds - usually over £2.5 million. You definitely need to do the proper due diligence in this case, so an excellent document pack is required. This is s longer process, where a decision committee is often involved. There is a chance that you might find a long-term institutional financing partner.

6. Listing on a recognised market - floating the company, often the point where early investors make their money (and profit).
   

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End Note

Funding for your startup can come in different shapes and sizes. At each stage of your business, it is essential to evaluate every option at your disposal and decide what would be best for your startup and its future. This can be a tough choice to make, especially when you have to focus on a million other things to keep your startup going.

But do NOT rush into taking money just because it’s there and you’re desperate.

If you need help with securing funding, where to look for investments, or weighing up what type of investment would be best for you, we’d love to help you out.

You can reach out to us at info@startup-gurus.com or on LinkedIn.