You are solving a problem big enough that a large number of people are willing to pay you for you to solve it. There are numerous ways of funding but you are unsure which is the best and why.
Before we go into exploring the possible startup funding routes it’s important to always ask yourself — Do we really need to raise funding? — Will our startup cease to exist if we don’t raise? More importantly — Can we achieve at least 80 per cent of the desired results without funding?
Limits drive innovation. Having limited resources forces you to become creative and come up with different ways to validate, build, and grow your business. In fact, Growth Hacking was born based on the latter premise.
Here are ways to fund your startup
You can fund your startup with your savings and/or by having a part-time job.
Pros: Maximum investment process speed. Keep total control of your company (100 per cent shareholder). Enjoy total freedom. Future investors, partners, co-founders, and employees appreciate that you believe in your venture and you put your money where your mouth is.
Cons: Unless you are very wealthy, personal investments are usually limited and may be not enough to get your startup off the ground. There is greater risk of the venture going bust and leaving you with no savings. The latter might put your close circle (family, friends) at risk too.
FFF or family, friends, and fools
You could always borrow or raise (in exchange of equity) funds from your family and friends.
Pros: You have a close relationship with them and there is mutual trust. The funding process can be really quick as fewer papers are signed in comparison to raising from sophisticated investors.
Cons: Your friends and family are most likely to be unsophisticated investors and thus unable to provide support, advice and a network of key people. Also, there is the risk of damaging your relationship- especially if the venture goes bad. It is hard to avoid blending personal with professional matters with your family members.
You can get a loan from banks, local authorities, government organisations and small business associations. Here is a list of startup loan resources for UK-based companies.
Pros: Terms and conditions are clearly defined, the interest is usually fixed, and you have access to resources such as a network of mentors and key people. As a founder you are forced to do research, define your unique selling proposition (USP), due diligence, and create a thorough business plan to access a startup loan.
Cons: Market validation and proof of concept are most likely required to secure a loan. You will need to provide promising sales and earnings reports. You might also be limited in how and where you can spend your money, as you will be required to provide an agreed, detailed analysis of expenditures.
Looking for funding? Find the right finance for your business here
Alternatively, you could get grants by winning business startup competitions; there are quite a few out there. Check out this list of awards here or look at expansion grants like this:- British Small Business Grants.
Pros: It is free money. You do not have to pay it back. Securing a prestigious grant can be used to prove to future potential investors, partners, and your clients that your business has potential.
Cons: It is a long process that takes time and there is always the possibility you will not be eligible. Your startup needs to match certain criteria that might result in having to deviate from your original focus and create a different product than originally intended.
Angel investors are affluent individuals who inject capital for startups in exchange for ownership equity or convertible debt. Some angel investors invest through crowdfunding platforms online or build angel investor networks to pool in capital.
Pros: Angels are usually passionate about your venture. More often than not, they are experienced entrepreneurs and sophisticated investors that can provide you with support and guidance. They have a network of key people and are willing to take greater risk than other investors.
Cons: Having an angel invest in your company is followed by a close relationship as they usually want to get involved (sometimes too involved). In this relationship you give away control, and equity. Equally, an angel could be disengaged and not willing to support you if they lose interest or they are not experienced enough.
Venture Capital Startup Funding
Financing that investors provide to startup companies and small businesses that are believed to have high and long-term growth potential. Early Stage Investment Funds specialise in early stage startups: ideas, prototyping, MVP, early traction, and growth. They usually manage small funds and have networks of angel investors that co-invest. They are typically involved in the Seed round and invest anywhere between 25,000K-1M depending on the type of business and the size of the fund. Later stage (Series A, B, C, D etc.) VCs usually invest millions in established businesses with a good track record of sales and growth.
Pros: VCs can provide large amounts of funds (larger than angels) and have networks, mentors, and resources to help your business achieve high growth and scale.
Cons: Like angels you are giving up equity and control of your company to an extent that will maximise their returns. Big decisions are now not entirely up to the founder. VCs will probably intervene if they believe you are not doing a good job.
Businesses or individuals can make a pitch to raise capital through online crowdfunding platforms. One of the most popular platforms is Kickstarter.com. This type of financing is more suitable to businesses that cannot get access to Small Business loans and is ideal for B2C startups that want to validate the market demand.
· Pros: You get to keep control of your company, as you do not have to give up equity. Test that there is demand for your product while you minimise risk and reach your audience straight away to get feedback and increase awareness.
· Cons: To succeed in crowdfunding you need to put the right amount of effort and time to create a compelling story, build your brand, produce a video, and market it properly. At the same time, less than 44 per cent of the projects on Kickstarter were successfully funded (2014).
The process whereby people (i.e. the ‘crowd’) invest in an early-stage unlisted company (a company that is not listed on a stock market) in exchange for shares in that company. A shareholder has partial ownership of a company and stands to profit should the company do well.
Pros: Business founders do not have to give away a large amount of ownership, thus they can retain significant control. Investors do not have to be sophisticated to invest since most equity crowdfunding platforms prescreen startups and do the necessary due diligence, making it easier for your startup to get funded.
Cons: Most investors are less likely to be sophisticated and usually acquire a small percentage of your startup and might not be involved enough to support your venture. Equity crowdfunding is time consuming and competitive which may require an initial investment to produce a high standard campaign with appropriate media content (explanatory videos, press releases, etc.).
Vangelis Andrikopoulos is investment associate for www.startupfundingclub.com