Startup sources of money
There are roughly three ways to find money as a startup: free money, loans, and investments.
Where I mention prices and values, they apply in any of £, $, or €, given current currency exchange rates.
Disclaimer: I did this research when I was thinking of raising money for my new startup, but so far, I haven’t gone for any of the sources of funding and I’m still bootstrapping.
Disclaimer: I have no financial training and this is not financial advice, just a summary of my own personal research, and some of my opinions
Free
Grants
Free money does exist, in the form of grants, but they are difficult to find, and my impression is there will be lots of competition if you do apply. To get started, search for grants in your geographical area and your chosen industry.
Crowd-funding
It is also possible to set up crowd-funding in the form of donations or patreon-style, where you don’t need to pay back the investors. Interestingly, these seem to be have best chances in the same industries as grants.
Best for
You’re most likely to be successful if you are starting up or looking for funding in a wealthy country and in an industry which is fashionable for donors, for example social and non-profit businesses, new and exciting tech, or the arts: and willing to invest a lot of time and effort finding and applying for grants or setting up a crowd-funding initiative.
Loans
Bank loans are not well documented for small businesses, my impression is this is because they work the same way as personal loans. You’ll need to have an ability to repay the loan, and it may help if you have collateral
Best for
You’re most likely to be successful if you already have a profitable revenue, and you need capital for specific expansion, for example you need a larger office or to increase your stock or range.
Investment
Investment in small companies is where individuals or other businesses invest money in exchange for a proportion of your share equity. The most well-known version for startups is venture capital, but it may not be the most appropriate.
Angel investing
Angel investing is where private individuals invest money in your business in exchange for equity. There is generally only very limited contract between an angel investor and a startup, the investors are entitled to a proportion of the dividends if you make profits. Angel investing is seen as very high-risk for investors, because it means investing in a single, untested company. But it’s still worth considering, because it can be extraordinarily tax-effective for higher tax-payers. One tip I had from someone who is impressive at sales: you’re more likely to succeed with ‘warm’ leads (friends, family, former colleagues) than with ‘cold’ leads (wealthy strangers). In the UK, look up the SEIS and EIS tax schemes.
You will probably need to do some work on keeping your angel investors happy, for example through newsletter or direct contact, consider a minimum investment to make this worth your time.
Crowd-funding
Investment crowd-funding is a way of reaching a broader audience for angel investors, who can still apply under umbrella tax schemes. One tip I saw is to line up some friends to sign up via your crowd-funding platform soon after it launches, this way your offering looks interesting.
Venture capital
Venture capital firms specialise in bringing together investors and small businesses. They raise funds from the investors first, then find a number of small businesses to invest in for a fixed period.
Making a bid for venture capital can be a fairly painful process, somewhat like Dragon’s Den, and you will need to invest time and effort finding the best way to present your business and its future. Accelerator programmes help potential companies improve their application for venture capital or other funding (see below)
Typical venture capital funds will raise money in millions, invest millions in a handful of companies, and often provide mentoring and expert support around business or industry skills as well as funding. They expect the majority of the businesses they invest in will do no better than break even: that is, they will not get their full investment back from most of their investments.
How do they make money? For the funding round to be a success, they need just one of the companies they invest in to do extremely well, ideally becoming a unicorn (billion-dollar) company or at least nudge into the hundreds of millions. As a result, some of the less scrupulous firms may push the companies they invest in to the limit: they will prioritise one quick win over the long term survival of all firms in the cohort.
Accelerators
A business accelerator is a program that gives growing companies access to mentorship, investors and other support that help them become stable, self-sufficient businesses. Companies that use business accelerators are typically start-ups that have moved beyond the earliest stages of getting established.
Most accelerators will ask you to present a very lightweight business plan in order to join the programme: as part of the programme you will improve and enhance the business plan, and learn how to sell your business in a fundraising context, for example to potential angel investors and venture capital companies.
Accelerators vary, they may or may not ask for equity in order to join the programme. Many programmes are run by venture capital firms or private investors and part of their goal is to prepare you for a venture capital or investment bidding competition. A side benefit again is that you will probably receive business mentoring as part of the course. If you’re considering venture capital or angel investing, it’s definitely worth looking at an accelerator to help refine your business plan and introduce you to a network of investors
Incubators
Incubator programmes are similar to accelerators, but generally take place earlier in the startup process. In some cases, they may help you to find or refine your idea. They can also help with early-stage marketing, funding, and sourcing teams to build your idea. They are more likely to charge fees rather than take equity
Best for
All small companies can benefit from angel investors, this would be a good choice for funding if you don’t qualify for a grant or bank loan. Research and mention the tax options (SEIS and EIS in the UK) to any potential investors!
Accelerator and venture capital programmes are only suitable if you can see at least some potential for your future revenue to run well into the tens of millions, and even then, beware of pressure to overexpand too quickly. Incubators can be a good option if you are still early stage and want to explore your idea in a community environment.
Bootstrap
The internet has made it increasingly straightforward for small companies to start with very limited funds, often only the owner’s personal savings. You may find that you don’t need as much capital as you think. Here are some alternatives that would mean you need to raise less or no funding.
Office space Work at home or use co-working space instead
Digital presence Build your own website in squarespace, wix, weebly, or wordpress
Social media and SEO Write your own marketing materials, and post regularly on facebook, twitter, instagram, linkedIn, youTube
Build an app Sell your products or through etsy, eBay, amazon, red bubble, instead. If your app would have video content, try youTube or Vimeo
Stock Gain customer investment before you order the stock. One route to consider is that investors in crowd-funding sites don’t expect the immediate gratification that most other platforms offer. If you’re selling through a website (your own or a marketing platform), most customers do now expect very quick delivery, but if you have a niche product, you could get away with a few weeks’ wait providing you are clear about the delivery times during the ordering process
Conclusion
Funding seems to be relatively poorly explained, I knew almost none of this when I founded my business. As well as being risk-averse, I have a handicap in a lack of selling skills. Raising money effectively requires you to sell the idea of your business before it exists. It’s a scary thought for someone with no business background.
So far, I’ve been surviving through the bootstrap approach. If I need to raise funds, my first choice would be to target friends, family, and colleagues as angel investors. If I can survive in bootstrap long enough, I’d like to get to a point where there is revenue that I can re-invest in the business, and make a more natural organic growth. It may be slower, but it feels less risky, and also has less reliance on selling. I’m lucky in that my business (software) has few fixed overheads.
On the other hand, I’ve just reached the point where my business desperately needs marketing, which is painful for my non-selling abilities. I’m considering accelerator programmes partly because they tend to come with business mentoring around marketing and selling. Who knows what the future will bring!
