The Quick Start Guide to Startup Fundraising

startup fundraising

One of the key roles of the CEO/founder/owner of a business is to keep the business funded. There are a number of ways to do this – grants, equity finance, debt/loans and, of course, revenues. For this article we’ll focus on non-revenue funding sources and talk about the pros and cons of each. Here's our quick start guide to raising funds for your business aka Startup Fundraising 101:

Savings/sweat (Equity or Debt)

This is where founders effectively bootstrap. Usually they’re working from savings and pay themselves very little, instead ploughing all available monies into the business.

Pros

  • Founders keep control of the business.
  • Shows commitment to future investors.

Cons

  • It's hand to mouth, stressful and tenuous and may not be enough to get business on an even path through critical early phases.

Top tip: You will need to make key C level hires and won’t be able to pay. Treat these hires as early founders and give them a good chunk of equity – to compensate for not being able to give competitive salary but also to motivate.

Family and Friends

This is where family and friends lend to or invest in the business. It’s probably more about giving the founder a start than a pure business decision.

Pros

  • The terms of this finance can be flexible, even though agreements should be written without emotion.

Cons

  • If the business doesn’t go well, will family and friend relationships be strained?
  • Will these ‘investors’ feel that they can have a say in your business?

Top tip: It's best to clarify if it is a loan or an investment up front: How the money will be paid back and its interest rate or what percentage of the company they will get, and what say (if any) they will have in the company.

Grants

There are a myriad of different grants out there for all sorts of business – and literally hundreds of agencies. In fact – and to be fair – the government supports for business on this island are amongst the best in the world and can help your business at each stage – from grants for market research to full blown investment by the likes of EI to help you attract private investors.

Pros

  • There are plenty of grants.
  • They are given on very favourable terms.
  • They also come with advice, support and mentoring.
  • They can give your business credibility and put you on the radar of investors and even potential customers.

Cons

  • Like everything they need time and work.
  • The grant that suits your business has to be identified – in a forest of different agencies and grants.
  • Usually the government agencies have a way of doing things that may not be your way…put up with and learn their way and make sure that you keep the end game in sight – access to really good funding and to an ecosystem that can help your business through its lifecycle.
  • Some companies can get addicted to securing grants – at the expense of their core business.

Top Tip: Get to know your local research institute. There are lots of grants available for SMEs especially for research if the work the grant pays for is to be done in collaboration with a research institute.

Bank Finance (Debt)

Banks give loans or lines of credit based on very straightforward criteria and every business person needs to understand these. The criteria are based on:

Capacity – do you have the means to repay the loan?

Character – Are you and your directors honourable and honest and will endeavour to pay off debt?

Credit – Have you paid off debts in the past?

Collateral – Does your company have asserts that can guarantee any loans or lines of credit?

Pros

  • You keep ownership in the company – as long as you pay off the debt.
  • There are a range of banking products from assert finance to factoring to lines of credit to commercial mortgages and lots in between, that could be a very good fit with your business.

Cons

  • Banks are lending you their other customers money - don’t forget that,  so they are conservative and look for collateral that many start up and early stages companies will not have.
  • The other big criteria that banks lend on is Conditions and they will have a lot of terms and conditions that you will be expected to sign before handing over the cheque. Make sure you understand them and their consequences.

Top Tip: Good bank managers can be invaluable because they can help you plan your finance needs since they probably deal with lots of different companies at different stages of growth. Good bank managers are also great in your network and a great source of contacts and introductions.

Incubators

There’s incubators and accelerators. They both give workspace, access to infrastructure and opportunities to meet and learn from other business people. The accelerators will also invest and usually focus on a particular sector and really focus you on getting you investment from a network of investors that they know.

Pros

  • Access to an ecosystem that can help you grow – infrastructure, like-minded people and introductions to investors.
  • Credibility – with customers, investors and government agencies because usually you have to ‘qualify’ to get in.

Cons

  • Be careful how much equity they look for.
  • Be aware of how much of their ‘offer’ is ‘in-kind’.
  • Perhaps too many still are tech focused.

Top Tip: If you get in and are still there after 6 months, or if you leave one program and then enter another…and another, you’re doing something wrong. 

Crowdfunding/Peer-to-peer Lending

This is where you can take a loan or investment from multiple people at the same time rather than large lenders/investors.  There are platforms like Kickstarter to facilitate crowdfunding programmes, and Linked Finance offer peer-to-peer lending. 

Pros

  • They come in different forms and are flexible. You can take a loan or sell equity to the crowd depending on your needs.
  • They can generate more money than you expected.
  • They can generate significant interest in your product from a marketing point of view.

Cons

  • Some products/services are better suited for crowdfunding than others.

Top tip: Make sure you know the platform and the type of ‘crowd’ it has and then set a figure that is doable. Not hitting a target can generate less or no money than expected and this is fairly public.

Angel Investors (Equity)

These are wealthy people that are willing to invest in early stage growing companies with potential for major growth. Many are successful entrepreneurs themselves and know the risks.

Pros

  • They have an appetite for risk and are happy to invest in the early stages of the startup.
  • They are usually connected and can provide intros to investors, partners and customers.
  • They can get involved as mentors, advisory board members.

Cons

  • They are another layer or pressure because you are endeavouring to give them ROI. They will press you if you and team are not delivering.
  • They may argue for short term action to protect their money that may not be conducive to the long term strategy of the business

Top Tip: There are a lot of angel investor clubs and they are usually easy enough to get in front of. Make sure they invest in projects like yours. Also these clubs are usually centred around one very successful investor who all the others follow. He/she is your audience.

In addition,  some investors will look for a too large a chunk of the business at the early stage – especially from entrepreneurs with no funding experience. Do your homework on how the funding process goes and find an experienced advisor during the process. 

Venture Capital (Equity)

Companies that raise funds and invest them in the hundreds of thousands to multi million range and expect to get ROI through trade sales or flotation.

Pros

  • They inject cash that can drive the company's growth.
  • Top class VCs give company credibility
  • They can help find the people to surround the founder with the C level management he/she needs to lead and drive growth.
  • They are only in it for the money so bring real clarity to a business.

Cons

  • They generally don't look at early stage.
  • They are only in it for the money - not for you or your team.
  • They will replace founders if not delivering.
  • The T&Cs that they will insist you and team sign can give them a lot of power over the company.

Top Tip: Raising VC can take at least a year and if you start running out of cash, VCs will strike a hard bargain. Make sure you start your raise when you actually don’t need the money.

Whatever startup fundraising options you look at, do your research and make sure to take advice from mentors or other companies. Don't be afraid to ask for references from whatever funding body. Also talk to other companies about their experience of the funding application process and the funder.

Funders will do due diligence on you. Make sure yo do the same on them.

What's your experience of start up fundraising? Did you find it straightforward? Share any thoughts or tips in the comments below. 

 

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