So, you have an amazing idea for a business and now wonder how to finance it? Well, the first step is to be resourceful. There are plenty of different paths you can take to get your startup funded, and below we present an overview of them.
Personal savings
Also known as self-funding, is the first stop on the entrepreneurial journey for many startups. It focuses on using your savings to build the company from the ground up. You can think of it as an organic growth with no strings attached. There are no loans or investors involved, just you and your dedication. It’s not the most efficient way of funding for the startup but it leaves you with all the control over the company and is a great option if your startup is at the idea or pre-seed stage. This way you can develop your business and aim at its better valuation while raising funds e.g. from a VC fund in the future.
Bootstrapping
If you want to prove that your business idea is working without external investment, start by generating revenue that can cover the costs of further development. Bootstrapping is essentially a broader approach to starting your business lean, without any outside investment. If you’re a good hustler this approach can work through strategic partnerships and barter agreements. You can also use personal loans, credit cards and optimize the timeline of receivables and liabilities (meaning mainly revenue streams and costs). In addition, co-founders with complementary skills are often welcomed to minimize the cost of hiring specialists, so if you’re an IT guy it might be a good idea to look for a co-founder who specializes in marketing or sales to create a unique synergy between the two of you. The thing to remember here is to not let the romanticized concept of bootstrapping fool you, it is not easy and takes hard work and dedication to achieve everything on your own without outside capital.
Friends and Family
You can also start looking close to home, among the 3 F’s: Friends, Family and Fools. We know, calling them Fools sounds mean, but we entrepreneurs are quirky that way. These people are your first stop since they believe in you the most with the least amount of evidence. The obvious disadvantage of this method of funding is how the possible failure might play out for your loved ones. If you do decide to take this path, remember to be honest about the risks and don’t ask for more than someone can afford to lose. As for the main advantage, again, this type of startup funding doesn’t impact the ownership of the company and it utilizes the network that’s already rooting for you. To make it work, just be sure to ask for a specific amount of money for a specific goal, show your commitment to the idea, be transparent about your plan and all the potential risks and last but not least, put it down in writing to avoid any misunderstandings.
Accelerators & Incubators
Incubators and accelerators are meant to speed up the growth and the success of your company. They provide resources and point you in the right direction to gain some traction for your business. The right startup incubator works in the same way a regular incubator works for an egg. Your business idea, similar to an egg, needs careful nurturing to successfully grow into a new environment. The benefits of working with incubators and accelerators include mentoring from experts from many business fields (e.g. product, go to market strategy, sales etc.) and great networking opportunities, between you, other entrepreneurs, coaches and investors that are part of the program. The aspect worth remembering is that in return for taking part in the accelerator program which will jump-start your business, you’ll probably have to give up a few % of shares. Just be sure the value you're getting is worth the shares you're giving up. There are tons of programs available so take your time and consider whether that’s an option for you.
Crowdfunding
If you need money to kick off your startup and personal funds or friends and family aren’t an option, crowdfunding might be the one for you. This funding source has been highly popularized by platforms like Kickstarter, Indiegogo or Gofundme and relies on small payments. Once you’ve created your campaign and pitched your idea, anyone who believes in it can donate or lend money or buy equity shares depending on the type of crowdfunding you’d like to use. The key here is having a compelling origin story, which will attract donors or investors. Just remember to stray away from over-promising and under-delivering to your contributors, and read the fine print before picking one of the platforms. Some of them require you to reach 100% of the goal of the campaign before any money is paid out or have additional hidden costs. Moreover, bear in mind that equity crowdfunding can lead to a so-called broken cap table.
Grants
Equity free money from the government could be a tempting direction. If your startup has the potential to overlap with government goals, develop innovations plus it has a high possibility of commercialization, it might be eligible for a grant. If it sounds too good to be true, it’s because it does come with certain drawbacks. Firstly, the competition - free money is great and appealing to many, so be prepared for a crowd. Secondly, the process - since it’s the government you’re asking for money, the application procedures can take months to complete and involve essays, videos and interviews. Our tip here would be to do your research and aim for business or sector-specific grant like the ones for small businesses owners, women entrepreneurs, minority-owned businesses and so on, the competition is likely to be lower there.
Angel Investors
If you’re looking for more than just the money, we’d advise looking for an angel investor. They’re usually the high net-worth individuals with an interest in helping small businesses and entrepreneurs both with money and expertise. They often like to take on the “mentor” role and be hands-on with their portfolio companies development. One of the advantages of agreements with business angels is that they tend to be more flexible and friendly compared to the ones with venture capital firms. Just remember that you are still letting go off a part of your equity in exchange for their help. To attract the right angel investor or group of business angels, polish your investor networking skills and don’t be afraid to be picky. Remember, it’s about finding the right match for you and your company, not just picking the first angel investor on your way.
Find out more about business angels in 15 Advantages Of Business Angel Funding article!
Venture Capital Fund
Now this one is not for everyone but if you’re a technology and market disruptor with a huge potential to grow and scale your startup, we recommend trying to attract a VC fund. The idea behind it is they invest in companies that distinguish themselves with potential for significant growth in turn for an equity stake. The VC fund will buy a stake in firms, nurture their growth and wait for cashing out with a substantial return on investment. Mostly associated with money, venture capital can also come with other benefits such as networking, mentorship and guidance. With this option, you need to ask yourself whether you’re open to losing control over your company, additional input from a venture capital fund.
Convertible Note
Sometimes called a hybrid between debt and equity, a convertible note is a form of debt investment which in time allows the startup investor to convert the principal and accrued interest into equity. It is essentially a short-term "loan" convertible into shares. In the context of seed financing, a convertible note is usually converted into discounted Series A stocks. The investor receives preferred stock in the startup on the terms described in the convertible note deal instead of a return of the loan with interest. It’s a great option as it doesn’t take away founders control over the company and keeps the paperwork and negotiations to the bare minimum on both sides. It allows the investors to have economic exposure to equity investment with a higher chance of getting their money back in the form of original investment or shares at lesser of cap or discount. Aside from the usual convertible note, KISS and SAFE have been created to further simplify the financing by presenting standard form documentation.
Loans
If you want to avoid taking money directly from private or public investors, a traditional bank loan might be an option. It’s usually not the first stop for entrepreneurs since receiving a bank loan can prove to be difficult. Bigger institutions require some assurance of their investment and unless you have a substantial amount of assets or proof of stable revenue over time it might be hard to convince them. If you want to take that particular path, remember to come prepared. You’ll definitely need financial data, but a bank may be satisfied with a summary of the rest of the business if you prepare a good pitch. This funding source also comes with a lot of bureaucracy, a formal schedule of paying back the loan and unlimited liability but your success -- or failure -- is all your own!
So where to find investors for your startup?
As you can see there are a lot of options you can choose from, when looking for best way to raise funds and we’re sure you’ll find the most suitable startup funding source in no time. If you’re looking for an all-in-one place to manage the fundraising process and get access to the leading investors, business angels, VC funds, accelerators and corporates in the current world, you should definitely check out Vestbee, our online matchmaking platform for startups and investors targeting CEE businesses. We see that more and more startups and investors are looking for a way to connect online and Vestbee platform helps them find relevant connections, take part in online events and pitch challenges which can be a great way to get funding along with attracting wide publicity.
Related Posts:
VC Tips For Successful Startup Fundraising (by Magdalena Balcerzak, Manager, Vestbee)
VC Types Of Startup Funding Rounds (by Marcin Laczynski, Partner, Next Road Ventures)
How To Create A Pitch Deck That Will Get Your Startup Funded (by Ewa Chronowska, Partner, Next Road Ventures)
