So, you have the idea of a lifetime for a startup to fill a glaring gap in the market. Great stuff! The bad news is that the idea is just the beginning.
Whether your idea is for a small independent shop or the next Uber, you are going to need money to make the idea a reality.
Fortunately, you’re in luck because there is a range of startup financing source available to you that will suit every size or type of business.
Below is our selection of the most accessible ways in which a startup can raise money. But before deciding which is appropriate, there are a few questions you should ask yourself:
- Would you be willing to give away equity in your firm, or influence in its future direction?
- Do you have your own funds that you can contribute to the startup? And if so, do you definitely need outside investment?
- Do you have a detailed business plan and an enticing pitch explaining why only a fool would not invest in you and your idea?
Once you know the answer to the above questions it’ll be much easier to determine which of the funding options mentioned below are the best for you. And if you are unsure about where to start when it comes to raising money for your business, here are seven fundraising lessons from Latvia’s million-dollar startup.
There are many slightly different definitions of bootstrapping, but essentially this is a form of startup financing which involves no outside parties.
It could be that you fund your idea using your business’s custom, with a combination of advance orders and long-term subscriptions providing the cashflow you need.
More likely, however, is that it will involve you putting in your own money, whether via savings, loans or credit cards.
This is an undoubtedly risky approach, but with the significant upside of potentially realising your ambitions without having to go cap in hand to others.
Speaking of which…
- For a great resource on bootstrapping check out this guide.
Friends and family
Your friends and family probably know more about your idea than anyone (except you of course!).
You will undoubtedly have spoken to them at length, excitedly detailing every reason you are convinced your startup will be a roaring success.
And no one should understand and value your passion more than your inner circle.
It is hugely tempting, therefore, to approach friends and family, whether for a large investment from a single person, or smaller amounts from several.
A word of caution, however: while you have unshakable faith in your idea, it is an unfortunate fact that not all businesses succeed. Another unfortunate fact is that a large proportion of family disagreements centre around money. So the risks associated with funding your startup with money from loved ones should be clear…
An angel investor is usually a high net worth individual (though there are also angel investment groups) who specialises in providing backing for startups.
Although they will expect equity or convertible debt in return for their capital, the rates offered by angel investors are likely to be more favourable than those offered by ‘traditional’ lenders.
Angels often invest based on their faith in the individual behind the idea as much as the potential viability of the business, so a convincing pitch is all important when seeking this type of financing.
- For a great resource on Angel investors in Europe check out Angel.co.
When analysing your startup’s funding options your local bank is still one of the best places to start. Borrowing money from the bank is perhaps more difficult than in past generations, but it is still likely that they will have a range of small business loans available to help you get your startup idea off the ground.
Seeking smaller amounts of money from a large number of individual investors is a thoroughly modern way in which to fund a new business. Effectively you put together a compelling pitch explaining why the world will be a better place if your idea comes to fruition and place this on one of the plethora of crowdfunding websites.
There are three main types of crowdfunding:
This involves investors obtaining a stake in your business in return for their investment; as such it is the most closely aligned to traditional venture capital funding.
Here is where you can have some fun with your ideas, and build relationships with customers at the same time as raising funds. In return for a donation towards your startup individuals are offered a non-financial incentive. If you are marketing a specific product then the incentive could be early access to the product, or an ‘early bird’ reduced price.
Just be careful to only offer realistic incentives that you are confident you can deliver: the rap group Run The Jewels once had to record an entire album comprised entirely of cat sounds due to a ‘joke’ incentive they offered assuming no one would take them up on it!
Using this model the startup repays each investor after a certain time at an agreed interest rate.
And if you want some inspiration of what others have done in crowdfunding and what hasn’t worked, check out our dive into the top five crowdfunding fiascos.
The appeal of grants as a form of startup funding is obvious, as any money your business is offered does not have to be repaid as long as you meet certain goals.
Of course, the criteria for being awarded a grant in the first place are likely to be strict and the vast majority of startups are more likely to be awarded a small amount rather than enough to be able to fully fund your business for several years.
As such, we would recommend that grants are considered a ‘nice-to-have’ source of additional funding rather than staking your future on obtaining one.
The grants that are available to you will vary depending on region, but if you’re a European startup here are a few options to explore:
- EU grant options: https://www.welcomeurope.com/european-subsidies-beneficiary-SMEs.html
Like grants, venture capitalists will provide your startup with money that you won’t need to give back. Unlike a grant, however, they will expect equity in your business in return for their investment.
It is also likely that, alongside this stake in your nascent firm, investors will expect a level of influence in the future direction and decision making of the business.
For some startups the promise of additional input and expertise will prove reassuring but those that are determined to retain full ownership of both their business and their idea should seek alternatives.
If you do decide to seek out venture capital however, beware of the four types of investors you want to avoid at all costs.
The process of turning an idea into a viable business can certainly appear intimidating, but whether you decide to approach outside investors, loved ones or even use your own money, help is out there in many forms to make it a reality!