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:
- Do you need external investment to start with or can you manage with your own money?
- Are you willing to give away equity in your firm, or influence in its future direction?
- Do you have the expertise and knowledge to grow your startup from idea to physical product/service?
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.
Bootstrapping your startup means launching without the help of outside capital. You’re basically starting out with your own money, using for example your savings, and you build your company and manage costs through the cashflow your business generates.
The benefit of bootstrapping is that you keep control of your company. Since you don’t have any outside investors, you also don’t need to give away a stake in your company, nor do you have to live up to outside expectations. You can decide all on your own which direction to take your company in, and ultimately, the success of your business comes down to you and the people you hire to help.
The downside of bootstrapping is that you don’t get the outside influence. As great as it is to have autonomy and maintain control, outside investors or stakeholders bring with them knowledge, network and support – all which can have a huge impact on your growth, development, and chance of success. Plus, you get to share some of the stresses and workload, as the people who have invested in you will want to help you succeed.
Friends and family
Raising money from friends and family is exactly what it sounds like: friends and family financing your startup. Friends and family financing can be an attractive solution to getting your business started. They know you, they most likely know your idea, and they may be more inclined to take a chance on you than an angel investor, venture capitalist or bank.
Plus it can actually be a positive signal to future investors, that you have a network of friends and family who have already supported your startup idea.
Thus, it can be hugely tempting to approach family and friends, either for a large investment from a single person, or smaller amounts from several.
It is worth nothing though, that not all businesses succeed. In fact, only a handful of all startup ideas turn into successes. Hence, you, and your family and friends need to be comfortable with the thought of your business going bust, and them losing their money.
Be honest and transparent about the risks of your venture, show that you have put thought and effort into a business plan and agree to put the investment terms and agreements in writing.
An angel investor is a high net worth individual or group 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.
Crowdfunding means seeking smaller amounts of money from a large number of individual investors. 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 a crowdfunding website.
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.
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!