The types of funding for startups
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Starting a business can be a costly venture, and it’s not unusual to need external investments. Funding rounds are a great way to set some start-up goals and estimate how much capital you’ll need to reach those goals. Your goals and estimates can then be used in pitches with investors, to help get funding for your business.
It’s important to know about the different types of funding you have access to as the founder of a start-up. We’ll go through each method, and explain which stage they’re most useful at.
- Bootstrapping
- Crowdfunding
- Incubators
- Accelerators
- Angel investors
- Venture capital
- Bank loans
- Government grants and loans
Bootstrapping
Bootstrapping refers to funding everything yourself, you personally use your own equity to help the business meet its financial needs. When starting a new business, this method is most likely to be an owner’s first port-of-call, since it’s easier and more accessible than raising money elsewhere.
This method of funding is great at helping you retain complete control over your business, but if your business needs significant cash injections then this can quickly get out of hand.
Recommended stages:
- Pre-seed
- Seed
- Post-seed
Crowdfunding
If your business is customer-facing, you may benefit from raising the needed capital through crowdfunding. Crowdfunding can be an excellent strategy, because instead of asking one person for £500,000 you ask 50,000 people for £10 each.
With the reach of the internet, raising money from a wider range of people becomes a lot easier. If your wary of its potential, you may like to know that in 2017, crowdfunding was responsible for raising $419 billion worldwide.
Crowdfunding is a popular method with the public, because they typically get unique items for their investment. While websites like Kickstarter have a focus on more creative projects (like books, games and technology), Crowdfunder and Crowd2Fund are great business-centric alternatives.
Recommended stages:
- Pre-seed
- Seed
- Post-seed
- Series A
Incubators
For some business owners, the biggest issue is knowing how to run and grow their business effectively. Incubators are the perfect solution for this problem, because they help set the foundations for your business.
Since incubators want to help your business grow, they’re less interested in quick and rapid growth and more focused on your long-term success. You may also find that your incubator wants you to create jobs to stimulate local economy.
Most incubators offer your business resources (like office space) instead of capital, so they might not be useful to business owners who only need a cash injection. On the other hand, since they don’t offer capital, they rarely request equity in return.
Recommended stages:
- Pre-seed
- Seed
- Post-seed
Accelerators
Incubators and accelerators often get lumped together, but there are some stark differences in how they help start up businesses. For example, while incubators help your business in the beginning stages, an accelerator helps them quickly scale up.
Finding an accelerator to help grow your business can be challenging, since businesses need to apply and the application process is a very competitive one.
If you are successful, the accelerator program roughly lasts up to six months — during which you’re introduced to mentors and various investment channels. At the end of the process you usually pitch to investors, which can secure additional funding for your business.
Recommended stages:
- Post-seed
- Series A
Angel investors
An Angel investor is a person or group that funds and mentors a new or growing business in exchange for equity. Typically these investors are on the hunt for the ‘next big thing’, so it’s not always easy to gain their mentorship and funding.
If you can find an angel investor in your niche, you need to be fully prepared before approaching them. This includes writing a good sales pitch and business plan, as well as knowing all of your businesses figures. A few of the figures you’ll need to know are:
- Income
- Spending
- Profit and loss
- Projections
Your agreement with angel investors is likely to be unique to your business. For instance, they may own 30%, but that drops to 25% when they make their investment back. Don’t be afraid to negotiate the terms of an offer to try and get the best deal for your business.
Recommended stages:
- Pre-seed
- Seed
- Post-seed
- Series A
Venture Capital
Once your business has passed the seed stage and is on Series A funding or later, then seeking out venture capital investors is an excellent idea. Venture capitals are usually firms that invest in start up businesses with huge potential.
These firms are looking to make money by investing in a business that needs a boost to go public. Since their interest is money-driven, these firms want to make their investment back within a few years.
When working with venture capitalist firms, you may find they want more control over your business than other types of investors.
Recommended stages:
- Series A
- Series B
- Series C
Bank loans
One of the most common sources of funding for start ups is by getting a business loan from a bank. Rather than taking equity, a bank will charge you interest rates on your business loan until the full amount is paid back.
When you apply for a loan, you’ll need to prove that your business is able to pay it back. This can include showing your profit and loss records, business plan, and projections. The full terms of your loan, including amount and interest rate depend on your bank and business.
Because of the interest, the debt you owe the bank will keep growing if it isn’t paid off. Large, long-term loans can have a negative impact on your cash flow, so it’s best to make sure that they are manageable.
Recommended stages:
- Pre-seed
- Seed
- Post-seed
Government grants and loans
As a start up, you may be eligible for a government grant. Unlike other types of funding, a grant doesn’t need to be repaid or require equity in your business. Grants are typically given to businesses in certain industries or you plan to make innovative products. Innovate UK, for example, offers guidance on how to find and apply to these funds.
You can also get a loan directly from the government. The best example of this is the Start Up Loan, which offers between £500 and £25,000 to new businesses. The loan comes with guidance for writing your business plan, and up to one year of mentoring.
Recommended stages:
- Pre-seed
- Seed
- Post-seed
Managing your funding with one clever app
If you’re struggling to manage your business’ funding, you might benefit from accountancy software. Certain services, like the Countingup app, possess features that can make it really easy to spot exactly where your funds are going.
The automatic categorisation feature, for example, is brilliant for sorting your income and outgoings into pre-approved HMRC-compliant categories. Whether you’re submitting your taxes, or sharing your finances with an account
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