You’ve got a great idea, you know how to execute it, you know who you need to hire and you’ve probably already envisioned the branding for your startup. There’s just one thing holding you back from soaring success - you need money.
Don’t worry, in this article we’ll cover what startup funding is and how to get it to help you turn your idea into reality.
Startup funding is capital used to start and grow your business. Founders usually need to raise capital to fund the business until it starts making a profit. There are a few different types of startup funding, including:
When you raise startup funding, you go through a series of rounds. Each round involves raising more money so your business can grow bigger. And with each round, the stakes are higher and the deals are more complex.
It can take a few years before a startup becomes profitable, so until you start making your own money, founders need to search for alternative ways of funding. Funding is needed to pay for business expenses like:
Founders usually can’t pay for all these expenses from personal savings, which is why you need to raise money from external sources.
There are a number of ways to get funding and many startups combine different types of funding sources. Here are some examples:
Invest your personal savings and ask your friends and family to invest in your business. When taking money from friends and family while bootstrapping, make sure you’ve got a term sheet in place so everyone is clear on the terms of the investment.
Raise small amounts of money from large groups of people through crowdfunding platforms (popular examples are Kickstarter, Crowdfuner and Indiegogo).
Crowdfunding is also a good tool to get validation from the public before you approach angel investors and venture capitalists. If they see that people are already interested in your product or service, it’s a sign that your business could be successful.
ASAs and Convertible Notes
If you don’t want to do a full funding round, you can raise money from investors flexibly using Advance Subscription Agreements (ASAs) and Convertible notes. These are legal documents that promise shares to investors at a future date in exchange for capital now.
During the early stages of your startup (pre-seed and seed rounds) you can approach angel investors to invest in your business in exchange for equity. Angel investment deals are usually more relaxed than deals with venture capital firms, so you generally won’t have quite as much pressure on you to succeed as you do with venture capital investment.
You can find angel investors at networking and pitch events for founders and investors and through angel syndicates like Angel Academe and Connectd.
Venture capital firms
Many startups use venture capital investment to grow their businesses because you can attain large sums of capital from venture capital firms. Getting venture capital investment also comes with other perks like gaining access to a large network and industry expertise from your investors.
You can get investment from venture capital firms during the early stages like pre-seed and seed rounds but it’s most common during the later stages from series A and beyond. There are loads of venture capital firms in the UK, you can search for them on google, read through their websites and compile a list of the firms that sounds right for you.
Venture capital is a type of equity financing so you’ll give investors a portion of ownership in your business. This comes with challenges like investors wanting a say in how you run your company. It also comes with the pressure to succeed as investors can often want ten to fifty times back on their investment in five to ten years.
Tax relief schemes
In the UK there are tax relief schemes for businesses that boost economic growth and innovation. One popular scheme is R&D tax credits, which give companies making developments in science and technology up to 33% cash back on the money they spend researching and developing. There’s also the Patent Box scheme, which reduces corporation tax on profits if your company sells patented products.
Using tax relief schemes is a helpful way to get more cash flow in your company so you can use the funding you’ve raised more efficiently.
Another common way to get funding (usually combined with other methods) is to take a business loan (also known as debt financing). There are lots of banks and companies that offer this service so do your research and find the right loan for you.
Just remember that company debt makes it more difficult to raise capital from investors so keep your debt to a minimum if you want to remain attractive to investors.
Raise with tokens
For startups that offer tokens, some investors will invest in exchange for your tokens. For this kind of agreement, you could use a SeedSAFT (Secure Agreement for Future Tokens).
Before you go about asking for large sums of money for your startup that’s not yet making any profit, you need to be able to show potential investors why you’re likely to succeed so they can make a return on investment.
To get ready for fundraising, you can:
Raising startup funding does take a lot of work but you can make the journey easier if you stay organised, get clear on your vision and make sure you’ve got the right support around you.