12 Mar Six ways to fund your startup
No matter the startup you are running, you will need to look for funding at some stage. This post takes you through the possible ways you can fund the rounds discussed in our post Pre-seed, Seed and Series A …what does it all mean? Choosing the ideal source of financing can be an overwhelming process. The startup world is full of advice, and you need to take each bit of advice with a pinch of salt. You should independently weigh the pros and cons of each source of funding, allowing you to choose the ideal option for your circumstance. Listed below are some common funding sources, with a brief explanation of each.
- Personal Savings
Now, be careful here. Although this may appear to be the most attractive source of financing, largely because you don’t owe anyone else in the process, it still has its downsides. People are often blinded by their “amazing idea”. If it’s savings your family needs be careful. Friends and family do not like to tell an enthusiastic entrepreneur their idea is not good. Getting them to commit money is sometimes the true test, so although personal savings might get you off the ground, couple this with an additional source if possible.
You have total control of your business, and you can spend the money where and when you like. If you are a solo founder, you also do not need to answer to anyone. We would never recommend someone to invest their retirement savings into an idea, but if you have the money to lose this is sometimes the easiest way to test the concept. But startups are high risk; assume you are going to lose it.
If the business fails, which the data suggests is likely, you lose not only your time but your savings. The cynical person will say this is a waste, but I disagree. You will gain experience, probably at the expense of that new car or a trip to Mexico. In addition, with a lack or mentors and/or angels, you will only have your advice to follow, and you will be biased.
Generally, this will be your pre-seed round or part of it.
- Family and Friends and Fans
The 3 F’s – family, friends, and fans. Your friends might say your idea is great, but you know this is the truth when they back you financially. This type of funding has more to do with the relationship itself, and if they trust you and think you would be competent at running a business this round will be easy(ish). Backing a startup is more about backing the entrepreneur than the idea.
This is generally the fastest funding process and the most flexible. You should still have contracts, but the due diligence process will be low touch and quick. You can close an FFF round in less than a month.
Family and friends often provide the funding without assessing the viability of a business plan itself. They will invest and then let you do your own thing. They will offer little in the way of constructive criticism.
This is generally for your pre-seed funding or used to top up a seed round.
This type of funding process involves raising several smaller investments from a large number of people, generally via the internet. Founders will need to lean on their vast networks of friends, family, colleagues, and the general public via different social platforms. You need to spread the word and make what you are trying to do go viral. Easier said than done, but the platforms that offer these services are normally great at providing advice.
Crowdfunding opens up the potential of gaining substantial capital over a short period of time. Also, it helps you gain a big pool of investors that might be interested in follow-up investment.
Requires time and dedication before results may be realized. More so, you are exposing yourself to the public; if it fails it fails with all to see.
Generally, this will make up your seed round. You will need positive metrics to get the public to buy in. Alternatively, if you are producing a cool product/concept, this could be your pre-seed round.
- Angel Investors
Angel investors are high net worth individuals who will provide funding in exchange for a share of equity in the business. Some angels work in groups, often called syndicates, and screen deals together. The majority, however, work alone and rely on introductions from people they trust.
Angel investors not only provide capital, they can offer valuable advice and mentorship. Generally, they will have experience in the industry you’re in.
You will have someone to answer to. This may seem like you are getting forced to give up control of your business, but this is simply them trying to protect their investment. Remember, they want you to succeed.
Angels will make up the majority of your seed round, with some providing follow-on investment into your series A round.
- Venture Capital (VC)
Venture capitalists are investors who put in a considerable amount of money into your business in exchange for equity and generally a seat on your board. They will be like a dog on a bone to get a return and will try and steer your company towards an exit. VCs are all about the money and only invest in businesses that have the potential of providing good returns to their investors.
VCs not only provide funding but can offer expertise, mentorship, and great industry introductions. They tend to invest in specific industries, so will be able to bring knowledge to the table. VC funding also gives the business immediate credibility. VCs often do not want to be the first in; once you have one, others will follow.
You may be forced to give up a large chunk of your business due to the significant amount of funding provided. You will generally be forced to give them a seat on the board, and they will make decisions based on their investment, which is not always ideal.
VC’s only really get involved in a Series A round. However, it is more common now to see specific VC’s who invest in seed rounds as well. However, to get a VC in early you will need great traction, and keep in mind it is not always good having a VC in this early.
- Bank Loans
Bank loans are common but can be quite hard to secure in the ‘idea’ phase of your startup. Before you apply, educate yourself about the various options available and the interest rates. Personal guarantees are very risky!
There are multiple funding options for multiple needs. Banks will let you know quickly if you qualify. If you do, you should receive the money quick. You don’t have to give up control of your business. Banks will never take equity or want to sit on your board.
Requires a lot of documentation, which can be tiring and time-consuming. This can all be a waste of time if you do not qualify. You need to educate yourself about the best option available for you, and most people are not experts. The money has to be paid back, and you will need to pay interest, whether the business succeeds or not.
Generally, loans will be used to fund your seed round, or for specific equipment, stock orders etc. Banks are not experts at startup business plans, and generally, require steady revenue..which most startups are lacking.