If only we could turn our ideas into fully-fledged businesses overnight. Sadly, Rome wasn’t built in a day, and most entrepreneurial dreams require lots of planning, budgeting, bravery and – in many cases – luck.
If you’re building your first startup, it’s likely that you’ll be looking at raising funding from one source or other. There are plenty of ways to budget your endeavour, with their fair share of individual pros and cons. Finding the right source of funding for your business could ensure its growth or seriously hinder your progress. To help you to find the right methodology for your startup here’s a deeper look at seven key potential funding options.
(Bootstrapping is favoured, but plenty look to external help. Image: Neil Patel)
As we can see from the table above, the use of personal savings when setting up a business is a very common form of funding startups. Support from friends and family can also contribute to the overall bootstrapping aspect of making sure you can manage your operating costs.
While bootstrapping is the most common form of getting your business up and running, it’s also by far the most difficult – as well as the most rewarding.
The advantages of bootstrapping can be found in how easily accessible the money is, with little-to-no bureaucratic obstacles in place.
Unlike with many alternative forms of funding, business owners typically retain full control of their endeavour and have fewer stakeholders to answer to. This means that they’re able to act more decisively and have the freedom to carry out radical changes where they see fit.
The most significant downside to bootstrapping is that it comes with a significant danger of struggling to make ends meet – depending on the owner’s financial situation.
Many businesses are forced to fold due to revenue streams drying up, and this can come at a heavy cost to bootstrappers – who in many cases can feel obliged to sell their assets to keep their startup afloat against the odds.
Fortunately, if your idea is strong enough and your marketing campaigns are strategic alongside a healthy level of proportionate budgeting, it’s entirely possible for a bootstrapped startup to be a resounding success – but it certainly requires a lot of work and sacrifices in many cases.
2. Venture Capital
If you’re a firm believer in your idea (and why wouldn’t you be!?), it’s possible to pitch your business to Venture Capital firms in a bit to obtain a wealth of financial support in return for a share of your company’s equity.
The cost of equity refers to shares in your company, and the level of ownership given up can range from as little as 1-5% all the way through to 50% and more. While the notion of relinquishing ownership of your company could seem like a negative thing, it does come with some positive effects. For example, you’ll also gain great levels of guidance from your VC firm, and will likely benefit from their expertise and industry contacts.
Of course, the downside of losing a share of your equity could be felt later on. If your business becomes a success and you’re looking to sell up, the money you make will have to be scaled down to represent your smaller share of ownership.
The implications of Venture Capital means that business owners need to carry a heavy level of introspection around their endeavour. Is a percentage of equity worth a healthy windfall early on? This is a question only you will be in a position to answer.
The level of funding available from Venture Capital firms can be significant, and worth tens of millions of pounds. This degree of finance can significantly accelerate the scaling of your business.
3. Angel Investors
It’s true that angels walk among us, however, they have a habit of being extremely difficult to find.
Angel investors typically come in the form of high-net-worth individuals and tend to invest their own money based on the type of business proposals they see. This type of investment isn’t quite as lucrative as Venture Capital, but angel investors can often be more willing to back riskier prospects.
(Estimated total of business angels active in early-stage investments in Europe from 2011 to 2018. Image: Statista)
As high-net-worth individuals, angels can also provide invaluable levels of insight into endeavours and offer tangible advice for startup owners.
Despite it being relatively difficult to find angel investors, there are some great places to look – with the UK Business Angel Association (UKBAA) making for a great resource on the matter. Furthermore, the UKBAA states that angel investors typically pump between £10,000-£500,000 into a single business when financing them – with around £1.5 billion typically invested each year in total domestically.
Angel investors represent a strong prospect for startups looking for a relatively small cash injection to help operations without losing a chunk of equity as a result. However, as they use their own finances to fund endeavours, a strong pitch will likely be needed to encourage them to part with their money.
(Regional crowdfunding revenue. Image: Fundly)
It’s a relatively new form of fundraising for startups, but there are already plenty of ways in which entrepreneurs can get involved in crowdfunding.
Here you can offer potential patrons or stakeholders the opportunity of rewards or memberships in return for a one-off payment or recurring fee.
The beauty of crowdfunding is that you have the chance to galvanise your prospective market ahead of launch, and it’s a great way of engaging with customers in a way that makes them feel more associated with your brand.
Crowdfunding can help to ensure that you retain full equity of your business, too. However, opening your business up to a significant number of stakeholders could mean that you lose an element of liberty with the direction your business takes. For instance, if you started a crowdfund to help launch a soft drinks business, your investors and stakeholders will likely seek action if you suddenly changed your focus to something different.
Alternatively, equity crowdfunding can also be utilised as a rewards-based system – however, instead of offering freebies or memberships, you’re in fact offering company shares. This can help your business receive a significant injection in cash but such investment will come at the cost of full control of your business.
5. Bank Loans
Away from the investments of Venture Capital firms and angel investors, it’s also possible to receive external funding in the form of a bank loan.
This form of funding is subjective based on the programs of each banking institution but is certainly worth checking out if you’re exploring your options.
Bank loans tend to take the form of ‘working capital loans’ and more straightforward ‘funding’. While working capital loans are built as a way of traversing one full cycle of revenue generation for a startup. While funding arrives at the bank’s discretion after a fully costed project report is delivered.
The pros of bank loans typically revolve around the size of the capital that can be generated for startups to work with. However, this form of funding tends to come with risks associated with the entrepreneur’s collateral assets. Thus, failure to repay a business bank loan could lose you a lot more than your company.
One of the most appealing but illusive options available to entrepreneurs is the opportunity to obtain a grant.
It’s possible to receive a grant from both the government and other institutions, and they make for an excellent way of gaining healthy windfalls without losing any business equity.
While there are plenty of grants available for businesses to apply for in the UK, the chances of gaining them vary depending on each case. One of the best places to search for applicable grants and study accessibility can be found through your Local Enterprise Partnership (LEP), which aims to sustain the growth of businesses and offers grants in selected industries.
There’s also a wealth of EU grants available for startups within the European Union, however, if you’re a business owner from the UK, your access to this source of funding will likely be dependant on the outcome of the Brexit negotiations which are likely to remain ongoing until early 2021.
7. Look out for contests
One of the more exciting ways of obtaining the funding that you need can be done by entering business competitions. There are plenty of awarding bodies that are willing to fund your ideas if your pitch is up to scratch, and the award itself can be an excellent sign of vindication – not to mention a form of recognition that can be flaunted to prospective customers.
One example of a recurring competition comes in the form of VOOM, which is run by Virgin Enterprise where entrepreneurs have the chance to pitch their startups to Richard Branson in return for a prize pool amounting to £1 million.
Naturally, winning a contest not only comes with a significant cash injection, but the media coverage and publicity will come as a huge boost to your endeavour.
However, it’s worth noting that the chances of winning such lucrative contests will be extremely slim regardless of the quality of your idea, and thus could prove to be a significant waste of resources that may have been better invested elsewhere. Likewise, the sheer competitive nature of these competitions could have a demoralising effect for the losing entrepreneurs – who may lose confidence in their project as a result.