7 Ways to Finance Your Startup
How do you finance your project? This is one of the key questions at the start of any project. How you answer it determines many aspects of your future company - the number of resources you have, the amount of time you can take until profitability, and even strategic direction. However, it is not only relevant for the very early stage of a business. Fundraising is an important part of every startup stage development process.
In our agency, we have been working with organizations funded in many different ways. Therefore, we will be happy to describe the main funding options to you.
But before we jump into that, let’s define different stages of startup funding based on average numbers:
Pre-seed - valuation €10 - €100K, raising €50K
Seed - valuation €3M - €6M, raising €50K - €2M
Series A - valuation up to €24M, raising €2M - €15M
Series B - valuation €30M - €60M, raising up to €30M
Series C and beyond - valuation p to €120M, raising €50M
At each stage of funding, a different mix of financing could be used. There is no right or wrong answer, however, each of the options comes with its conditions. We will cover the main 7 ones.
It means starting up a project only with your resources. This includes your savings and sometimes resources from your friends and family. This approach gives your company a lot of strategic freedom. Since you don’t depend on any outside investment, you don’t have to be accountable to any third party. Therefore, a decision about where the company is going belongs only to you.
This also means high risk. Should your business fail, you’re going to lose your own money and time. New entrepreneurs are likely to feel a lot of pressure because of that. As a result, many bootstrapping companies try to “play it safe” and are less willing to focus on experimentation. This, together with the lack of mentorship and experience, may inhibit your company’s growth in the future.
What do companies such as MailChimp, Shopify, GitHub, Shutterstock, SurveyMonkey, and GoPro have in common? You have probably guessed it - they were all bootstrapped! There are many examples of widely successful companies that were self-financed. So, if you don't have a problem risking your resources and have a clear sense of direction, perhaps bootstrapping is the right financing option for you.
These are collaborative programs that are focused on startups. They provide resources necessary to succeed - financial, network, space, education, etc. In exchange, they usually take % of the equity. Incubator programs are aimed at early-stage projects - sometimes, you don’t even need to have a business or an idea - you can come to the incubator and find out what you want to do there. Accelerators are targeted at more established startups with an ambition to grow.
This option provides you with the most resources. In addition to finances and mentorship, they often help with practical aspects of being an entrepreneur. This gives you a lot of creative freedom and room to experiment. Moreover, you become a part of a community of entrepreneurs. This kind of support is a great asset for new businesses. Furthermore, you're not restricted to a specific area - many of the programs currently run online. This provides you with a good opportunity to expand your network online and access new markets and opportunities you might've not thought of.
However, these types of programs might be too restrictive for some founders with a specific vision who are not open to changing it. You would have to follow the program of your incubator and shape your idea and vision accordingly. Moreover, not all accelerators and incubators are created equal - while there are many players in the ecosystem providing immense value for startup entrepreneurs, there are also some which may take a lot of your time, energy, and equity in exchange for subpar mentoring and growth opportunities.
Your business’s “Godfather”, who takes your project under his generous wing. Usually, an angel investor is a successful entrepreneur himself. Therefore, in addition to financial resources, you also get access to his network and experience. Moreover, working with external resources lifts a part of the burden of losing all your assets. This allows you to be more creative and risk-taking without worrying about instant financial consequences.
However, working with someone so experienced has its downsides. Angel investment is usually provided with strings attached - meaning you have to provide a part of your equity and control of decision-making in the company. Therefore, you have to consider the opinion of your investor. Should your vision of the project not be well aligned, you will have major problems in your project’s development. Further, it might be a challenge to find the right angel investor. This is especially the case if you don’t work in one of the “hot” industries.
When looking for an angel investor, you have to rely a lot on the power of networking. It can be difficult to reach out to investors outside of the right context and without the right introduction. Usually, the mailboxes of investors are overloaded with messages, therefore, getting their attention online can be a difficult task. Furthermore, many investors prefer to invest in the markets where they are active themselves, making it difficult to raise funds for founders outside of developed startup ecosystems.
VC is an investment capital provided in exchange for equity by a professional investment firm. Experienced investors provide it to support your startup with high growth potential. The difference from the angel investor is where the money comes from. Typically, VCs don’t use their own money. Instead, they pool resources from investment companies, large corporations, and pension funds. Therefore, it might be more challenging to raise capital through VCs. Typically, they have more rigid and complicated investment processes in place.
On the plus side, venture capitalists have more capital to work with. Therefore, if you have a business that requires a large investment, VCs may be a better fit. In addition, because venture capitalists are professional investors, they typically have a highly developed network, helping your startup in plenty of other ways than just financing. Think about legal expertise, employees, expanding to new markets, management consulting, and marketing. This level of support may be extremely valuable for an ambitious startup founder.
Furthermore, typically venture capitalists ask for a seat on the board of directors, therefore, you will need to align your company’s strategy with them. You would also need to formally report on your business operations. In case your business doesn't perform as well as expected, you might even lose it. A famous example is Steve Jobs being fired from Apple in 1985 after several disagreements with a board of directors.
What do angel investors and venture capitalists have in common, except for their never-ending search for mutually beneficial investment opportunities? They will want to see your pitch deck - a presentation about your company and how you intend to make money with it - before getting into a discussion with you. A well-crafted pitch deck helps you to stand out from the competition and build credibility with potential investors. However, it can be difficult to build a high-quality pitch deck - you have to focus on the right elements, keep it consistent and short, and oh, don't forget about the design!
Luckily, our team has vast experience working with both investors and startups. Therefore, we know what aspects investors are looking for in a pitch deck and can help you to optimize your pitch deck accordingly. We offer to create an audit with a step-by-step overview of:
2. Structure & Content
Check our special offer.
Make sure that your pitch deck is up to a standard to ensure your success in raising funds!
This one is rather self-explanatory. You fund your project with a loan from a bank. With this financing option, you build your project with money from the bank. This allows you to keep complete ownership of your company. You won’t have to run any strategic decisions through anybody, and all the future profits belong to you.
However, this is also true for responsibilities. Should your business not work out, you would still have to repay the borrowed amount. Furthermore, banks tend to be risk-averse, therefore it can be challenging to obtain financing for a new business without a proven track record. This is especially the case for startups, for which it usually takes a while to reach profitability and develop a solid demand for their products.
Bank loans can be the only feasible financing option if you aim to work outside of the main hot tech industries. As mentioned above, angels and VCs usually have a strong preference for the industries and markets they invest in. Furthermore, this type of financing is susceptible to trends and fads, making it difficult to secure financing for projects which are not perceived as trendy. This is not the case for the banks - they care more about the strength of your business model and your financial track record.
An increasingly popular way to fund projects is with the help of the community. In crowdfunding, you raise funds with a large number of a small amount of money from the people participating in the campaign. This way, you leverage the resources of a large number of people interested in your project. This allows a broader pool of investors, who can invest as little as a few euros in your business.
Crowdfunding helps you to raise funds with little risk. There is usually no obligation to repay the backers. You only need to fulfill your backing promise - what you offer your backers in exchange for their contribution. Furthermore, as crowdfunding engages a large number of people from the early stages, it helps you to build a loyal following from early on. Also, it allows you to keep full control over your venture.
However, crowdfunding can be time-consuming and difficult to set up. You have to be creative about what you offer in return for investment. This might be impossible for some businesses. If your product is too specific, or you fail to explain it clearly, your crowdfunding campaign is likely to fail.
However, despite the small number of funds raised from each investor, this doesn't mean that crowdfunding is suitable only for small local businesses. There are billion-dollar companies that started on crowdfunding platforms. Some famous examples include Oculus VR (5 billion dollars valuation), Allbirds (1.4 billion), and Peloton (12.2 billion).
Grants can be a helpful source of funding for startups, especially for those that are working on innovative or socially beneficial projects. Grants are typically awarded by governments, nonprofit organizations, or other institutions, and do not need to be repaid like a loan.
One of the benefits of grants is that they can provide startups with the initial capital they need to get their business off the ground. This can be especially helpful for startups that are working on projects that require a significant amount of upfront investment, such as developing a new technology or conducting research.
Another advantage of grants is that they can provide startups with the credibility and validation they need to attract other sources of funding. For example, if a startup receives a grant from a well-respected institution, it can show potential investors that the company's project has been deemed worthwhile by experts in the field. This can make it easier for the startup to raise additional funds from investors or banks.
Some examples of grants that may be relevant for startups include:
Government grants: Many governments offer grants to support entrepreneurship and innovation. Horizon is one of a good examples for EU-based startups.
Nonprofit grants: Nonprofit organizations often have grant programs that support startups working on projects that align with their mission. Industry-specific grants: There are many grants available that are specific to certain industries or sectors.
Applying for grants can be a tedious and bureaucratic process. But money coming with almost no strings attached and with no Patagonia-wearing investor to report to is not a bad thing, right?
Need Help Fundraising?
Hope that this brief overview makes it clear to you what options you have when it comes to financing. There is no one best way to go about your financing. What works best depends on many factors: the type of your business, its stage, your personal credit history, and your entrepreneurial experience. Therefore, before deciding what type of financing, to evaluate carefully all these factors.
If your startup is currently fundraising, at EDGEncy we have a vast network of VCs and Angels. We are happy to help selected promising tech startups, and make an intro.
Feel free to send us your pitch deck and happy fundraising!