Funding Your Start-Up
By Abby Hindle, Halal Incorp
A start-up is a company in its early stages, a company developed by entrepreneurs who believe they have identified a gap in the market they can fill. Many struggle with the amount of funding their start-up requires, as start-ups have high costs and a fast burn rate. This article lists various types of funding, as well as stages of funding, and their pros and cons, as well as offering advice on approaching investors.
Funding Your Start-Up: Before any business starts to get off the ground, the issue of fundraising needs to be considered. While some start-ups are able to self-fund entirely from the founders’ personal funds or from investments from friends and family, for most bootstrapping it simply is not an option. Start-ups are intended to grow quickly, so require a large amount of capital to burn through to maintain that growth until they start accruing profit.
Before you begin your fundraising efforts, make sure you are adequately prepared; you will need to have a compelling idea and product, and to be able to pitch them clearly, concisely and effectively to investors. Some amount of traction (customer adoption) is desirable as it will prove the product is marketable. Growth of around 10% per week consistently over a number of weeks is ideal. This demonstrates your companies’ viability and encourages investors.
Funding Your Start-Up
Work out your plan for your budget well in advance; know how much cash you need to raise and make sure you have a budget figured out. You could also potentially work out different plans for different amounts of money raised, as there’s no guarantee you will be able to raise the exact amount of money you want. The ideal goal would be to raise enough funds that your company reaches profitability meaning that, depending on the type of business you are creating, no more funds need to be raised. This is not possible for most start-ups however, so enough to reach the next funding milestone (around 12-18 months) is a more achievable goal
Types of fundraising
Family, Friends, Founders, Fools
This is the first port of call for most start-ups. Putting your personal cash into your business or asking your friends and family is a logical first step for companies starting out. Some may be able to fund their business entirely using this method, but for many this is only the beginning stage, necessary to get the business started but not feasible for developing it beyond that. This method is often quicker and easier than methods like searching for investors; friends and family are often more lenient when it comes to financial agreements and may not even require returns on their investment.
There are, however, obvious risks in using your own finances or those of the people in your life. There is also the chance of complicating personal relationships. You may also be tempted to treat these arrangements with family and friends more casually; this would be a bad idea. Draw up agreements the same way you would any other financial agreement. If you are using your own money or that of people you know personally, it is especially important to devise plans for what to do in the event of failure to mitigate the risks mentioned above. While no business starts out anticipating failure, it is necessary to think about the possibility and plan for it.
Bank Loans
Seeking a bank loan is another common first step for new businesses. It is useful for people with little business history. It gives you full ownership of your business, unlike seeking investors, and may potentially allow you to protect your personal finances, reducing the risks of failure, as it can keep your personal finances separate from your business. On the other hand, this may not be the case; from the perspective of the people giving loans new businesses are a big risk and they will require security, often in the form of a loan backed by your own house. There are also certain qualifications to meet to get a loan which you may not reach. Loans also require monthly repayments, which will need to be accounted for in your budgets for the future, reducing your revenue and possibly limiting your businesses’ growth.
Funding Your Start-Up
Angel Investors
These are investors who will invest some money into your business for a return. This method of fundraising is common and one of the ones most accessible in the preliminary stages of growing a new business. They are often more willing to take risks than banks and are more willing to invest large amounts of money, as they generally will have made their own money through entrepreneurship and understand the hazards of starting a new business.
An investor will also often have in-depth knowledge of a particular area, often where they themselves made their money. Fundraising in this way will involve trade-offs; look at how much progress a certain amount of funding will gain you in comparison to the amount equity ownership decreases as you hand stakes in your company to investors (dilution).
Crowdfunding
This is a method of raising funds that has become more common in recent years. It involves utilising social media and crowdfunding sites, such as Kickstarter, to bring your company to the attention of people outside of the more traditional circle of investors. It allows you to raise money from anyone who wishes to invest. It’s a good option to consider for anyone struggling to raise funds in more traditional ways.
Some companies are able to raise all their funds in this way; one example of such a company is Oculus VR. However, a few things are important to keep in mind. Crowdfunding is a very competitive market and there is no guarantee of being able to raise the full amount you require, and, in some cases, an incomplete funding campaign will result in all the money being returned to your investors. You will need to build interest in your product before starting your campaign to generate significant gains.
Grants
Some businesses fund by using a grant or a combination of grants. These grants may be given by the government, or they may come from a local organisation. For UK businesses, for example, you may be eligible for an Innovation Grant, which is government funded. Grants are among the cheapest ways of financing your business, but there may be non-financial stipulations attached.
Funding Your Start-Up
Pitching to Investors
Pitching to investors is a crucial part of fundraising and some idea of how to go about it is necessary.
- Try to connect with investors – they see hundreds of pitches so if they don’t feel a connection to you and your product, they will most likely pass
- Have a story. Who you are and how you talk about yourself and your company will have impact and help with forming a connection.
- Don’t come off as arrogant, but don’t be too humble. Confident and willing to stand by your ideas but able to listen and take criticism is a good balance to strike.
- Keep your pitch concise and to the point. Your points should stick with your investors, not overwhelm or bore them. The presentation should be around 20 minutes, with minimal graphics and only a few points per slide.
- Do research on your investors – what do they typically invest in and why? This will help you connect with your investors and decide what the angle for your pitch needs to be, as well as help you judge which investors are more likely to close.
- Ensure you know your product, market and customer base and are able to talk about it clearly and knowledgeably.
- Emphasise what sets you apart. Investors will see many pitches, perhaps even for concepts similar to yours, so clarify what makes you different and why you are the best people to be delivering this product.
- Start out broad – describe who you are and what your objective is. Then as you go on, add details and evidence to support yourself. Build up a case for how you can deliver on the objective you outlined at the beginning.
- Most investors will not invest based on one pitch, no matter how brilliant. Book many meetings but focus on those most likely to close.
- Include a Q&A portion to address investor’s queries and concerns. This is another opportunity to build your connection with investors and make yourself memorable, as well as demonstrate your understanding of your product and market.
- Try not to negotiate directly with investors, as they will most likely have much more experience than you in this area. Take investor requests away and seek advice and legal counsel.
- Don’t hesitate to ask investors to clarify their requests.
- Don’t take too long to close a deal. You do want to get the best deal possible, but your main goal is to get a deal. You need your investors signature and funding, as quickly as you can.
Funding Your Start-Up
Stages of Fundraising
Pre-Seed Funding
This is the stage where your business is just starting out, so most funds will either be your own money or given by family and friends. At this stage you will be pre-product but in the process of developing a viable product and will understand your market opportunity. This stage can occur very quickly, or can take a while, depending on your initial costs.
Seed Funding
The first official money your company will raise before being fully operational. It will support the first stages, such as product development or market research. This is where investors or loans generally come in. To attract investors at this stage you will need a compelling idea and an explanation for why you are the right people to deliver it. Some amount of customer adoption is necessary as well.
Series A
By this stage you will have a track record of success, an established customer base and a consistent revenue that will attract investors. The purpose of this series is to optimise your product and user base. While mostly this stage is provided by investors, it is not unusual to complete or boost this stage through crowdfunding, as you may still struggle to gain sufficient support from investors at such an early stage.
Series B
This is the stage at which you are taking your business to the next step, out of development. You will be building up your business development, advertising, and tech, amongst other things. You have demonstrated you are able to be successful and are prepared to succeed on a larger scale.
Series C
This series is for funding new products and scaling your company. By this point your business is established; you may wish to expand at a higher level or acquire new companies.
Funding Your Start-Up
Challenges
There are a variety of challenges start-ups face, but with the right planning many can be mitigated. Many founders, in the excitement of a new idea, rush into starting their business without sufficient planning or research into the practicalities of starting a company. They may not know what the market demand for their product actually is, as lack of demand is a huge reason start-ups fail. They also may not have a solid of objectives set for themselves, having failed to adequately plan for running a business long-term; often people don’t know enough about running a business so there are vital skill gaps.
It’s unlikely for a new entrepreneur to know much about running a business without a large amount of preparation beforehand. This can be remedied by calm, careful planning and gaining a thorough understanding of your market and the steps necessary to bring your product to customers. Create a proper budget; understand the costs that go into starting a business and assume there will be ones you haven’t foreseen.
A final issue start-ups run into is the amount of time it takes and the knock-on impacts on your health. Running a new business is extremely demanding. Developing time management skills and establishing firm work/life boundaries are important for new business owners. Outsource tasks where feasible and share the load with your fellow founders.
Disclaimer: The views of the author do not necessarily reflect the views of Halal Incorp. This article does not provide financial advice. When seeking financial advice always refer to professional financial advisors.