We’re entering a phase in our economy now where startups are an increasingly popular option. As the digital world opens up new opportunities for anyone to go into business, startups are launching at record rates. Getting startup funding is probably one of the most crucial elements to its success. Given that half of all UK startups fail within the first five years it’s not something that can be overlooked. But what are your options if you have an idea that you want to sow, germinate and grow?
This is an increasingly popular way to get investment to help boost cashflow and take a business to the next level. There are a number of different crowdfunding options out there and their offerings differ. You can choose a platform that gives your crowdfunders some kind of reward or incentive to invest (e.g. a personalised or exclusive product) or one where individuals buy equity in the business. Equity is essentially a share of the business. Normally, to use an equity model you will need to have a startup that is a company limited by shares (Ltd company). The more shares you give away, the more control you potentially hand over to the crowdfunding investors. However, the equity model of startup funding also has a benefit as the more successful your business is, the more the shares are worth, and so people may be more willing to invest. Crowdcube, Seedrs and Kickstarter are three of the most popular crowdfunding platforms.
Incubators are designed to help startups grow through a combination of startup funding and advice. They offer a more involved approach – you won’t just be getting the cash but guidance too. This works well for some startups but can feel like a hindrance to others, depending on what you’re looking to achieve. It’s worth bearing in mind that many incubators are created by established national or multinational businesses. Their aim is to make sure that they are in at the forefront of cutting edge products or tech. This could mean that the cash comes with conditions of sharing or ownership that some startups may not be comfortable with.
Business angels are the real world equivalent of the investors on Dragons Den. Effectively, they are individuals with money to spend that they want to invest into up and coming businesses. Angels may be able to offer contacts, experience and open doors to new opportunities. If you’re considering working with an Angel then it’s important to choose someone you have a good relationship with. Angel cash as startup funding is more personal than an investment from a relatively anonymous source and most Angel investors will choose startups that they are genuinely interested in.
Venture Capitalists (VCs)
If you have a business that looks like it might be able to offer a fast and large return on investment then VCs are a good option. VCs tend to put money into a business based on numbers and will take a share of equity to secure it. So, if your business plan shows that you will be able to generate profit relatively quickly (3-5 years max) your startup may appeal to VCs. This type of investor deals in larger numbers – few VCs will invest less than £500,000. It’s worth bearing in mind that VCs will want control so that they can protect their investment. So, they may put someone on your board of directors and will want regular updates. They may even require a say in high level business decisions, which they may be entitled to depending on what percentage of shares (equity) you have handed over in return for their cash.
Loans and debt
Especially in the early stages of a startup, loans and debt are the more traditional approach. Friends and family, your own savings and mortgages on properties are often the way that startups get off the ground. Personal loans and credit cards, as well as payday loans, are all part of the debt landscape that entrepreneurs have used to help generate cashflow for those crucial early years. Peer to peer lending is another option – this is essentially a way of matching individuals who want to lend with those who want to borrow. Peer to peer lending can be faster and cheaper than traditional banks. Some may set a minimum amount that can be borrowed, others don’t. Most peer to peer lending is accessed via a website and is easily searchable online.
Alex Hartley is a keen advocate of improving personal finance skills. She's worked at Solution Loans since 2014 and written hundreds of articles about how people can manage their money better. Her interest in personal finance goes way back to...Read more about Alex Hartley