Explore a variety of different funding options available to startups below, down by the corresponding stage in the funding journey and also by type of capital available to your business.
There are a plethora of funding options available to startup companies. Bootstrapping is of course an option too, but in a lot of cases because of a need to scale quickly or to fund a significant capital investment, bootstrapping isn’t always an option.
Before diving into the various types of funding available, a quick note of caution. By raising capital, you sacrifice control. It’s of course better to own 20% of something significant than 100% of a company that never does anything, but in the latter scaling stages of a company the cap table and various levels of equity will have a considerable say over how the company is run.
Tread carefully and identify early on if this is a lifestyle business or if you’re aiming to transform a particular industry in 5 years and crush everything in its path. Both options are fine but will require very different levels of funding and early stage investment.
We’ve set out a variety of different funding options available to start ups below, broken down by the corresponding stage in the funding journey and also by type of funding.
Explore based on types of funding:
Equity Finance / VC funding
Each of the stages listed above are commonly funded through equity financing. This type of capital is commonly raised through the sale of shares to institutional investors (VCs) or angels; giving away equity in exchange for cash to enable growth. Equity financing is extremely common for startups due to the large number of angel syndicates and VC firms looking to invest in high potential businesses, but is far from the only option available to an ambitious startup.
Crowdfunding
Crowdfunding refers to generating capital from brand advocates or early adopters in place of giving away equity, usually via a third party platform. In simple terms, asking a large number of people for a small amount of money each.
Crowdfunding can provide a solid base for both B2C and B2B startups. Not only can you reach a significant number of potential investors (who could double up as users and better yet, advocates) who have used your platform of choice in the past, but it can serve as a nice piece of PR to build up your link profile with local and national business press.
Think about what is going to pique a journalists interest more: “Sheffield start up launches hypoallergenic mattress company” or “Sheffield company launches £2 million crowdfunding campaign to create their first 10,000 hypoallergenic mattresses”.
In the UK the 2 leading platforms are Seedrs and Crowdcube. Both have similar fee structures (they take a % of the amount raised) and there is even a merger between the two on the horizon.
Accelerators/Incubators
Accelerators and incubators operate in a similar manner, and both are geared to take cohorts of startups through their sometimes awkward growth stage. The key difference is that accelerators often have a set end date, and you can read more about their key differences.
Alongside being a place to network with fellow founding teams and receive mentorship advice across a variety of business functions, there are also funding incentives (in exchange for equity).
In the last decade, there has been an explosion in new accelerator programmes on offer. F6S has a directory which at time of writing has almost 1,200 open for applications globally.
Word of advice, these programs don’t suit every personality type and experience level. Very experienced, introvert founding teams operating in a highly technical space may not find these the best places for their business to grow as there can sometimes be a lot of mandatory sessions to attend and hoops to jump through. Of course, every program and team is different so do your research before jumping in with an application (no matter how juicy the funding on offer seems!).
Government Funding
Depending on your sector there are a plethora of available start up grants and loans from the UK government. (Full disclosure: other governments are available). For a simple loan up to £25k, this is a good place to start your research.
Innovation grants and R&D funding are also worth a look. Rather than go through all the available options and sector specific considerations here, we would advise start ups go to Grant Tree for further reading as the guidelines and criteria can be quite complex.
Before you decide if government funding is a good fit for your business, it is highly advisable to read up and see if your start up is eligible for the Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS) . Both are forms of venture capital investment schemes that provide potential investors with significant tax breaks if they do decide to invest in your start up. So indirectly this is a great way to ensure extra private funding at an early stage.
Debt funding
If you want to keep your CAP table Marie Kondo-esque and sparking joy, then debt funding may be the way to go. Rather than giving up equity in these early stages, there are several debt funding options available. Bear in mind most high street banks are not interested in significant business loans for start ups, these provide some alternatives. The best known company in this space is Funding Circle and Silicon Valley Bank is also worth a mention here.
Of course there are also traditional invoice factoring too (where you receive x% of your outstanding invoices in as little as 24 hours). Word of warning here: with great speed of financing comes unfavourable interest rates and higher fees. If time isn’t a pressing factor we would recommend pursuing invoice factoring as a last resort.
Function Funding
Function funding is a mechanism for a startup to acquire growth capital without taking on traditional debt or awarding equity, when borrowing for a specific purpose.
There are a new breed of companies jostling for position in this space like (get in touch for an intro) offering new and unique options beyond the traditional debt funding models mentioned above.
These loans are typically calculated based on your MRR or ARR and start ups are encouraged to use this capital to accelerate their marketing efforts or acquire additional inventory.
In the case of ClearBanc, a secialist eCommerce growth lender, part of the repayment plan is a % of your daily revenue until the amount is repaid (instead of flat fees), so they have a vested interest in the ongoing success of the business. If your in ecommerce, just make sure not to do this immediately before your big Black Friday promo 😊.
The aim for all of these function funding options is to build a longer term partnership (so a start up can approach again and again, when cash flows are looking a little scarce), helping you get quick and easy access to capital without having to sacrifice any equity or jump through the due diligence paperwork that is required with traditional VC backed deals.
Explore based on funding round:
Pre-Seed
Pre-seed generally only really applies when there are no institutional investors (or at a very low amount), suggesting the funding comes from friends, supporters, family and potentially individual Angels too.
An angel investor is typically a high-net worth individual, who provides financial backing via a private investment into small startups or founders. It is fairly common for angel investors to be found amongst a founders family and friends or wider network. It is becoming increasingly common, however, for Angels to operate in groups or syndicates to increase their investment level accordingly.
Angel investment is a form of equity financing–the investor supplies funding in exchange for taking an equity in the startup, usually as an alternative to traditional investments.
Sometimes a pre-seed round is often referred to as a ‘friends and family’ round.
Here startups are in the earliest stages of their journey. A startup may have a minimum viable product and a clear understanding of their market, but likely won’t have demonstrated product-market fit or have began marketing the product in earnest.
Depending on the nature of the company’s business model and associated setup costs, the size of this round can vary dramatically and funding is often provided via a convertible note or preferred stock.
Seed Round
The purpose of a seed round is to supply a startup with the capital they need to an early stage business progress towards being a profitable business model. This funding is typically used for things such as recruiting integral team members, market testing ideas or developing MVPs further.
This round usually represents the first official (or institutional money) a startup raises. Some companies never extend beyond seed funding if the raise is sufficient to generate enough revenue and reach profitability to fund growth themselves.
Round sizes range between $10k–$2M*, though larger seed rounds are becoming increasingly common. This round generally comes after an angel round (if applicable) and before a company’s Series A.
Series A
Typically this is where a start up first gets a taste of venture capital financing. There is significant traction but a serious injection of cash is required to accelerate their growth and ensure a start up can establish themselves in the market before competitors.
Venture Capital firms come in all shapes and sizes and many of them specialise in early stage ventures.
Series B and beyond…
At this point the business is well and truly out of “start up” phase and there will be more VC firms (and private equity firms) interested in investing.
Here the VC firms are usually considered to be “late stage” investors and will have previous experience in bringing a company from series B (and beyond) to public listing.
IPO (Initial Public Offering)
Very few start ups reach this stage, but those who do tend to be almost household names (if they are in the B2C space).
At this point, investment is no longer limited to private individuals and companies, but the general public can get involved too. This is where early stage investors start to realise some or even all of the value of their initial investment and the company has officially graduated to more of a corporate entity.
Make something happen
If you’d like to discuss funding options for your startup, we’d be happy to help you navigate the options available to you. Feel free to get in touch.