Depending on the stage they have reached, some businesses require funding for growth. In order to gain traction, entrepreneurs should consider obtaining start-up capital from external sources at some point. Taking into consideration various factors such as stage or company size, there are several options that may help promising businesses obtain that.
Small Business Loans
When a company is still at the idea or concept stage, it is much more challenging to obtain funding in exchange for equity or the business will have to give away a substantial portion of the business. That is because at idea stage the company’s valuation is difficult to calculate, most of the valuation will be based on the team and the belief the investors have that the team will be able to execute. A small business loan is a better option at this stage, and there are plenty of financial institutions that tackle this market segment.
Incubators & Grants
Although the loan is the most common funding method at idea stage, there are other types of funding available for businesses looking to grow. Entrepreneurs should consider startup accelerators or business incubators that can help with initial funding to get things started, in addition to mentoring and connecting the entrepreneurs with potential investors. Some of them organise startup competitions where the best ideas are selected for funding.
European, UK, and Governmental funds or grants are also an option for aspiring entrepreneurs. These funds are allocated based on industry and company stage, and there are pre-determined amounts (usually a few million pounds) allocated for projects in different sectors that last from one to five years.
Funding after concept
If the business has passed the idea or concept stage, entrepreneurs can start looking at other types of funding that include trading equity for capital. However, they should take into consideration that as soon as an MVP is in place, entrepreneurs can start monetising their product. This may not bring the necessary revenue to scale the business up immediately but can be of great help in covering the initial investment, whether we are talking about bootstrapping or business loan payments.
This is one of the modern types of funding for early-stage companies. Since the minimum investment amount is usually small, starting from £1 on some well-known platforms. The investors on these platforms are usually regular people instead of HNWI. Crowdfunding not only generates capital but can be used as a user acquisition model as well.
To close a successful crowdfunding round, you must create a pitch deck that is as easy to understand as possible. Keep in mind that you want to reach a large audience. Products that tackle regular individuals’ day-to-day lives and widely accessible services are the most successful crowdfunded projects because of the above-mentioned capital providers.
Venture Capital Investment & Angel Investment
VC and Angels are similar in the way they operate but different in the way they are managed. Both provide capital in exchange for equity, provide mentorship and take part in board meetings to decide on important business aspects.
Venture Capital firms are managed by investment strategy experts and look for promising companies as a part of their job. They are looking for the next Unicorn (£1 billion-plus valued company) which will allow them to deliver the returns to all the investors in the fund.
Angel Investors also trade capital for equity but usually prefer to conduct due diligence on their own or in a syndicate for each company they invest in. Equity is negotiated between the founder and the investor, following the decision to allocate a certain amount of capital. Reaching angel investors can be hard, as some of them decide to remain anonymous and most of them receive hundreds of investment opportunities on a weekly basis. Investment platforms like Angels Den Funding solve this problem, as they have an existing investors database that are presented with pre-screened businesses.
Benefits of Angel Investment
If you have decided to trade equity for capital, you have three main options, each of them with its advantages and disadvantages.
Although crowdfunding looks attractive with the exposure it brings, it certainly does not work for every business. Crowdfunding focuses on small passive investors. Angel investing’s main advantages over this funding option are being featured in private HNWI networks where they will not only invest cash but will also bring industry connections and experience to the business.
Another important feature of Angel Investing is the personal touch it brings. While a VC firm only cares about the top-level returns, an angel investor who invests his own money in a team will become, in most cases, a mentor to the aspiring entrepreneurs. As he seeks the highest possible return on investment, it’s in his best interest to make sure the right decisions are taken. As you know, in order to maximise the potential of great revenue in the long run, there may be months in which profits will decrease in favor of research, development or scale-up efforts. As an individual investor and board member, an experienced businessman will know what to expect and even provide you with valuable advice for this process. A VC will put a lot of emphasis on the monthly or quarterly return it brings to his investors, so will most likely not always encourage you to make the best decisions for your business.
Angel investing can be one of the best ways to raise investment in the early stages of your business for the reasons stated above. Angel investors are not passive capital and the right Angel will drive the business on.