How To Fund Your Startup

It's amazing how many times we meet a team of founders, or an aspiring entrepreneur, and their first question is 'how do I fund my startup?'.

While there are lots of other questions I'd advise any entrepreneur to think about first (what problem are you solving, what market are you looking to reach, who are your main competitors, why you and your team, etc) funding obviously does play a big part when starting out. So here's a round up of the main ways to fund your start-up.

Start Up Loans

Start up loans are available to people in the UK who are over 18 and pass the required credit check. It's a personal loan, given to be used specifically for a business purpose. Available from 25 delivery partners (the Start Up Loans Company is a UK-wide, government backed scheme) loans can be made of up to £25,000 per founder. The maximum that can be lent to any one business is £100,000.

Assessments are made on the needs of the business and some providers, such as Transmit Start Ups also offer support with your business plans, financial projections, and free mentoring after the loan is approved.

Start Up Loans can work well for pre-starts and businesses that are already established (up to 2 years old), or where you need to purchase an asset that will generate an income immediately - repayment holidays are only offered if you can demonstrate the need for it. It's also important to understand that the loan is made to you personally: even if your business idea doesn't take off, you'll still be expected to make the monthly repayments.

Rich Myers, Commercial Director at Transmit Group adds: "We have been running the Start Up Loans programme across the UK, for 5 years now. We have approved £25m worth of loans to over 2500 entrepreneurs and the demand continues to grow. 

"Our lending terms are very favourable to early stage businesses but it is the free business planning support and 12 month's worth of free mentoring that gives this scheme it's real value. We have supported all manner of businesses - from coffee shops and restaurants, plumbers and construction firms, to software companies and e-commerce retailers - there are very few business types we can't support!"

Crowd Funding - Rewards-based

The easiest to understand form of crowd-funding... You have a product you want to build and sell, or a project you want to launch, but you need cash up front. You list your idea or design on a crowdfunding platform such as Indiegogo and offer 'rewards' to people who donate. Rewards typically range from early release or limited edition versions of the product to VIP invites to launch parties. Your 'backers' get early access to new products and the feel-goods of supporting innovation. They don't get any long-term involvement with your company. 

Product-based crowdfunding works really well for gadgets, creative projects and other tangible items - something that people can imagine themselves buying. It can also help test the demand and marketplace for your ideas - if no one backs your product maybe you need to think again about what problem you're trying to solve.

Crowd Funding - Equity-based

Similar to rewards-based crowdfunding, equity-based crowdfunding involves listing your company or idea and offering shares in return for backers' investment. 

While you'll still have to do the same legwork (preparing business plans, pitch decks, and so on) as you'd have to do if you were seeking venture capital investment, the benefit of crowd funding is that you can raise the same amount from a much larger number of people. 

Take it from someone who knows - Sophie Slater is Co-Founder of ethical fashion startup Birdsong. Last year Birdsong successfully closed an over-subscribed funding round on Crowdcube. She says: "As two young women in our early twenties, we were intimidated by leaping straight into a conventional funding round and didn't know where to start. Crowdfunding was a really nice way to get support, use the campaign as a marketing strategy and allow all our early adopters, friends and fans to invest from just £10. It feels really nice that our models and photographers could afford shares. To boot, 90% of women founders succeed on Crowdcube, which felt like great odds to us."

Equity-based crowdfunding can be a great way to garner support as well as capital from a wide network of angel investors. You'll need to consider what stake in your company you're willing to part with before starting, and it can also help to have a 'cornerstone' investor lined up ahead of your campaign going live. This is someone (an Angel or VC firm) that is willing to put in a fairly substantial amount via the platform, which encourages other investors and helps build the momentum that the platforms like to see.

Venture Capital

Demand for venture capital investment has grown significantly over the last few years, with companies like Uber and AirBnB making headlines for the vast sums of money they attract. VCs have traditionally preferred technology companies, or technology-enabled companies, as it's easier to imagine these companies scaling globally (and thus offering an attractive return). As with equity-based crowdfunding you'll part with shares in your business in return for capital. 

VC Rick Charnley, from Northstar Ventures, offers this advice: "Venture Capital investment isn’t right for every start-up; for instance if you’re offering a service, then you can sell this from day one, whereas if you're building a product you might need investment to hire the engineers, design the UX etc. Until you launch your product you won't be able to generate any revenue to cover costs. This funding gap is usually where venture capital is applicable. 

"There are lots of factors that are considered before an investment is offered, including the type of business, the founder, ambition, scalability of product, defensibility, market opportunity and timing. There are also softer factors that really do need to be considered. For instance, how ready/willing are you to work with an investor? What do you want to get out of the business, and does it match the investor's aims? Could you finance it by changing your business model (e.g. offer consultancy at the start to generate revenue)?

"I’m obviously a big advocate for VC investment, but I’m a bigger believer that it has to be right for your business and ours, before recommending any investment."

Grants

A once-popular way to cover the costs of starting a business, grants are becoming harder and harder to find. Occasionally councils or other public sector bodies do have small grants that can help with relocating to a specific area, opening an office, or perhaps small equipment purchase, but they often aren't advertised so you need to be prepared to do your research. The Business & Skills team at your local council (most councils have a department called something similar) is a good place to start.

Grants like these really are the holy grail of funding options though, and certainly shouldn't be considered a right when you're starting out. It's much better to work out a way to sustainably fund your business, right from the start.

Bootstapping

Made popular once more by Eric Ries' The Lean Startup, bootstrapping refers to the practice of 'doing everything you can for as little money as you can' while you get your business up and running. Bootstrapping your startup might involve working another job to pay the bills while you build your platform, or being flexible with your business model until you are generating a regular income. You can even bootstrap while taking part in an accelerator or incubator (as it'll make any pre-seed investment go further).

Bootstrapping your business might mean the early stages take a little longer to work through, which can be frustrating when you're excited about your business idea. But it also means you have to focus more keenly on the core elements of your startup, that you have the time to adjust your product based on testing or feedback, and that you're able to prove the concept of your business before taking on any debt or giving away equity. All of which should make your company's foundations stronger in the long run.

If you're looking to grow your business but don't know where to start, our business support specialists can help. Offering impartial advice, free hotdesking in our office (and a fully stocked drinks fridge!) and a number of fully-funded (i.e. free to you) services including marketing & PR support, we can help you get on the right track.