Main Types Of Funding For Startups And Their Differences – Challenge Advisory

By Jacob Williams

28th June 2018

Different Capital Raising Methods For Startups

 

When setting up your business, one of the biggest questions you will have to ask yourself is, ‘How am I going to fund this project?’. Getting funding is harder than ever, and it’s easy to see why. Just consider the facts: only 50% of small businesses formed since 2010 have lasted longer than 4 years, and just 3% make it to a fifth. Furthermore, lack of funding is attributed as the cause for more than 80% of the start-ups that fail.

 

a photo timeline of funding for startups

 

The simple fact is that it is much harder to get funding for your business than it’s ever been. However, this does not mean it is impossible. Be prepared to think outside of the box and consider all of your options. This guide will help you decide which route to funding is the best fit for your start-up.

 

Crowdfunding

 

Crowdfunding is one of the newest routes start-ups are beginning to take for securing funding. It works by posting your business and project onto a crowdfunding platform and receiving pledges from consumers who promise to donate to the company based on certain criteria being filled. As opposed to an ordinary business pitch, the CEO or founder will usually produce a video to accompany the platform post, detailing the goals and values of the company, plans for how they will make a profit, how much capital is required and what for.

 

Startup Financing Cicle

 

Crowdfunding can be a good idea as it can also generate interest which helps with the marketing of the product as well. Depending on your company, launches and goal-hitting can generate outside media attention as well. However, as with any route, there are risks. When it comes to failed projects, the average amount raised is 10.3%, and 97% of those failed never make it past 50%. For more advice on how to run a successful crowdfunding page, check out our guide here.

 

Angel

 

Angel investors offer a good route of funding, particularly if your company or product requires space, technology and a team that cannot be financed through smaller cost-saving methods. They typically invest between $10,000 and $2,000,000 and look for promising companies that they do not have ties to already. It is worth doing your research to find investors that share similar industry focusses to your own, and are able to provide the funds you need, however, there are a number of resources that can be consulted to help you, such as AngelList and Angel Capital Association.

 

Equity vs Debt method of raising capital

 

Venture

 

The venture capital route has its positives and negatives. What you get in significant capital you often have to give up in equity and control of your company. Generally, it is not a road worth going down until you are looking for more than $1,000,000. Additionally, it is not the most time-efficient, with around 6 months being required from initial search and close of the deal. Furthermore, VCs often look to recover their investment within a three-to-five-year window, which can be significant if you are trying to market a product that is taking longer than that to get to market.

 

However, once the necessity of more significant investment comes up, venture capital can allow you to grow significantly, and it can be difficult to find any other route able to offer this. Investors at this stage also have knowledge and experience that can be useful for any company looking to grow, allowing you to evaluate the business from a sustainability and scalability point of view.

 

 A Chart regarding performance based funding

Small Business Grants

 

The beauty of small business grants is that they require no repayment and no trade of equity. Although often described as ‘Free Money’, you still need to fully research and apply, ensuring that your grant application stresses the synergy of your company with the goals of the sponsor. Applying for government grants can be both tedious and onerous, but if successful they have the potential to significantly grow your start-up.

 

Incubators and Accelerators

 

Usually locally focussed, Accelerator and Incubator programs work to assist start-ups over a period of 4 – 8 months. Aside from their financial contributions, these programs also allow you and your company to make strong connections with others involved in the program, from investors to mentors. Although very similar by design, the main difference between an incubator and an accelerator is the pace of development within the program. Incubators tend to be more meticulous and nurturing towards a company, whereas Accelerators tend to be more focused around hitting particular goals as quickly as possible.

 

Forming a Partnership

 

An important statistic to remember when it comes to strategic partnerships is that 85% of companies say they are vital to their growth. Besides the shared knowledge and expertise you get from a partner, it also allows you to share your financial risk and combine your resources.

 

Stages of Capital Raising

 

If your partnership comes from a more established company, they may have their own strategic interests in helping you develop your product, and may offer financial aid to do so. This can often be a more cost- and control-effective route to funding.

 

Competitions

 

Competitions can offer a great opportunity for start-up funding, especially as the number of contests continues to grow as more organisers begin to understand their benefits. Usually, such competitions either require you to build a product or prepare a business plan. Should you choose to follow this route, your pitch deck and business plan are vital. Check out our guides on preparing these documents before you decide to enter here.

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Jacob Williams