Besides a winning idea and a crack poorly-paid team, your startup’ll need proper funding to get off the ground.
Of course, given the huge amount of fundraising options out there, it can be tricky knowing which one(s)to shoot for. So in the hope of making your choice a little bit easier, our article below spills the tea on 4 of the most common fundraising methods and whether or not they might be suitable for your business.
Fundraising option 1: Crowdfunding
You’ve probably heard of crowdfunding A MILLION times before. But what exactly does it mean? In its typical guise, crowdfunding involves posting the seed of a business idea onto a dedicated fundraising website. Should the idea sufficiently delight the viewing public, they can then pledge their cash towards that concept’s future development.
So…free money? Not exactly! To turn interested onlookers into fully-paid up investors, you’ll need to offer an inducement beyond the warm, fuzzy feeling of a good deed done. Commonly-used incentives range from provision of company shares (the Dragons’ Den route, sans having to face a grilling in front of the TV cameras) to delivery of the finished product once it’s ready for release.
The flexibility to choose the incentive that’s offered makes crowdfunding a popular choice for many startup business owners. Reluctant to dip into personal finances? Offering up company shares might be a way to bring in the financial muscle you need. Looking to test a prototype? So long as you take into account the extra delivery costs (and compensation fees if you’re going with Evri), sending the unfinished article out to supporters can be a great way to get feedback.
You’ve had the good; now here’s a brief paragraph on the bad. Without patent protection, any idea you post on a crowdfunding website is un-fair game for thieves. Admittedly, the practice of pocketing ideas from these sites is pretty uncommon – after all, value lies more with implementation than the concept itself. However, if you’ve got something particularly groundbreaking up your sleeve and are yet to properly protect it, you may be better off looking elsewhere for funding.
Fundraising option 2: Loans
Unless you’re reading this article for fun (not likely), you’re presumably starting up a business sometime soon. I’m therefore not gonna patronise you with a detailed description on how loans work. Let’s dig straight into a few pros and cons.
Pros
- You won’t need to give away any equity to get one. Retaining equity will entitle you to a greater proportion of the business’ returns. Whilst this is an advantage in and of itself, you will of course need to remunerate the bank in some other way (see ‘’Loans are expensive’’).
- Banks are reliable. Though some banks have proved Northern-Rock solid in the past, the vast majority of modern institutions are pretty damn watertight. Certainly, there’s no serious prospect of them rugpulling promised funds or stealing away your big business idea.
Cons
- Your finances will need to be in great shape. Both your personal credit score and your business calcs. (e.g. budgets, profits) will need to add up before the bank will part with any of its cash.
- Loans are expensive. On top of the loan itself, it’s nigh on certain you’ll be charged a bunch of supplementary fees. After all, banks have a vested interest to look after. *insert tumbleweed here*
Fundraising option 3: Venture Capitalists
Instead of looking for a loan or a large number of investors, you could seek fundraising from a venture capitalist (VC).
A VC is an independent investor who provides money to startups in return for a stake in their business. Though a VC’s vast wealth means they can be an excellent avenue for funding, they don’t hand out money to all and sundry. When they’re not enjoying champagne breakfasts, they’re out listening to business pitches – so you’ll need to ensure your idea stands out (in the right way) to have a chance of securing their investment.
Though dealing with just one investor might seem like a fairly simple proposition, expect them to take an active role in how your business is managed. This is a double-edged sword in many respects: whilst they may be able to provide useful advice and put you in touch with a bunch of new contacts, the wrong VC may become Very Controlling in relation to future business decisions.
Whether or not the VC proves meddlesome, they’re ultimately in it for profit. If your business grows, the amount of capital your VC is entitled to upon exit increases. We’re not, of course, suggesting you stifle your business to spite an as yet imaginary investor, just be aware that any returns are proportional, not fixed.
Fundraising option 4: Research and Development (R&D) tax credits
Whilst the British government is not necessarily synonymous with forward-thinking (hello, first-past-the-post voting system), their Research and Development tax credits initiative bucks the trend somewhat. This nifty scheme aims to encourage innovation by reducing the tax bills of those engaged in R&D by up to 230%!
Given the size of the discount, you might expect the eligibility criteria to be slighly finciky. However, the opposite is true! Provided that your research is innovative (e.g. seeks to create a new service/product or improve an existing one) AND based in a scientific/technical field, you’ll already have met the two main conditions for acceptance.
Though not strictly part of the eligility criteria, it’s also worth noting that the award of tax credits isn’t linked to successful implementation of your R&D. Meaning even if your research amounts to a “UK Eurovision entry” style flop, you’ll still be well and truly in the frame for a claim!
All sounds good, right? But where’s the catch?
Well, there really isn’t one – unless you count filling in a few forms as a significant problem! In any case, persevering with the paperwork is so, so worth it.
Questions about any of the 4 methods discussed?
There’s only so much we can cover in an 1000 word article! If you’d like some bespoke advice regarding which fundraising ideas might be best for your startup, please book in a FREE call with one of our team 🙂
