No matter how big your startup idea is, you can’t turn it into a profitable business without the necessary capital to get you going. In some cases, a few thousand pounds will make a difference, but most of the time, you’re looking to secure tens, if not hundreds of thousands in seed capital and more in future funding rounds.
For the past decade or so, startup founders customarily turned to venture capitalists and angel investors for that type of funding. Over the past two years, however, following the pandemic, rising inflation, and interest rates increasing to provide better (and lower risk) returns on cash deposits, investors have become more cautious. As a result, it’s become harder to secure much-needed funding. Although we’re starting to see some tentative good news on the cost of living, securing capital for growth remains challenging. In this blog, we’re investigating where else startups could secure funding to help founders make the transition from idea to company and from one-man-band to scaled company.
When Access to Funds Matters Most
We started this blog by saying that you can’t turn an idea into a business without funding. That is true, but it’s also a little too generic. In the lifecycle of any tech startup, there are moments when access to funding is exceptionally important. Although every business is different, startups tend to go through a few standard stages of development.
I like to think of those as not all that different from the developmental milestones we expect kids to meet as they grow up. Having an idea generally costs nothing. Making some notes to sketch it out, running it past friends and family, and even putting together a couple of PowerPoint slides can be done without any funds.
1. Getting Your Idea Off the Ground
The first time most founders need serious capital is the moment they know that the idea may actually have legs. Perhaps you need to hire one or two people to put your idea into code. Amazon is a good example of that. If the recent movie about the early days of the company is to be believed, Jeff Bezos hired two programmers to build a platform like none before it.
Creating an initial version of a software, a prototype of a product, or a minimum viable product to sell to customers all require significant capital investment. In most cases, this is the first time you need premises (even if we’re talking about a garage), a team, and equipment.
2. Scaling for Growth
Let’s assume you took the first hurdle, and your startup is gaining traction. To build a truly profitable company, most businesses need to scale. Often, that means expanding your team, moving into larger premises, purchasing more equipment, improving supply chains, and investing in marketing and sales. Again, every business is different, but these are some of the basics.
For many businesses, this second step requires far more significant funds than the first step. At the same time, the company may still be in its early years, making it particularly vulnerable to failure. So it’s easy to see why investors may be hesitant.
3. Navigating Difficulties
No startup journey is entirely smooth, and successful founders will tell you that there were moments when they either doubted that they could make it or simply kept their fingers crossed.
What tends to help in these challenging moments is easy access to cash, whether you need to cover a temporary shortfall or simply deal with a cash flow issue. Without that access to funds, a temporary problem can quickly sink an otherwise perfectly viable idea. Just another reason to watch your cash flow closely.
Sourcing Alternative Funding
With venture capital harder to come by but still as important as ever, founders need to look for alternative funding sources. At first sight, this may seem like a hurdle that’s impossible to overcome. But once you start looking, you may find that funding is available from sources you may not have thought of yet. Here are a few examples:
- Bank loans
- Government and other grants
- The bank of mum and dad
- Crowdfunding
Accessing Bank Loans
Bank loans may seem almost too obvious as a funding source. At first sight, you may even be sure that you wouldn’t qualify. After all, who would lend to a new, as-yet-unproven business? You’d be surprised by how many lenders are happy to work with you.
If you’re considering a traditional loan, look for lenders offering products designed especially for new businesses. To qualify, you may need to present a business plan and projections of how you expect your business to develop.
Traditional loans that are not specific to startups may be hard to secure for new businesses unless you have some kind of business track record. As a company director, you may help secure a loan with a personal guarantee although choosing that option puts your personal assets on the line if the business fails. For many startup founders, this is part of the process, and they’re happy to accept the risk. Whether you decide this is an option for you or not, it’s important to be absolutely clear about the potential consequences.
Researching Government Grants and Loans
Government grants give you access to funding without the need for repayment. Sounds too good to be true? You might be surprised by how many government grants are accessible to you. Be warned, though, that applying for these can be complex, you’ll likely face stiff competition, and availability can vary by region. Scotland for instance has different grant programmes than English regions.
With that said, I would still recommend at least researching potentially suitable grants. After all, why would you not take advantage of this kind of support? Grants can be tied to certain industry sectors or locations. Depending on the level of support you may be able to access, these grants may be reason enough to establish your business in a specific location.
If grants are inaccessible to you, the UK government also runs its own startup loan scheme for companies that are less than three years old. These are loans that you can access without collateral, but they come with strict terms of repayment and fixed interest rates.
The Bank of Mum and Dad
Have you considered asking friends or family members for help? You might be surprised by how much money you may be able to raise simply by asking family members to back your startup. What have you got to offer them? Founders’ shares for a start. Once your idea takes off and the business grows, your family investors will not only get their money back, but they may also benefit from dividends once the business is profitable.
Having said that, there are a few common pitfalls you need to avoid. It is often too easy to simply shake hands on an agreement with friends or family. Signing a contract seems somehow too formal, but I strongly recommend you put your agreement in writing so that everyone is clear on the terms.
A contract doesn’t need to be lengthy or complicated. It’s simply a case of clarifying the expectations of both sides. For example, are you receiving a payment for shares, or a loan? If a loan when are you expected to pay it back? Can you pay it back in instalments, or do you need to come up with a lump sum? What happens if your payments are late?
Having answers to these questions before money changes hands is essential to avoid problems later.
Crowdfunding
Crowdfunding takes the idea of sourcing funds from friends and family one step further. Rather than asking your inner circle to help you, you’re asking the general public.
The goal is to persuade small investors to back you, usually in exchange for shares in the company. Why does it work? Crowdfunding works because it allows interested parties to support you with smaller amounts of money. Rather than convincing one or two large investors to back you, you’re asking a thousand or two thousand to support your idea.
Crowdfunding can also be based on rewards, such as receiving a copy of the product you helped finance. Debt-based crowdfunding effectively means getting a loan from the public, managed through a crowdfunding platform. Rather than dealing with a more traditional lender, founders make their monthly payments to the platform.
Which Funding Option is Right for Your Business?
As is often the case, there is no one-size-fits-all answer. Venture capital remains the most common source of startup funding, but that doesn’t automatically make it the best choice for you. Considering options like grants or loans and speaking to friends and family members may open up doors you never thought existed. Crowdfunding is another option to help your business get off the ground.
In summary, even though investors are being more cautious, startup founders have plenty of options to access funding. If you would like to know more about the options available to you and your business, don’t hesitate to reach out. We’re happy to help you identify and pursue the best funding options to help turn your idea into a profitable business.