The biggest challenge for those who believe they have a winning business idea is finding enough financial resources to turn it into reality. It will not surprise you to learn that the easiest and most straightforward way to finance a startup is to use personal savings. Don’t worry: if you do not have the necessary funds to start your new business, you can always use one of the many methods that exist today to finance the birth and growth of a startup.
Financing a startup: the methods
We’ll say it again: nowadays those who, like you, want to know how to finance a startup find several answers. Each solution has its own pros and cons that might push you to choose it or convince you to discard it. To proceed to the best decision for your specific purposes you need, therefore, to analyze the methods one by one.
Bootstrapping
As mentioned a few lines above, having your personal income or savings at your disposal to be able to finance your startup avoids many possible drawbacks. The method of self-funding, known by the English term Bootstrapping, uses precisely the personal resources and money obtained from early sales to give the startup a chance to grow in its first months of life.
This is a method that is especially useful for new businesses characterized by not particularly high start-up costs, such as web-based businesses where staff work remotely. It should be emphasized, however, that inevitably this method has a major limitation: to self-finance you must have enough money to do it without risk and stress.
The main positive aspect of Bootstrapping, if you have the opportunity to self-finance, is that you do not need to convince anyone of the merits of your idea. If you self-fund, therefore, you can focus all your attention on your potential customers and on developing your product or service in line with their needs. In addition, without outside investors, you also have the opportunity to maintain, at least initially, absolute control over your project; this, combined with the fact that you have invested your own money, also contributes to greater accountability and better decision-making, “forcing” you to minimize costs and eliminate unnecessary expenses.
3F – Family, friends and fools
If self-financing alone is not enough to turn your business idea into a startup, you need to find investors. A first option is to try the route of the so-called 3F method: Family, Friends and Fools. For the first two categories of funders, you don’t need too many introductions: your family and friends are, of course, the easiest people to convince to support your business project. The “fools,” on the other hand, are people who fall in love with the idea behind your startup (for reasons outside rational and objective criteria) and are willing to invest their money so that you can turn your project into reality.
Also with this method of financing, as with the earlier Bootstrapping, you have the advantage of retaining control of the ownership of your startup. In addition, you do not need to present any particular collateral, as you would have to do in the event that you were to apply for a bank loan. That said, at any rate, given also the personal relationships involved with the 3F method, you should be clear from the outset with your lenders about the risks involved in their investment.
Incubators
Another solution answers to the name of “incubators“. In this regard, it is necessary to make a clarification right away: by this word we refer to companies that support entrepreneurs in the development phase of the business model so that it becomes replicable and scalable; therefore, it is not strictly correct to say that incubators finance startups, although, with their activity, they represent a fundamental springboard to access investment. In fact, in addition to validating the business model by gathering valuable data to obtain the necessary funding to support the startup, incubators also provide their network of contacts.
Accelerators
In contrast to incubators, accelerators directly fund the startup and participate in the capital with a stake that generally ranges from 5 percent to 15 percent. Not only that, accelerators also offer crucial support in various areas, from legal to marketing.
Acceleration programs generally have a short duration, which is normally between 3 and 6 months, and are aimed at speeding up the growth and maturation of a startup. They are, therefore, particularly useful in the “seed” phase of a startup, that is, at that point in the life cycle when the main objective is to ensure that the initial business idea has a sufficiently solid structure to make its entry into the target market.
If you are thinking of enlisting the help of this particular figure of financiers, it is advisable that, first, you take some time to analyze the track record of other startups that have previously joined the accelerator program to which you plan to apply.
Crowdfunding
You may have noticed that, in recent years, a particular mode of financing has become increasingly popular: crowdfunding. In addition to the aforementioned “seed” stage, this method of collective funding, in which a group of people invest their own money to support an entrepreneurial project, can also sometimes prove useful in the “growth” stage of a startup, that is, the one characterized by more sustained growth. Not only that, if you decide to resort to crowdfunding you also have the advantage of being able to get your products and services known more easily and quickly.
Of course, this method also has its downsides: the main one is related to the costs you have to incur to start a crowdfunding campaign. You then have to keep in mind that those who agree to fund your startup will have to pay you a fee, which, in the case of equity crowdfunding, is a share in the company and, in the case of so-called Reward crowdfunding, translates instead into a product or service.
Business Angel
Your startup could also be financed by a so-called Business Angel: this term refers to a particularly wealthy entrepreneur who, out of pure philanthropism, give back, or self-interest, decides to make part of his or her capital available to startups for the purpose of developing their growth. In addition to money, the business angel generally also offers his managerial skills and network of knowledge.
Normally, with this method it is possible to receive the money quickly but the investment of a Business Angel tends to be limited (roughly from a few thousand euros up to 100 thousand euros).
Banks
Speaking of financing, your mind will probably have immediately gone to banks: you should know, however, that for an innovative startup, although the state facilitates access to credit by providing guarantees on bank loans, it is not so easy to obtain bank financing, since these financial institutions are risk averse. Interest rates, moreover, are higher when there is high risk for the lender. At the bank, however, you can get a personal loan, which is equally useful in the initial stage of your entrepreneurial venture. In this case you have the advantage, since you do not have to give up shares to investors, that you can keep control of the startup and do not have to share profits with anyone.
Venture Capital
If your startup has passed the seed stage, you may be able to obtain funding from a Venture Capitalist: these are financial companies that specialize precisely in the field of investment and are willing to put up very large sums of money, as well as their knowledge and networks, often even internationally. Be very careful, however, because when faced with the possibility of getting a very large investment, you risk quickly losing control of your company. Therefore, you may need to read the terms of the agreement very carefully before signing it.
Awards and competitions
To fund your startup you can also participate in so-called competitions, which are contests, usually organized by investment funds, foundations, banks, or multinational corporations, in which startuppers pitch their idea. Winning the competition (and in some cases even just ranking) can secure you the chance to be able to go through training with a team of experts and/or get money (often this is a grant credit). This possibility also has additional benefits: these are opportunities where you can network and create a solid and useful network of contacts, ensuring you get great exposure.
Calls
Government entities (such as individual states or the European Union) as well as companies and foundations can also publish calls dedicated to startups and aimed at providing financial support for new business projects. By applying and meeting the requirements set within the calls themselves, you can access low-interest financing or grants. The benefits are the same as for competitions, but remember to read the terms of the calls carefully to best assess the cost/benefit ratio.
Work 4 equity
Have you ever heard of Work 4 equity? In order to take off in the market, your startup needs qualified professional services, which are often very expensive for those who are just starting out. If you do not have the necessary liquidity, you can resort to this modality in which you can remunerate consultants and external collaborators for their services in a tax-advantaged way through shares, units or participatory financial instruments.
This solution provides you with the obvious advantage of being able to incur lower costs in economic and financial terms for the acquisition of qualified professional services and, in addition, makes it possible to create a more cohesive and motivated team, since the professionals partially share the business risk. Work 4 equity legislation is, to date, not easy to understand, and therefore, the advice for you is to consider well whether and how this solution may be right for you, even with the help of a team of experts.
When to find funding for your startup
It is now time to delve into something only mentioned so far: when should you find funding for your startup? Timing is crucial because the stage your startup is in also depends on what kind of solution you can adopt (although funding, of course, is always welcome).
The risk of seeking funders when you are not yet ready to do so is to burn your reputation with your possible investors. To make a perfect funding plan you must be, first of all, clear about what the life cycle of a startup is.
The most important steps are 6:
- the initial phase (which is called “bootstrap” or “pre-seed“), in which the startup is just a project idea in its embryonic stage, still to be validated (problem-solution fit);
- the “seed” stage, in which the business idea begins to take on a structure that allows it to enter the market (market validation, MVP and Business model);
- the “early stage“, in which the first feedback from the market begins to be obtained (product-market fit, talent recruitment, customer acquisition);
- the “early growth” stage, during which the startup transforms into a real company (business-model fit);
- the “sustained growth” phase, during which users and customers grow exponentially and revenue increases very fast (scaleup);
- the “exit” phase, in which the startup has now reached full maturity and operation and is now able to self-finance itself from revenues. It now prepares for consolidated expansion.
In the first stage you can rely on such as exclusively on the famous 3Fs (Family, friends and fools). Generally, in fact, the first funding outside your circle of friends and family comes in the second phase (business angels, crowdfunding, incubators, accelerators). Venture capitalists and banks come into the picture only in the third stage, that is, when the startup project has now been validated.
Starting in the fourth phase, Series A financing rounds (larger financing rounds that are used to enter new markets, develop new distribution channels, and/or make marketing initiatives more robust and structured) and Series B financing rounds (even larger and characterized by lower risk of failure, whose purpose is to gain new market share) make their debut.
Series C funding rounds, which are low-risk and aimed at business consolidation, can be accessed in the last phase of a startup’s life cycle. If you’ve made it this far, you can say it loud and clear: you’ve made it!
Conclusions
You now have a clearer idea of who can fund a startup and when. It is useful, however, to reiterate once again that you should not be in a hurry to find capital for your project, because you risk thwarting your efforts and jeopardizing your chances of getting funding in the future as well. Keep in mind the advice of Pandora founder Tim Westergren:
“Be prepared for a long journey with often uncertain features. Good results are not easily obtained”.
In general, you can start looking for funding when the cash that is already available to you allows you to negotiate with possible investors and does not force you to accept disadvantageous terms. There is another key aspect: you need to present your business idea to possible lenders when you believe it can get the valuation that you think is most fair. Pay attention to this factor because it is a double-edged sword: in fact, startuppers often tend to overvalue their project. Do not make this mistake.
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