What is the best way to secure funding for a start-up?Posted on: January 19, 2023
The main preoccupation for most entrepreneurs and intrapreneurs is securing the requisite funding to launch a new business or venture – both at early-stage and throughout the lifecycle. It’s an expensive gambit: developing high-quality product or service offerings, bringing the right people on board to support the start-up project or business idea, launching to market, and all the other associated costs quickly rack up. Depending on the sector or market a business is operating in, these figures can easily run into the millions.
In fact, it’s one of the primary reasons why an anticipated two in three start-ups fail. In 2021, 38% failed as they ran out of money or failed to raise new capital. Both cash flow and time need to be allocated sustainably and judiciously by business leaders in order to give a start-up the best chance of succeeding.
How can a start-up be made more appealing to investors?
Getting investors and venture capitalists behind a start-up provides much-needed working capital to cover set-up and operational costs, as well as maintaining quality products and services and offering smoother routes to market.
Often, there are distinct and easily identifiable differences between start-ups that manage to secure sources of funding and those that don’t. Unlike most other stakeholders, investors are generally interested in a single key aspect of a potential venture: what is the likelihood I will receive a positive return on my money? Putting emotion to one side, investors analyse business opportunities on their financial success, risk profile and scaling opportunities.
To make a venture more attractive to lenders, venture capitalists and angel investors, there are a number of aspects that business owners and leaders can focus on:
- Possess a clear USP. How does this venture stand out from others? What pain point does it address or benefit does it offer? Why should investors choose this idea over competitors? Ensure there is a compelling case for the new business or business idea – including how it is unique or different enough to make a considerable return – and that it presents an attractive, lucrative choice for potential funders.
- Get existing finances in order. Are there strong numbers with high-growth potential – for example, proof of sales, an existing, engaged customer base, or confirmed orders with suppliers or providers – to back up the venture? Potential investors will want to see hard numbers and data to support a venture’s viability – subjective metrics or projections based on instinct or emotion are unlikely to factor into decision-making. Strong numbers are hard to argue with and provide leverage; professional financial auditing isn’t necessarily required but can provide extra validation and security when approaching others for funding.
- Ensure that the business model and business goals are clear and documented. Is there a detailed, solid business plan that outlines aims, operations, scaling and growth opportunities and overall business trajectory? Investors will want to understand how much money is required, what it will be spent on and why, what return on investment (ROI) is expected and when this will happen. Ensure that the next six months, year, three years or even five years are well articulated to investors. This may include details such as cost analysis, competitor analysis, marketing ambitions, sales channels and market forecasting.
What types of funding are available?
Where an individual business is in its life cycle – as well as the amount of financial support required to support business needs, whether the need is short-term or long-term, the type of business, which industry the start-up is operating in, and in which location – can help to define which funding options are most suitable to pursue and more likely to be successful. For example, early developmental stage funding is different than funding a more mature, established venture.
Common start-up funding options include:
- Start-up loans and business loans. UK businesses can apply for specific start-up loans from the UK government for amounts between £500 and £25,000. They take the form of unsecured personal loans with an application process that includes an eligibility check, and come with support, guidance and up to 12 months of free mentoring.
- Seed Enterprise Investment Scheme (SEIS). A SEIS offers tax-efficient benefits to investors in return for investment in small and early-start start-up businesses in the UK.
- Crowdfunding. As the name suggests, crowdfunding involves a crowd of individuals contributing amounts of money in order to meet the funding needs of a business. There are various online platforms available for equity crowdfunding, depending on the business needs – for example, Kickstarter, Indiegogo, GoFundMe, Funding Circle and Crowdcube.
- Business loans. Bank loans are a form of business finance commonly used by small businesses and small-medium businesses (SMEs) in need of funding to expand a business, or for specific purchases such as new equipment. Depending on the lender, this can go up to £1 million or, in some cases, higher. Business credit cards may be an option for entrepreneurs who require extra cash flow, rather than a one-off, larger lump sum.
Other sources of business funding include:
- personal savings and financial bootstrapping
- family and friend funding
- small business grants
- angel investment
- venture capital and private equity
- debt financing
- revenue-based financing
- supplier networks.
Business owners and entrepreneurs should do their due diligence and research on the intricacies of funding their start-up ventures. As well as different types of investment, awareness of negotiation, money management, valuation and scale-up costs is invaluable.
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