By Ian Naylor
If I were one of those cheery life-coach types, I’d remind you that one cannot spell “funding” without including the word “fun,” but I’m a realist, and that’s not going to happen.
Securing funding for your startup is actually not a fun thing to do at all. It’s not that it’s so terrible, it’s just that it’s not fun searching for capital to keep your business going. At some point, though, there will probably be a day when your revenue isn’t covering your expenses and you will need to find ways to obtain capital.
Finding the right source of funding can be a full-time job, but when you find the right opportunity, it will be well worth your effort. So what does the right opportunity look like? Here are three options.
1. Local and regional business grants
It costs less to start a tech business than ever before. Costly infrastructure build-outs have been replaced by cloud computing services at low monthly fees. The old Silicon Valley legends of startups working out of garages is no longer some kind of symbolic badge tech entrepreneurs wear—it’s just good business sense. Why throw away money on leasing office space and buying IT gear that loses its value faster than a car?
In the early stages, then, you might actually be abl e to fund everything yourself, working your startup like a side hustle until you’ve got a finished product or service to sell.
But something strange happens when you start to succeed: You’ll need to start operating more formally, and bring on some new employees, so that customers aren’t dealing with a company that’s basically a couple of people in a garage. While there’s never a bad time for free money, the “We’re-Just-on-the-Verge-of-Making-It” stage is ideal.
Back in 2013, my company was starting to really hit its stride. Our customer base was growing at a pace that soon we would not be able to support without some new hires. We looked at a lot of different ways to raise the money we needed—one of those was to apply for a grant through our city council in Nottingham.
By early 2014, we were awarded £150,000 through the council’s Technology Grant Fund (also known as N’Tech). It was exactly what we needed, when we needed it. We increased our headcount from 4 to 16 people, which helped us to support our growing customer base. It also gave us plenty of breathing room as we sought out private investors to help us through our next phase of growth.
That grant was a real game-changer for us, but I also should point out that calling it “free money” is a bit reductive. Writing up grant proposals isn’t easy, or quick. And there are, of course, certain stipulations to how money can be spent.
This isn’t a bad thing, though, since your grant proposal should spell out exactly how you’d use it. These stipulations make sure you’re not blowing $50,000 to have your launch party rickrolled. That’s just a bad use of growth funds, plus way too much money for a Rick Astley appearance.
Finally, a grant isn’t going to be the last funding you ever get. It’s a quick infusion of capital for shorter-term needs. To go the distance, you’ll an amount that can sustain you—and your growth—for quite a few years.
2. Angel investors
Angels and venture capitalists are often confused with each other, the terms used interchangeably. But there are some key differences between them: Angel investments are smaller than venture capital, and can be anywhere from a few hundred thousand dollars to $2 or 3 million.
This isn’t just money that you’ll need to tread water for a little while; instead, it’s the money required to prove out the business model. Angels also differ from VCs in that they’re looking for a quicker time to exit. Exit can a mean a lot of things—selling the business for a profit is one way—but in all cases it means that investors are finally seeing a return on their money.
Any investor will want an ownership stake in your company, too. For some, that stake means they get a proportional share of the profits; for others, they’ll want a voice in how the company is run. If handing over any level of control is an issue for you, then you’ll want to make sure the level of involvement (or lack thereof) is spelled out clearly.
RELATED: 50 Questions Angel Investors Will Ask Entrepreneurs
Still, the involvement of an angel can be a good thing. Many angel investors are CEOs or other higher-ups with experience in an industry and an eye for what’s needed. Even if investors don’t take on a decision-making role, their experience and expertise can be invaluable.
For my company, our angels came in the form of an infrastructure and private equity investment firm, and the money we received came from a regional growth fund focused on my city, Nottingham. As someone who’s passionate about my city, accepting funding from a company that’s actively investing in the area was a bonus. It felt like we were both working toward a common goal that was more than my company, something I don’t think I’d be able to say if we’d been funded by a big-time VC.
3. Crowdfunding
This isn’t an avenue I’ve gone down, but I love the democratising nature of crowdfunding. Not everyone has access to grants, or can get a meeting with the right investors. But if you’ve got a good idea and a way to reward people, something like Kickstarter or Indiegogo can go a long way.
Much like investments from angels or VCs, you need to look at this money as what’s required to fully execute on your business model. And with crowdfunding, it’s pretty much a one shot deal—there’s no Series B funding on Kickstarter—so you need to make sure all your numbers are right. If you come in too low and can’t deliver, you’ll end up with hundreds or even thousands of irate investors who won’t be keen to send more cash your way. But if you come in too high and don’t meet your goal, then your project doesn’t get funded.
Crowdfunding’s not ideal for every business—it certainly wasn’t for ours. Our product is for businesses, not consumers, so there wasn’t much in it for your average crowdfunder looking to throw 100 quid at a project in exchange for some cool swag.
Still, the idea behind crowdfunding is enticing. When you’ve created something that people want, you simultaneously attract investors and customers. And if it turns out that people aren’t into your idea, the worst that happens is you don’t reach your funding goal. At that point, no one’s spent a dime, and you leave the process with little more damage than a bruised ego.
RELATED: How to Create a Great Investor Pitch Deck for Startups Seeking Financing
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