There are number of viable avenues open to entrepreneurs in need of funding to grow their business. The avenues are not always mutually exclusive, but each has its own advantages and disadvantages to be considered before pursuing investment through it. This articles covers the essential information to help you decide which route(s) is(are) best for you.
1. Crowdfunding:
"Give us your fired, your under-funded start-ups, your huddled masses of innovative entrepreneurs yearning for access to capital. The wretched refuse of your economically broken shores. Send us the Twitters, the LinkedIn and Facebook tempest-tossed pioneers fighting to claim their piece of the American dream and let them stake a claim and crowdfund, so we can all walk through the golden door."
- Ruth E. Hedges at http://www.globalcrowdfundingday.com/
What is it?
Crowdfunding, in a nutshell, is all about persuading large numbers of people to donate small amounts of capital towards funding your business. When several thousand people contribute £10 or several hundred people contribute £100, large amounts of capital can be raised without bankrupting anyone.
This means of fundraising has risen to prominence with the ‘democratic’ system of social media. Now every internet user can and expects to have a say in the public domain about matters that interest them. Crowdfunding is the social media version of fundraising.
There are more than 600 crowdfunding platforms around the world and in 2013 the industry was estimated to be worth somewhere in the region of $5.1 billion worldwide.
In January 2018, Angel Investment Network launched their long-awaited corwdfunding site, SeedTribe. The platform allows people to invest online from as little as £1,000 with all the legal paperwork done for them. The companies listed are vetted by the management team and usually have an existing lead angel investor.
How does it work?
There are currently two principal types of crowdfunding: reward-based crowdfunding and equity-based crowdfunding.
Reward-based crowdfunding is the most common type. Examples include sites like Kickstarter and Indiegogo. Contributions are made in return for special rewards offered by the company receiving the funds. These rewards could be anything from a free product to a chance to be involved in the design of the product. This method has been used to raise funds for a wide variety of businesses including film promotion, software development, social enterprises and clothing brands.
Equity-based crowdfunding is a more recent option. Shares of the company or ownership stakes are offered in exchange for funds. There are two different models for equity crowdfunding: in one (e.g. Crowdcube) you do the deal with the company directly and get your name on the shares; in the other, the crowdfunding site does the deal on your behalf and holds onto your shares. But the outcome is practically the same as you have risked your funds in the same way whichever model is followed.
Advantages:
Useful way of gaining funds without losing control of your company
Provides another avenue for raising funds when traditional methods aren’t working for you
Social & Market validation- way of gauging public reception of product/service while gaining funds
Potential for engaging directly with your audience and gaining invaluable feedback which may contribute to your future vision or even cause you to pivot
Provides a self-selected group for pre-release and beta testing your product/service
Disadvantages:
The public revels in engaging stories so if your company does not have one, it may struggle to capture their imagination
You may not get the support and expertise that characterise the other funding avenues
On some sites like Kickstarter the funds are not collected until the allotted time is up; so if you do not reach your goal, it could be a lot of time wasted which could have been spent on growing in other ways
If you reach your goal but underestimate the funds required, you could risk being sued if you fail to deliver your promised rewards to public investors
You do not get the mentorship that you could potentially receive from Angel Investors and Incubator programs
Tips:
Have a small network of family and friends willing to donate. Crowdfunding works by momentum. Pre-assembling a crowd will encourage people to follow the crowd when they see funds going in.
In line with this, use crowdfunding as a means of raising the last few thousand of a round that has raised funds from other sources (e.g. Angel Investors); this way you can give the impression of momentum in your ‘crowdfund’ by already being 70/80% complete (for example) when you launch your crowdfunding campaign.
If you decide to operate a reward-based raise, then make sure the perks are desirable.
Have different tiers of rewards for different levels of giving.
Present a professional business plan and a clear account of why the money is needed and what it will be used for. People like to know exactly what their contribution will help you achieve.
Demonstrate that you believe in your business by showing that you have invested your own money in it.
Create an engaging but short video pitch with a clear call to action at the end.
Be prepared to spend a lot of time online, especially on social media sites to keep your profile active in the public domain for the duration of the raise.
For a step by step walk through guide see the walkthrough on our partner site: SeedTribe
2. Incubators/Accelerators
“Business incubators are organizations geared toward speeding up the growth and success of startup and early stage companies. They’re often a good path to capital from angel investors, state governments, economic-development coalitions and other investors.”
Entrepreneur Magazine
What are they?
Business incubators are organisations created to nurture an early stage startup through the provision of office space, mentorship and networking opportunities. The purpose is to help speed up growth and increase the chances of success for these companies. Often several startups share an incubator’s office space and so will be able to bounce ideas off one another and inspire an atmosphere of success.
They are often a direct route to funding from angel investors, state governments, economic-development coalitions and other investors including the incubator programs themselves.
How do they work?
Incubators and Accelerators use a variety of different models. These should be researched carefully before you decide to apply for one of their startup courses. A comprehensive list of global accelerators can be seen here: http://www.seed-db.com/accelerators
Do they work?
There is a lot of anecdotal evidence in circulation about startup success stories caused by incubators and accelerators, but there is no broad consensus on how effective these programs are. In the USA, the National Business Incubation Association (NBIA) has claimed that its research demonstrates that incubated companies have a 2-5 year survival rate of 87%, double that of non-incubated companies.
However, an academic study conducted by Syracuse University claims that there is no substantive evidence for the long-term benefit of business incubation and that the effects of incubation may even be damaging.
A decisive conclusion is proving elusive. This is largely due to the numerous problems with the variables regarding data collection. For one, companies have to apply to be selected onto incubator programs; and as such the ones selected are already considered reasonably likely to succeed and so it is unfair to compare success rates of incubated and non-incubated companies.
That said being selected for a program may be a good indication of your chances of success!
Advantages:
Your business is exposed to a wide range of funding choices
You will receive expert mentorship and advice as part of the package
You will have opportunity to massively increase your network
Someone else organises the office, reception, postal, communications infrastructure and printing etc…
Mentors work for the incubator partners so have a vested interest in helping you succeed. (This is obviously only the case when the incubator takes an equity stake as part of its payment)
Disadvantages:
Constant mentorship and networking may damage your focus during the crucial early stages
Some of the advice offered by the program in terms of choosing investors might be offered more in their interests than yours. (This is not necessarily the case, but it’s worth being cautious)
They can be expensive
In essence, all the advantages can work to undermine your ability to focus on your own business
3. Angel Investment Funding
“Angels were and are very important to us – these days it's hard to imagine how technology startups could get off the ground without angel investment."
Kevin Arthur, Founder & CEO of Oxford Photovoltaics
What is it?
Angel investors are certified high net worth individuals interested in investing their capital in early stage startup companies. They may be successful professionals such as lawyers, doctors and investment bankers; or, most usefully, they might be successful entrepreneurs looking to help the next generation of startups grow and succeed. The important point is that these investors have substantial funds to invest and have expertise and interest in achieving success for your startup.
How does it work?
You use your own network or leverage existing networks to meet Angel Investors. After attracting their interest and pitching successfully, they offer you funds. The deal usually involves funds in exchange for equity shares in your business. As mentioned above these investors are often willing to bring more to the table than capital alone- they want to use their expertise to help; they have a vested interest in doing so as they want to see the return on their investment grow along with your business.
Advantages:
Angels provide expertise as well as funding
Concomitant with this, is that they are extra motivated to see you succeed
Angels help grow your business network by providing you with access to their own networks
Angels are free to make funding decisions quickly
No repayments or interest which can severely hinder a sapling company trying to grow
In the UK EIS & SEIS tax break schemes encourage Angels to invest in startups by substantially limiting their risks
Angels can use their networks to invest in syndicates. This is helpful for companies looking to raise higher amounts
There is an FCA Regulatory framework in place to protect the interests of both angel investors and companies involved in this sort of investment
Disadvantages:
You must be prepared to give away equity stakes. N.B. This is not necessarily a bad thing as equity is a powerful motivator for everyone who gets involved
If they hold a large enough stake in your business, they will have the capacity to sack you, the founder, should they desire to do so
They are ultimately interested in a good ROI (return on investment) and so might be looking towards an exit before you are prepared to give up your creation
Tips:
Not everyone has the contact details of Angel investors in their address book; a good way of connecting with Angel investors and growing your network is through Angel Investment platforms like ours.
4. Venture Capital Funding
What is it?
VC Funds invest similarly to Angel Investors, but their investments are made through a fund structure rather than as individuals. This means they can invest more than individual investors.
How does it work?
As with Angel investors, Venture Capital funds invest in exchange for equity in the company. However, they usually invest after the initial seed stage in companies with greater validation and higher valuations than in seed rounds.
Advantages:
Potential to commit large amounts
Smaller investors like to follow where VC funds invest
Can provide a startup or young business with a valuable source of guidance and consultation
VC firms can provide active support in a number of critical areas, including legal, tax and personnel matters
Disadvantages:
VC funds are more analytical in their approach than angel investors so it can be hard to find one that matches your business
They have been known to string companies along while they work out their next move
Post VC investment the fund normally controls a large equity percentage
Potential to lose control of management of your business – but still could be a profitable partnership