Written by Gavin Morrice on Jan 31st, 2014
One of the questions we’re asked regularly by our clients is where they can find funding to help them launch their project. Typically, the client has a great idea, they’ve already put a lot of thought into their solution and we’ve provided them with a development estimate, so they know how much it will cost to develop their solution. The next step in their process is to find the money required to turn their idea into a profitable, successful business.
There are four main types of funding available and each comes with its own benefits and drawbacks. In this post I’ll describe each type of funding and show you how you can find out more about each. By the time you’ve read this post you should have a better idea of what funding options are available to you and what your next step should be.
Simply put, personal funding means you use your own money to pay for the initial startup costs and development of your business.
Using your own money to develop your project offers a lot of benefits over looking for funding elsewhere. There’s no lengthy application process, no investor presentations to give, nobody to pay back (with interest), no regular meetings to check up on how you’re using the money you’ve been given, and, most importantly, you get to retain 100% ownership of your project, which means 100% control over it’s future, and 100% of the reward when your business becomes successful.
However, relying entirely on your own savings has it’s drawbacks too. You’re taking 100% of the risk in a very volatile industry where 3 out of 4 startups will fail. Secondly, unless you have several thousand pounds saved up, you may find that relying solely on your own funds will limit the rate at which your business can grow and you eventually need to seek out another source of funding to keep your business afloat.
Trust Funds and Grants
Luckily, there are lots of great trust funds and grant schemes set up to help support new businesses. These range in size from offering a few thousand to hundreds of thousands of pounds, depending on the size of the scheme.
Grants are a great way to fund your business without having to give away any equity. Like using your personal savings, you still get to retain 100% ownership of your business, meaning the potential to earn more further down the line is much greater.
Grant funding is not exactly just free money though — grant fund managers have a responsibility to make sure the money they’re entrusted with is being used wisely. This often means a lengthy application process, strict or specific criteria in order to qualify, and regular checks to make sure you’re spending the money they’ve entrusted to you in the way you said you would.
While these extra responsibilities will usually be outweighed by the relief provided by the grant money you receive, it’s important to consider whether accepting the terms of the grant is appropriate for your business.
- Nesta — Funding Innovation in the UK
- Aspire — Funding Women-led Business in the UK
- SMART — Funding R&D in Small to Medium Businesses
- Innovate UK — Funding Small to Medium Businesses
- Scottish Enterprise — Funding For Businesses In Scotland
- Scottish Seed Fund — Funding Startups In Scotland
- FundMap — An Online Directory of Grants and Funding Available To Tech. Businesses
Non-Equity Based Crowdfunding
Crowdfunding is a relatively new, interesting and disruptive new way to raise money for your startup and comes in two flavours: Equity-based and non-equity based. In non-equity based crowdfunding, you propose your idea online to an audience of potentially millions of people and, if they like the idea, they can pledge to support it for as little as a couple of pounds, to the full amount. In return, you offer those who have pledged some perk or reward for doing so. This is usually something small, like a free membership to your service and can be another great way of boosting the all-important growth in the formative first few months after your product is launched.
One of the key benefits of services like these is that you get to test-drive your idea by pitching it to a large audience which can be a very useful indicator of whether or not your idea is a good one.
The main drawback to this type of funding is that it could take several weeks or even months to raise the cash required; or you might not raise the required amount at all meaning you’ll have to look for other sources of funding after wasting several months waiting idly.
When personal and free funding are not sufficient, you might look into borrowing money to help cover the extra costs. Borrowing money, whether as a long-term or short-term loan, can help mitigate the initial setup costs of your business, and give you the resources and time you need to grow your business, whilst still retaining 100% ownership.
Friends And Family
Perhaps you have a wealthy aunt, very nurturing parents, or a supportive spouse who loves your idea and believes in you. Most of us know somebody who’s financially comfortable enough to put some of their money to work and it can be tempting to borrow some money from them in exchange for a share in your success.
Borrowing from a friend or family member can be a great way to access funding that comes with fewer restrictions or terms and conditions. And since you’re not dealing with a strictly regulated financial body, they’ll be more flexible in the type of arrangement you can make on repaying the loan.
The obvious caveat with this type of loan is the stress it can put on the relationship you have with that person if you find you can’t repay the money as originally planned.
Instead of borrowing from friends and family, you may choose to apply for a bank loan to fund your startup. Bank loans are a great way to get much-needed capital but they’re not always easy. Banks know all-too-well the risks involved with investing in new business ventures and are unlikely to lend money (especially in the current economy) without seeing a very convincing business plan that clearly shows them how and when they can expect their money to be paid back. They may also require you to secure the loan against a personal asset such as your home or car.
While difficult, it’s not impossible to qualify for a bank loan and if you can, it’s a great way to bootstrap your business without having to give away any equity.
If you find you still can’t raise the funds you need to develop your business using the above-described options, you may consider seeking investors to invest the amount you require in exchange for a share in your business.
In the world of startups, when talking about investors we’re usually talking about angel investors. Angel investors will invest in the very early stages of a business, in return for a very high percentage of the equity.
Finding angel investors is relatively straightforward. You can contact your local enterprise board for more information or do a simple Google search for “angel investors in [your city]”.
Investors can be a great way to get quick access to the cash required to grow your business and can also offer you advice and guidance based on years of experience. It’s important to keep in mind, though, that this type of funding is the most costly. The sooner, and the more help you require from investors, the higher the equity share they will take in return. It’s not unusual for someone to be left with only 25% equity in their business after seeking angel investment.
We covered non-equity based crowdfunding earlier. Equity-based crowdfunding is a halfway point between that and seeking out angel investors directly. Instead of you having to hunt down, meet with and impress angel investors, services like Seedrs and CrowdCube offer you the chance to showcase and raise awareness for your idea to a much larger audience of experienced investors. As interest in your idea grows, more and more people may choose to invest, giving you more capital to get things rolling.
As mentioned already, a huge benefit to this model is that it gives you a chance to really test-drive your idea without spending too much up front. It’s easy to fall in love with our own ideas, but investors are a lot more experienced and savvy with what is and is not likely to work. If you cannot attract the attention of investors using a crowdfunding service, then it’s likely that your idea isn’t as feasible as you had hoped after all. While that may be a hard truth to accept, it’s much better to discover it at the beginning of your venture than further down the line, after you’ve invested a lot of your own time and money.
As with all investments, you’re going to be giving away a small, or perhaps a significant percentage of your business to others, meaning you have less control over your destiny, and a lower payoff when your business becomes successful.
Choosing The Right Approach For You
There are many ways to raise money for your startup and lots of support and grants available to those who are willing to look for them. Spending a few days researching the options available to you can be a great way to bring in more money, and ensure you keep more equity in your business (If your goal is to earn a lot of money, remember: equity is everything!).
Applying for grants and support can also be a great way to test your idea on a more objective and experienced audience. If their feedback is positive it should give you confidence that you’re steering in the right direction.
With that in mind, the most prudent approach would be to try and raise as much of your own personal, or free funding to get your app built before seeking out investors. The more you can develop your idea, before needing investment, the more equity you’ll get to keep for yourself.
Disclaimer: This article is purely informative, and does not constitute advice or recommendations.