If you want to create and build a start-up, you’ll need funding and a method of raising capital to make your dream business a reality. Raising capital for startups can be hard work, so expect to take up to six months to get the funding you need, and plenty of pitch tweaking and rejections along the way! You also need to remember to still give your business the time and attention it needs while raising capital. In this article, we’ll discuss the best ways to raise capital for your startup, so you know what to do at each stage of the process.
What is pre-seed and seed funding?
These terms are important when it comes to capital raising for startups. Pre-seeding funding describes the stage when a company’s founders are getting a company up and running with their own funds, and raising capital through funds of other supporters like friends and family. Investors are usually not involved at this stage. Seed funding involves equity in return for investment. This is the first kind of official financial backing that a company receives, and is known as the ‘seed’ that grows the company.
What is series A, B and C funding?
Series A funding typically occurs after pre-seed funding. It normally comes from venture capital organisations, as they are typically looking for strong companies with good financial projections. At this stage, investors will feel confident in a brand’s business plan. Series B funding takes a business past its development stage.
At this point, a business will have a strong user base and the company owners will have proven to investors that they are capable of growth. Series B funding helps to ensure this next stage of growth. Series C funding is often raised when a company is considered successful but wants to expand a product line, or trade in a different market. Investment banks, private equity firms and other investors are usually involved in providing the funds.
How do I start raising capital for my start-up?
There are plenty of ways to go about raising captial for startups. But your approach and how you choose to raise the funds will depend on the type of business you are starting, and your financial circumstances. You’ll also need to decide how much equity (if any) that you are willing to part with if you decide to have investors.
1. Bank loans (and other types of loan)
If you don’t have at least two-three years of accounts, it can be difficult as a new business to secure a bank loan, as you will be considered a high risk. But if you have a guarantor in place, this could be an option, as the bank will still be able to receive funds via the guarantor if your business goes under. If you can prove that your business is on the up, and that it is projected to grow quickly, a bank loan may be an option.
2. Funds from friends and family
If you don’t have a history in business and this is your very first venture, the most popular option is creating your own funding from personal finances, such as your own income, and savings of friends and family. This is often how many fundraisers start raising capital. The biggest benefit to this is that the terms can be very flexible. However, if your business doesn’t lift off the ground, the risk is that you lose not only your own money, but that of your closest relatives, too.
Think ‘Dragon’s Den’ when it comes to finding an angel investor. Angel investors are usually entrepreneurs with a huge passion for helping startups to flourish. You may have to offer them equity or a portion of your business in exchange for their finances, knowledge and expertise. These types of entrepreneurs also usually have great contacts in their little black book. You can find and use sites like Angel Groups, where groups of entrepreneurs come together and pool funds to finance an investment into a startup.
3. Crowdfunding for raising capital
Some capital raising for startups can be successfully done through crowdfunding platforms. Money can then be raised online through different sites, often with a ‘gift’ exchanged for a level of investment in a company. This means that business owners can raise small amounts of capital from large numbers of people without obligation for repayments. If you decide to raise funds for your startup this way, it is a good idea to have a strong marketing and social media campaign in place to create awareness of your brand, so people want to invest in it. If people do not know who you are, your crowdfunding campaign may not have the returns you expect.
4. Venture capital
Venture funds are usually used to inject a lot of cash into a startup to get it going. This is especially the case when the business has no assets that a bank could use as collateral to secure a loan agreement. Venture capital investment usually involves an investor taking a high stake of a business and lots of equity in return for funds. Sometimes, you may have to be prepared to relinquish more control than you may like with this option. That said, with this type of investment, the potential for growth is huge.
5. Grants
Gaining a grant is another method of raising capital for startups, but it is difficult to come by. There’s normally a strict set of criteria you and your business will need to meet, so you’ll need to check the requirements carefully.
How to raising capital
To give yourself the best chance of obtaining business funding, you’ll need an in-depth business plan to give potential investors detailed information on how much you need, and what you’ll use it for. Look closely at the startup expenses you’ll incur to actually get your company started. This business plan and cost estimates will be a part of the pitch deck you create. Your business plan should also include your target audience, analysis of competitors, business goals, financial projections and details of the products and services you will be offering. Investors will be looking at these closely to determine your level of risk.
Use SMART goals
When creating business goals, think SMART. This stands for ‘specific, measurable, attainable, relevant, and time-based. So when you set goals, make sure they are not vague, are backed by data, and are actually achievable. They should also be in-keeping with your brand’s overall mission, and should have time constraints attached to them.
Create a pitch deck to start raising capital
Your pitch deck should tell your brand’s story to an investor. It’s your chance to tell them why your startup deserves to have funding. Your overview of your business should grab the reader’s attention. Keep it short and sweet – 140 characters or less. Make your value proposition clear. Explain the problem that your brand aims to solve, and why it interests you.
Introduce facts and figures to back this up. Also mention your target audience, customer persona profiles, your product/services and how your company resolves a problem. An investor will also want to see a revenue model, outlining how your business will make money post raising capital, and how it plans to attract customers through marketing.
Research potential investors carefully
By investing carefully in potential investors, you’ll get a better idea of the pitches that have been successful with them, what they’re looking to invest in, and how their investments align with your own business goals. This research should give you a better chance of raising capital. Try to find investors who are already investing in your market, as they will be able to offer guidance in this area, too. You can find investors through directories like the British Venture Capital Association.
You’ve secured the investment – what now?
Most startups can survive on seed funding for between 12-24 months. But essentially, as soon as you receive your seed funding, it is good practice to start thinking about the future, raising capital through the next round of funding, and how you will achieve it. Start networking and build relationships with potential investors, and figure out what your numbers and KPI’s need to be for the next round of funding.
Need help raising capital?
If you need advice on raising capital for your start-up, or require a skilled part-time director to help with finance, marketing or operations, we can help at Leadership Services. We work with your senior team on a flexible basis to transform your startup, so that it meets its objectives and goals. Take a look at our case studies to see how we have helped to take other clients from strength to strength.