The way you raise funds for a startup or small business will determine a lot about your future. The structure of your business‚ the size of the loan you take and the monthly credit repayments involved all have an effect on your capacity for growth and expansion.
The presence of an angel investor or choosing to enter a sweat equity partnership will also determine whether you are able to leverage established business support‚ something which can have a dramatic impression on product success.
With that in mind‚ here are five ways to raise capital for your small business or startup:
Here‚ you’ll find the answers to:
What are the most common ways to fund marketplace startups?
How do I raise money from family and friends?
What are the pros and cons of crowdfunding?
What is the difference between an angel investor and a venture capitalist?
How does sweat equity work?
1. Bootstrapping
Bootstrapping is the term given to starting a company using only your own funds. It is the fastest‚ simplest way to start working on your product‚ but the independence it grants may also be its biggest pitfall.
In a bootstrapped business‚ you invest your own money in the startup. As it grows‚ you keep reinvesting the operating revenue and develop your small business relying on personal resources only. Although difficult‚ it’s an excellent method in terms of time: You start whenever you are ready‚ invest when you are able to‚ and retain the ability to make decisions quickly.
That being said‚ working alone is difficult. Lack of support‚ both technical and financial‚ can have a seriously detrimental effect on your goals‚ attitudes‚ and project velocity. You also may not have the funds to properly support a startup business‚ in which case it is crucial to consider other alternatives. Whilst many small businesses rely on personal savings as a source of initial financing‚ 82% of failed startups do so because of cash-flow problems.
Bank Loans for Bootstrapping
A bank loan is one of the most widely used options to fund a startup. Consider a local financial institution and arrange a meeting to find out if you can get a loan for the initial stage of your business development.
If you are going to apply for personal finance to fund your startup or small business‚ it is important to consider how much progress the bank loan would allow you to achieve‚ as well as how long it will take to pay it back. Keep in mind that it may be risky to accrue debt before your startup’s viability has been proven.
How Much Money Do I Need for a Bootstrapped Business?
Bootstrapping is wholly reliant on your own funds. The more money you have to invest‚ the more that can be used to develop your business.
If you don’t have enough personal funds to ensure the sustainable development of your startup or you plan to enter a marketplace that requires a high level of initial investment to be competitive‚ you should look at external funding methods.
2. Raising Money From Your Network
If you have a high-potential idea augmented with a presentation or a simple prototype‚ you can attempt to attract your first investors from friends‚ relatives‚ or your local community. The people in your network will not invest in your product‚ they will invest in you- an excellent funding strategy if you have no product to show.
Prepare a short presentation and share it amongst potential investors. Employ social media or even start a targeted advertising campaign to attract the community’s attention. If you plan to raise from your network‚ awareness‚ and relevance are key.
Whilst raising money from your personal network may provide an extra dose of motivation for you to reach your goals‚ network investment can mean that small business owners are forced to manage the pressure of growing their startup whilst managing the colossal responsibility to perform for their investors.
How to ask friends and family for marketplace startup funding
- Never lie about your idea or your chances of success
- Build a short business plan and outline your costs for the first period of investment
- Explain what the money will allow you to do
- Make it official: Prepare a partnership agreement that outlines the sum‚ repayment procedure‚ and any other terms of investment.
3. Crowdfunding
Looking for a way to attract investment whilst promoting your product? Take a look at crowdfunding platforms.
Crowdfunding is a way to raise funds through a donation from individuals or communities on online platforms. It allows individuals to spread awareness about your product and raise money from potential customers. You can pick one of the numerous available online crowdfunding platforms or combine several ones.
Typically‚ a crowdfunding website charges a commission. It may be a subscription fee‚ a percentage from successful payments or total funds‚ or something specific to that platform. Keep in mind that different platforms have different rules and policies.
Thorough preparation and research are required to launch a campaign on a crowdfunding website. The idea is no longer enough‚ you need to capture the community’s attention amongst a growing marketplace of ideas and prove that your product is viable before you raise funds.
Popular Crowdfunding Websites:
Crowdcube (Pitch to Investors)
Pros: Crowdcube allows you to pitch to a community of investors actively seeking new opportunities‚ with a team of internal lawyers who work closely with the Financial Conduct Authority to support your raise in terms of legal and regulatory compliance.
You are also able to access your funds within just 3 months of raising‚ ultimately allowing you to begin working on your application and reach the market faster.
Cons: Even though Crowdcube reduces the barrier for “normal” people to invest‚ there is still a requirement to show a satisfactory degree of financial maturity.
This is also reflected in the promotion of the campaign. You are not allowed to intentionally direct messaging towards unaccredited Americans‚ Canadians‚ or Japanese people who might be interested in investing‚ because these countries have a more regulated legal system for investment.
Successful Crowdcube Projects: Brewdog‚ Monzo‚ What3Words
Commission: 7% (exc. VAT) on successful raises‚ a completion fee of 0.75-1.25% of the total funds.
Kickstarter (Pitch to Consumers)
Pros: Kickstarter has the largest community of any crowdfunding source. This is particularly advantageous when first starting to advertise your product idea‚ as it allows you to reach the largest possible number of potential investors operating in a single space.
Additionally‚ backers get their money back if you fail to raise your target amount. This removes an element of risk for investors and means that you may be more likely to successfully hit your target amount.
Cons: Although Kickstarter has been proactive in removing scam campaigns from their platform‚ there is still no guarantee that a backed campaign will provide the product or service they promised at a level expected by their investors.
Kickstarter is often treated as an online store‚ but in reality‚ it is a way for the average person to invest in a company‚ brand‚ or idea in its earliest stages without the need for substantial investment. When a fraudulent campaign happens‚ it tarnishes every other active campaign and significantly damages the outlook of potential investors.
Successful Kickstarter Projects: Exploding Kittens Card Game‚ The Everyday Backpack
Commission: 5% of a successful campaign goes to Kickstarter. Payments are made via Stripe‚ which also charges 3-5%.
4. Angel Investors
If you have a Minimum Viable Product (MVP) or a detailed product roadmap‚ you can build a relationship with an angel investor. In this type of collaboration‚ an influential individual financially supports your startup in exchange for a business share.
Angel investors present a particularly strong funding route due to their ability to provide you with valuable startup recommendations‚ introduce you to industry leaders‚ and leverage existing contacts to help with the progression of your product.
You can meet potential investors through Forbes‚ who have curated lists of investors‚ or by reaching out through Linkedin‚ AngelList‚ or similar websites.
Angel Investors vs Venture Capitalists
A key alternative to partnering with an Angel Investor is to work alongside a Venture Capitalist. A Venture Capitalist is a person or company that invests in a business venture‚ providing capital for a startup or expansion. The majority of venture capital comes from professionally managed firms.
Angel Investors and Venture Capitalists invest in businesses at different stages‚ and the investor you appeal to depends on whether you are established or if you are just starting up.
Venture capitalists tend to invest in businesses that are already established to reduce their risk of negative investments from their parent fund. Angel investors are more likely to invest in businesses that are just starting out. They choose businesses that they are interested in and can see becoming profitable‚ even if the company has not proven itself yet. Because they often use their own money‚ their appetite for risk is based on how much money they have to invest.
If you are just starting out‚ an angel investor might provide you with enough money to get off the ground. When you’re established and looking to expand‚ you might try pitching to a venture capitalist.
5. Sweat Equity Investment
Sweat equity is a non-financial investment in which individuals (usually founders‚ co-founders‚ and directors) receive equity in recompense for their contribution to a business. Sweat equity is often offered in exchange for work done for free – or at a reduced market rate – hence the term “sweat”.
Agreements of this nature allow startup businesses to access highly experienced individuals and teams without the substantial financial investment that is usually required. This creates a ‘win-win’ situation in which employees with sweat equity increase the value of their own shares as the business finds new success and growth.
Through hedgehog lab Ventures‚ the investment arm of hedgehog lab Group‚ we have completed sweat equity investments in a number of startup businesses‚ including Railguard and Specfox.
One of hedgehog lab Venture’s most successful alumni is shared-economy parking platform YourParkingSpace. After joining YPS as Chief Product Officer‚ CEO of hedgehog lab Brannan Coady helped to grow the platform to over 700‚000 bookings per year and helped drive a 64% increase in app downloads throughout 2020. It is now rated as the leading parking platform in the UK.
By entering a sweat equity agreement‚ YourParkingSpace was able to leverage hedgehog lab’ award-winning team of analysts‚ designers‚ developers‚ QA professionals‚ and product specialists. This allowed them to go through an unprecedented growth period in 2020‚ with a 36.32% increase in bookings compared to the year prior.
Looking for a delivery partner that will work with you to identify‚ create and launch innovative technology products whilst providing clear ROI and long-term competitive advantage? Read our case studies‚ read our Start-up Sweat Equity Criteria for hedgehog lab Ventures‚ or get in touch today.
