So, you’re a startup founder and you’ve got a brilliant idea for a business. Your idea, should it come to fruition, is going to disrupt the industry or change the world (as the folks in Silicon Valley like to say). You know that turning this idea into a successful company and product requires hard work, a lot of knowledge, a little luck, and of course…money! The question is: how do you get startup funding?

In this post, we’ll be going through the main funding options available to you.

 

Types of Startup Funding

 

Grants – Government Funding

Grants are often the first place people look for funding, after all, what’s better than free money from the Government? The U.K. offers a range of grants and funding opportunities that can help you start your business or continue to grow it. The number of grants and their eligibility criteria is far too long to list here, so put together a quality business plan, get onto Google, do some research, and start applying.

 

R&D Tax Relief – Government Funding

If your company is developing a new product, chances are that you’ll be doing some R&D work. Whether it’s software, robotics, AI, engineering, or a host of other businesses, you may be eligible to claim a rebate from HMRC in the form of R&D tax relief. R&D tax incentives allow businesses to deduct eligible R&D expenditures and up to 33p for every £1 spent. In layman’s terms, the government will give you a refund on money you’ve spent on R&D, should it meet their criteria.

Early stage businesses also have the opportunity to access their expected refund in advance as a loan through Fundsquire. We will finance both accrued and filed R&D, giving you access to vital cash flow up to 9 months before you receive the R&D refund. See how our client, Trail, made use of Advance Funding to speed up development and further increase R&D spending.

 

Friends, Families & Fools

Consider starting with your friends and family – they know you, trust you, and believe in you. This could be a great source of funding if you’re an early stage founder with no prior track record in business or in your industry, or are an upstarter with ambition. Many successful businesses have been started with a loan (or gift) from a relative, and it’s a useful place to get your first capital injection.

 

Crowdfunding – Equity and Debt

Platforms like Kickstarter and IndyGoGo offer startups a unique opportunity to sell their idea or future product to a legion of active consumers. For businesses engaged in B2C, crowdfunding offers a real opportunity to get your product in front of millions of potentially interested people. With a slick video and some creative marketing, you might be able to join the likes of Kickstarter’s most successful campaigns.

 

Venture Capital – Equity Funding

While this may seem counter-intuitive, most Venture Capitalists (VC’s) are not interested in investing in just an idea. Instead, they want to fund companies that have turned ideas into a product, and require funding to scale up.

This type of funding is not for everyone. VC’s generally require an equity stake, thus diluting the ownership of founders, something that may not be palatable for those that have invested years of blood, sweat and tears into their company.

VC funds are not all the same, and the variety of specialised funds is staggering. Mainly, they vary according to three dimensions – Location (where?), Stage (when?) and sector(what?). This is absolutely key to know when you are planning on pitching to VCs. The more specialised you can be in how you pitch and who you talk to, the more chances you have in succeeding. Investors will only have time to analyse a few pitches, if something is “right up their alley”, that makes your chances infinitely better than going scattershot. 

The absolute best way to engage with a VC is by being introduced through a trusted friend, fellow founder, or colleague. So, put your networking hat on and step into the ring.

Related Article: Reasons to Avoid VC Funding

Venture Debt

Admittedly, for early stage companies, venture debt may not always be accessible, but it is also not off the table, depending on how fast your company is growing. Venture debt most often comes as a package with an equity sale, and is there to help the company accelerate growth without having to sell more equity. This can be beneficial for both the VC and the company, as the interest rate is usually quite steep, which guarantees a payout, but also helps protect the founder’s stake in the company.

Venture debt makes up around 10% of VC deal volume, and is growing, so it’s definitely important to keep in mind if you’re aiming at getting venture capital, especially in later rounds from series A and beyond.

Angel Investors – Equity Funding

Angel investors are usually very high net worth solo investors, who, like Venture Capitalists, invest in startups in and acquire either equity or potentially a convertible note, to be transformed into equity at a later date. Usually, Angels are either former founders and entrepreneurs or retired executives who want to contribute their talent, skills and money to the new generation of entrepreneurs – for a profit, of course! 

There is a difference between an Angel and someone who would just casually invest, but doesn’t do it professionally. The Angel is much more sophisticated and knowledgeable than a “Fool” type investor. Angles will do comprehensive due diligence on the company and will work to understand the company’s business plan in great detail. Another difference between Angels and their more institution al counterpart, VCs, is that they usually invest their own funds. This means two things: more skin in the game and more flexibility. Angels are usually more personally involved and more open to custom arrangements, as VCs often are bound by more complex formalities. For you as a founder, this could be either a positive or a negative: an Angel may want more equity or they may provide more hands-on help when the company needs it. 

 

Self Funding

Of course, there’s always self-funding. Who better to finance your idea than the person who believes in it the most, you! Using personal savings is a good way to start your business, however, be wary of taking debt against personal assets (e.g. a second mortgage) or piling business expenses onto a credit card.

 

The wrap up

As you can see, there are plenty of funding options available to you. Each method has its pros and cons, and founders should be aware of these before making this important decision.

If you’re carrying out research and development in the U.K., consider making an R&D refund claim. If you’re unsure if your business qualifies, reach out to Fundsquire and we’ll be happy to point you in the right direction.

Elizabeth Sheldon

Elizabeth has worked in journalism for the better part of the last decade and covers topics from economics to world affairs and finance. She's interested in science and now runs her company, Just Juniper Media.