Wherever you are in the start-up cycle, you will need money to keep your business progressing. Raising appropriate funding for each stage of your start-up is a real challenge, and it helps to know your options and what you can do to maximise success. Here are our essential tips for getting the start-up funding you need at every stage.
Tip 1 - Know your funding stage
How mature is your product? Is it still a prototype, for example, or is it ready for commercial use? Do you have customers and revenue? These are the sorts of things that define where you are in the business cycle and hence what sort of finance you might be looking for.
- Graham Oakes, Founder, Upside Energy Ltd
Understanding where you are in the funding cycle is essential if you’re going to raise appropriate finance. Your ability to engage investors will determine how far your start-up will go.
The typical start-up funding cycle:
- concept stage
- early stage
- later stage
- initial public offering (IPO)
In each funding stage, the company receives money that focuses on specific growth points.
The concept, pre-seed and seed stages represent the initial capital required for product or service development, applying for patents and researching the market, with the emphasis very much on the feasibility of the business idea and preparing to commence operations. The funds for this often come from the entrepreneur’s own savings or from family or friends. They can also come from government start-up grants like those available from Innovate UK. Venture capitalists are often reluctant to invest at this stage because the risks are high.
Tip 2 - Be clear on what your funding is for
Pitch a crystal clear proposition and vision with personality and passion, and back it up with a realistic valuation to attract investors
- Luke Lang, Co-founder, Crowdcube
Understanding the requirements at each funding stage will give you the platform to attract investors. The funds you ask for will have to be appropriate to your business targets at every stage, and be clearly costed.
The funding cycle typically encompasses:
At the exploration stage, you will be defining your concept; at the validation or pre-seed stage you may look to government grants as well as family and friends; during the build or seed/start-up stage you could look to crowd funding, angel investors or seed venture capitalists, and the same is true for the launch or early stage of the business.
During the growth stage, you will look to venture capitalist rounds to raise money, while in maturity it is more likely that bank funding and eventually an IPO to invite public investment in your company.
Tip 3 - Target relevant investors
Research your potential investor- what’s their risk appetite? What companies do they invest in and at what development stage?
- Don Spalinger, Director, Research & Innovation Services, University of Southampton
Your financing needs, progress to date and appropriate business milestones will determine the type of investors you can attract. With each round of fundraising there are several options. Asking for the wrong amount at any stage is likely to damage your credibility with serious investors.
Angel investors – accredited investors who invest their own money – will be your target at the seed and early stages. Your early employees may also be willing to take a lower salary in return for some stock in the company.
Venture capitalists, whose job it is to persuade other people to invest in their fund that they then invest in your company, will also become more interested at this stage.
As your company grows closer to going public, investment bankers will prepare your IPO paperwork and sell your stock, taking a percentage of the IPO in exchange. After the IPO, anyone, anywhere can invest in your company.
Tip 4 - Get the right funding at the right time
Identify how much funding you need to reach the next milestone in the growth of your business - be clear to investors why you need that level of investment and how you will use the funds raised.
- Jenny Tooth OBE, Chief Executive, UK Business Angels Association
Timing is everything in the success of a start-up. Idealab was founded 20 years ago by Bill Gross to help fledgling companies. Since then it has launched more than 100 start-ups. Founder Bill Gross looked at 200 successful companies to try and define the top five factors for success. His findings surprised him. Contrary to his initial assumption, the business idea itself wasn’t the most important element.
In fact, the number one thing was timing – accounting for 42% of the difference between success and failure. If the market isn’t ready for your idea, or the technology isn’t widely available to support its delivery, your business could fail. On the other hand, if the market is already flooded with competitors, there might be no space for you.
Your team and the way they execute your business plan is the next most important factor influencing success. The business idea itself comes next, followed by the business model.
The right funding at the right time – to support your launch, team-building, honing the idea and developing the business model – will help you execute each stage of your business growth successfully and make it a long-term success.
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