Raising startup funding is one of the most exciting, challenging periods for a new business, and most fail at this stage and new launch.
Research by The Kauffman Foundation found roughly two-thirds of the companies were financed by personal savings, investments by friends and family or traditional loans.
Here are the top seven categories of the decade-long research identified by the 5,000+ entrepreneurs interviewed by the Kauffman Foundation:
- Banks and Other Loans – 35 per cent
- Personal Savings – 30 per cent
- Friends and Family – 6.3 per cent
- Credit Cards – 6.2 per cent
- Angel Investors – 5.8 per cent
- Venture Capital – 4.4 per cent
- Government Funding & Grants – 2 per cent
10% of startups obtained funding from venture firms or angel investors (individual start-up backers). Among the most expensive financing mechanisms, credit cards were used more commonly by start-ups than angel or venture funding.
Bootstrapping and small business loans remain the most popular way entrepreneurs finance their startups.
What this research tells us is that:
- An entrepreneur’s ability, or inability, to find equity financing for their start-up is not a validation of whether or not they have a good business idea.
- While not a very sexy way to finance a business, bootstrapping a start-up is still one of the most popular ways to get a business up and to run.
- A startup loan is a very effective way to start a business.
Let’s now look at the main ways to get funding for a new business and what documents you need to produce to secure financing.
Bootstrapping & Friends And Family
Bootstrapping refers to starting a company with only personal savings, including borrowed or invested funds from family or friends and income from initial sales.
Self-funded businesses do not rely on traditional financing methods, such as the support of investors, crowdfunding or bank loans.
Rather, as the name suggests, entrepreneurs must use their own capital to launch or borrow money from their friends and family.
Pros of bootstrapping
- It allows entrepreneurs to retain full ownership of their businesses. When investors support a business, they do so in exchange for a percentage of ownership. Bootstrapping enables startup owners to retain their share of the equity.
- It forces business owners to create a model that works. Most failed businesses struggle due to a poor business model. However, bootstrapping entrepreneurs are forced to develop processes that produce immediate, lasting cash flow, bypassing this outcome.
- Building something from the ground up without outside help is very rewarding for some entrepreneurs.
Cons of bootstrapping
- Self-funded businesses can run out of funds more quickly and struggle to scale as their needs are met. This can limit a startup’s ability to reach its full potential.
- It limits support and opportunity. Angel and VC funding don’t just offer higher amounts of capital; they also unlock networking opportunities with top-level help, such as board members, shareholders and influencers. Bootstrapping a business limits that support and opportunity.
- Entrepreneurs who self-finance must be extremely meticulous about keeping their books in order.
- With potentially limited resources and connections, in the beginning, bootstrapping entrepreneurs have to work harder and take on more roles, which can affect their family and personal finances.
Bank Loans
Most countries have a government-backed startup loan scheme.
The U.S. Small Business Administration offers programs, such as the SBA microloan, to provide companies with up to $50,000 of working capital. The money can be used to build, repair, enhance, or re-open a business.
The Start-Up Loan scheme in the UK is a government-backed personal loan of between £500 and £25,000 available to anyone looking to launch or expand a small business. The interest rate is fixed at 6 percent per annum, and the loan can be repaid over one to five years.
To secure a government-backed startup loan, you’ll need to submit a detailed business plan and cash-flow forecast to prove that your startup can afford the monthly repayments.
Most commercial banks offer startup loans; however, they can be harder to qualify for and have higher interest rates.
Before you even start looking for a bank loan, you need to know how much money you need to get your business off the ground. This will help you narrow down your options and make it easier to find a lender that’s a good fit for your needs.
Angel Investment
An angel investor (also known as a private investor, seed investor or angel funder) is a high-net-worth individual who provides financial backing for small startups or entrepreneurs, typically in exchange for ownership equity in the company.
Angel investors are individuals who provide capital to startups at an early stage of development. They typically invest between £5,000 and £50,000 into a company.
An angel investor invests their own money in a small business in exchange for a minority stake (usually between 10% and 25%).
Angel investors tend to be entrepreneurs or people with extensive experience in the business world.
However, angel investment is about more than just money.
Angels offer to mentor and support, and businesses that receive investment will generally benefit from the investor’s time, skills, contacts and business knowledge.
Angel investors usually take a hands-on approach. They will spend lots of time with the entrepreneur and help to push the business forward.
Angel investors can invest alone, but usually, they invest together as a syndicate. This is when several angel investors work together to pool their money and experience. They can act as an adviser or even as a non-executive director.
Benefits Of Angel Investment
- An angel investor offers strategic, financial and sector-related advice to help achieve growth.
- Angel investors typically take a 10% to 25% share of your business, which leaves you firmly in control.
- Angel investment can give your business credibility for later investment rounds (from venture capitalists, for example).
How to attract angel investors to your startup
You should also build a network of connections with people who might be able to help you find funding. These connections could come from friends, family members, mentors, advisors, and others.
One of the best ways to find potential angel investors is through referrals. If you know people who have invested in companies similar to yours, ask them for introductions. You might also consider reaching out to friends and family members who work with successful angel investors.
You should also build a network of connections with people who might be able to help you find funding. These connections could come from friends, family members, mentors, advisors, and others.
Another avenue is to participate in business plan competitions. While these can be competitive, they’re also a great way to get your foot in the door with potential investors.
Venture capital
Venture capital is an important funding source for startups, but it can be difficult to obtain. You can do a few things to increase your chances of getting venture capital for your startup. First, have a clear and concise business plan.
Venture capitalists invest in startups because they believe that the companies will grow into big businesses. They provide funding so entrepreneurs can build new products and services people need.
Venture Capital companies tend not to invest in pre-seed businesses. You will have to demonstrate your business has been validated in the marketplace. This means launching your business and acquiring customers.
Start your business with an MVP (Minimum Viable Product), a product designed to test whether there is enough interest in the market to support a full-scale launch. Your product or service should be as simple as possible whilst still providing value to the customer.
You may need to raise seed capital to launch your MVP. You can do this with your funds, bank loans, angel investments, or crowdfunding.
The Strengths & Weaknesses Of Venture Capital
The main benefit of venture capital is that it can provide the capital you need to scale your business. This can be especially beneficial if you are in a high-growth industry. With venture capital, you can invest in resources and personnel to help you grow your business.
Another benefit of venture capital is that it can give you access to experienced investors and mentors. These individuals can offer valuable advice and guidance as you grow your business. They can also help you make connections with other businesses.
The main weakness of venture capital is diluting your stake in your business. By the end of the funding rounds, you may own a minority share of the business. However, this share will be worth more than you ever dreamed of when you started the business.
Documents You Need To Start Your Business
A well structured business plan should be the main document you need to:
- Prove your concept
- Set up your business
- Gain funding from most sources, including attracting loans from family and friends and investment from Angel Investors and VCs
Most business plans include
- Problem definition and value proposition
- Business Strategy
- Target market
- Competitive analysis
- Sales and marketing strategy
- Management Team
- Go To Market Plan
- Financial Plan
- Exit Strategy – This is mainly for investors and should include a plan for how you will repay them and how they can exit the company.
Not all Business Plans are the same. For instance, you will need a far more detailed business plan for Angel Investment and VC’s.
Friends & Family & Bootstrapping
Your business plan should focus on the value proposition of your business and its viability.
Family and friends know you, your skills and your experience. To convince them to invest or loan you the money, you need to show that the idea is viable and you will be able to pay them back.
Banks
Banks are fairly easy to predict. They want to ensure they will get their money back and interest payments.
This is why banks usually want you to secure personal assets against the loan.
If you are applying for an unsecured loan, you will need to prove that the business is viable, you know how to manage the business, and you have a solid sales and marketing plan.
Angel Investment
Business angels are looking for new innovative businesses within their field of expertise that has the potential to grow into a large business.
Initial investment from an angel can be just the first step in several funding rounds. Make it clear in your business plan what you plan to do with the money and where it will take the business.
Venture Capital
VC’s make their money by investing in high-growth businesses.
To justify investment from a VC, you will need to be able to provide an in-depth analysis of why your product or service has the potential to scale and be successful. You have the management team to grow the business and
VC’s are looking for businesses with mass market potential. Your business model has to be disruptive and potentially become a global business or, at the very least, a national one.
Remember, they will be investing lots of money into your business, so your sales forecasts need to be realistic but ambitious.
Pitch Deck
A pitch deck presentation—also known as a startup pitch deck or slide deck—is a visual document that provides investors with essential information about your business plan, product or services, fundraising needs, and key metrics like valuation, target market, and financial goals.
It’s important to ensure that your pitch deck is well-designed and professional, as this will give investors a good impression of your business.
Financial Projections
Realistic and robust financial projections for the next 3-5 years will be required for any type of investment or funding you seek.
This will include
- Sales projections
- Profit & Loss
- Cash Flow
- Balance Sheet
- Startup Costs
- Financial projections
- Exit Strategy (This is usually just for Angel Investors and VC’s)
It’s also a good idea to include sensitivity analysis, which analyses how the business will look if you do not hit your sales targets or your costs are higher than expected. This will allow the investor to understand how much funding the business could need.
If you want to attract angel investors to your startup, you need to prepare for due diligence.
Investors want to see that you clearly understand the opportunity and how you plan to capitalise on it. This means having all your financial documentation in order and being able to answer any questions investors may have about your business.
Build a strong team.
Investors will also want to see that you have a strong team with the skills and experience necessary to execute your plan. To convince them to invest in your startup, you need to show them that you have a clear vision and a solid plan for making your business successful.
A good team will help you build an effective product. You need people who understand what you do and why you exist. They also need to be able to communicate effectively with customers.
Conclusion
If you’re looking to get angel investment or funding for your startup, you can do a few things to increase your chances of success.
First, make sure you have a strong business plan and pitch deck. This will give potential investors confidence in your business.
Secondly, try to build relationships with potential investors. Get to know them and their interests, and show them how your business can help them achieve their goals.
Finally, don’t be afraid to ask for what you need. Angel investors are more likely to invest in a business they feel passionate about, so be clear about your goals and what you’re looking to raise.
Don’t forget to follow up with investors after your meeting to thank them for their time and keep them updated on your progress. Following these steps will increase your chances of securing angel investment for your startup.