Acquiring funding for early stage startups is never easy.
People don’t like to invest on businesses at the beginning, they prefer companies backed by revenues to have some form of confidence that their investment will provide returns.
Investment can be useful for a company to grow faster than the competitors, but it is fundamental to understand when is the right time.
In this article, we will go through the diverse options to collect investment at the beginning and understand the pros and cons of each option.
Do we really need investment?
The first question you should make before seeking an investment is if it is worth it at this stage? Do you really need it? Couldn’t you develop an MVP without outside investment required?
You don’t need to have an ultimate version of what you want to sell in the future, sometimes all you need is the minimum that can perform the job. Afterward, you have time to perfect what you are selling, but first, focus on minimizing the requirements before the validation.
Our first advice is to deeply look within your business and find out if it is really needed and how much investment will you need. Sales are what validates a business. If you can’t sell your product to the people who should need it (your customers), how will you sell it to an investor? Sales are the key before seeking investment.
If you don’t have good numbers, even if you somehow find out a way to get financing, the discount given by an investor on your total valuation will be huge.
In case you believe that you still require an investment, you should put the numbers together. Find out what is the main problem that your idea must solve, where you can save and decide on what you need.
Your own money
You already analyzed your situation and figured out that you require investment to put up your business to fully-work.
In this case, we believe that you should put the first part.
We are not saying that you should put up a mortgage on your house, but we believe that the first source of investment should come from the entrepreneurs.
- Gives you a bigger sense of responsibility. By having money on your firm, you will feel even more motivated to achieve results, since it is your own money that is at risk.
- It passes an image to the outside that you believe 100% on your project, making it easier for another person to commit to putting up investment.
- Higher risk of losing your money.
Friends and Family
You figured out the numbers, put some money by yourselves and you still require investment to grow your firm. Now it is time to seek external investment.
As before told, it is not so easy to get financing for a project without recurring cash flows or at least initial sales. If that is still the case, you should probably commit to working on marketing to sell more.
If you already have initial sales, a valid way might be to seek investment from relatives and friends.
Before seeking out investment, please create a pitch and summary business plan to let them know where they are investing.
Please avoid asking a lot to a single person. A minor failure is recoverable, whereas if you lose a lot of money from your loved one, it is a bigger problem.
- Time to pay. Usually, it will take longer for them to ask for their money back.
- The discount on your equity will not be so big. Your loved ones are probably helping you, not there simply for making money.
- The cost of debt will be low since as mentioned above it is more of a help and not a loan.
- If the company fails, your relationship might have a drawback. Ask for small amounts to each person, avoid concentrating your funding on a single person.
- Probably you will be giving equity for financing. Try not to lose a big share of your company at this stage, since in the future if your company grows you will require significant more investment in the future.
Do you think that people will like and relate to your project? Is it a new concept? So, why don’t you start a crowdfunding campaign?
These type of campaigns are a great source of funding for early stage startups!
On websites like Kickstarter, Indiegogo, RocketHub, or FundRazr, you can apply for investment from people around the world in exchange for your product, unique gifts, lifetime subscriptions among other benefits you can offer.
To create a winning campaign, it will take a lot of efforts and you will most likely have to outsource the creation of a great video. We consider it fundamental for the campaign video to be top quality since the competition on these websites is big.
One of the greatest things about these websites is that you are not only acquiring investment but also getting visibility for your brand. Even if you don’t reach your desired investment goal, you are showing your product to millions of potential buyers! Compared with the average cost of an ad, a crowdfunding campaign brings a lot of benefits.
- An affordable way to get funding.
- Possible new clients acquired that got to your product due to the crowdfunding campaign.
- It may take time and a lot of effort to create a campaign.
- On some crowdfunding websites as Kickstarter, they have a “funding all or nothing” system, meaning that if you do not reach your goal, you don’t receive any of the funding. For example, on Indiegogo, you can choose to keep your funds even if you don’t reach the expected goal.
- Upfront investment in the campaign.
Contests and Government Subsidies
This is a hidden gem.
There are so many companies sponsoring contests with money prizes for great projects. It is a matter of being proactive and applying for all. Even if you don’t win, there is always the networking made throughout the contests.
Governments offer from time to time incentives to entrepreneurship. Subsidies to incentivize business creation in smaller areas or on specific niches. It is a matter of finding out the right programs to apply.
With our market research services, we can find the best contests and government subsidies’ programs at a low cost. Just let us know more about your company, industry, and country and we will find them for you.
- “Free” money (funds you don’t need to return)
- Brand exposition
- Not a short-term way of acquiring funds.
- A lot of competition
Usually, it is hard for an early-stage startup to get funding from a bank.
There are a lot of bureaucracies required and the cost might be not worth it. Take a look at this article to get more into the requirements to request for a bank loan.
But it is always important to compare what each bank is offering in your country to see if one has the right proposal for your needs.
Before going to the bank, it is important to have all your financial data organized, a business plan, and a business professional pitch.
- It is a loan. You will not be giving equity for the loan.
- As long as you pay, the bank will not have a say on how you manage your company.
- Immediate funds available
- Higher default risk.
- Too many bureaucracies.
For early stage startups, incubators offer a great way to grow their companies and helping them succeed. In these places, your hobby pass to a business. On this journey, you will receive the guidance and feedback, usually, from successful entrepreneurs and investors.
Usually, at the end of the program, there are pitches to potential investors, where you can get investment.
- Network with potential investors
- Feedback from experts
- Usually, a slow process until you receive the funds
- A lot of competition
These platforms are for startups with steady revenues seeking additional growth recurring to peer-to-peer investment, which is a type of investment where investors co-finance projects by lending money in return of interests. Investments are done via crowdlending platforms such as Mintos or Raize (on this case, only for Portuguese startups).
These platforms offer you ways to get loans, usually easier than banks. As with the crowdfunding platforms, these also offer you exposition to a wide range of persons that will get to know your firm.
- Fast Funding
- Medium / Long term Financing
- The interest rates might be high
If your startup is growing fast and getting media exposure, Business Angels might appear. These are experts in growing companies. They get a share of your company and want to make them grow.
It is important to before receiving investment to understand what their positions in relationship with the future of your company are to see if they match what you desire. Always, do a background check on the investor to better know what type of investor is.
We would recommend avoiding selling too much equity at the beginning, but it all depends on your goals and your startup.
- Experience in growing companies
- In some cases, ready to commit to investing more
- Lost of power to decide your company’s future
Outside of the scope of this article are investments from Venture Capital Firms and Private Equity Funds, since, on the vast majority of the cases, they are not interested in companies at such an early stage. When you already have revenues confirming the potential of your product, you can start to approach these types of investors, if not, the total valuation will be too low.
Acquiring funding for early stage startups is not easy. After considering all the possibilities, we hope to have clarified some of the options that you have to get investment.
We recommend for you to diversify your funding sources in order to explore the benefits that each of them as to offer.
If you feel that you might need more help in finding out which funding source to follow, we would be available to better discuss it on 1-on-1 Strategic Consulting call for FREE. Just book it below.