How Do I Fund My Startup? A Question from a founder.

I had an email last night asking me for some advice from a founder that contained a number of questions about their business. I replied to all but the funding piece, saying there were many options and we arranged a call. Over my morning coffee, I decided to start noting down a bit of a roadmap. This is the first draft to answer that question, perfect for you to enjoy over your morning coffee.

How can I fund my Startup company?

There are many ways to fund a startup business, this is a non-exhaustive list of potential funding solutions.

1. Your own funds. Most startups start with founder funds. Not all but most. This is both in the form of sweat equity but also cash. You’re going to need something to show everyone else so this is a great starting block and pretty much the place it begins.

2. Friends and family. Yes, that’s right, friends and family. When your idea starts to mature most of the time people turn to friends and family to generate funds to take the business idea to the next level. At this stage you need little more than a seed to sell the vision, making it a place many turn to for support.

3. Competitive, non-competitive and matched grant funding. This type of funding is available from a number of sources in the UK. From your local government, your local enterprise partnership, central governement sponsored companies such as Innovate UK and even charities and private business/individuals. Grant funding will usually require a high input level, but mainly with elements you already have to hand like a business plan, cashflow forecast etc.

4. Business Finance. This can take the form of loans and overdrafts etc. If the business has become cash generative, standard avenues of business banking will allow you to take extra cashflow into the business, based on its current and future performance.

5. Angel investment. Angels will look for a high return on their investment. They get in earlier than other funding that will be discussed, but will want a healthy return on it. Angels will generally want between 5x – 13x+ on an investment, as they are expecting a good proportion to fail. That means the ones that come good need to pay off over and above the failures. At this stage it’s important to demonstrate a clear route to exit, considering those multiples.

6. Crowd funding. Seed funding operates similar to Angel investment. Except the investment may be in much smaller chunks and from generally unknown sources. Crowd funding models will expect a “cornerstone” investor to be on board already. Allowing others to match your valuation and get on board.

7. PE/VC. Once you hit around the £1m turnover mark, you can start to enter the PE/VC market. Here expectations on returns are around the 3x+ mark as you’re seen as a safer bet. You have a good level of turnover so the business model should be a sound investment. There’s still a level of risk, but it’s generally less than earlier stage funding.

September 19, 2021

by James