By Jack Underwood, CEO and co–founder of Circuit
Starting a business can be daunting. You could have the best product, an excellent team, and a scalable business model, but if you don’t have adequate cash flow and the money to invest at crunch points, then you have a problem. You don’t need to be rich to start building your business but you need a plan on how you will fund your business and raise the required capital.
Startups have a whole host of options to raise the funds they need. When I launched Circuit with my co-founder Pol, we started with our personal savings and bootstrapped our way to $10M in ARR.
Whether you want to get your business off the ground or take an existing venture to the next level, here are five different ways to get the cash you need.
Bootstrapping relies on a startup having some initial funds to start and using a business model that can quickly return capital. While it may not be appropriate for companies in highly competitive sectors, it’s an ideal solution for SaaS businesses. It instantly demonstrates what’s working and allows for sustainable scaling. PPC advertising is a very effective way to bootstrap and drive early customers.
Bootstrapping also allows for a more straightforward ownership structure as there are no, or fewer, investors involved. This means founders retain more control over the direction and destiny of the business.
The price of this is that bootstrapping will require some sacrifices from its founders. Some savings or funds will be needed to start or to plug the gap if the business doesn’t hit its initial revenue and profit projections.
- Business Incubators and accelerators
Business incubators and accelerators help startups build the right foundations and scale their business. They are often sponsored by private companies or public institutions, such as colleges and universities. Our company has benefitted first-hand from accelerator support. When we wanted to develop and launch a new B2B product, Circuit for Teams, we went to Techstars to help us enter this new market.
Incubators focus on sustainability driving business growth and will nurture companies and give them close attention and support. They also have fantastic networking opportunities, both for a business and its founders, through ‘open days’ and events along with shared cohort connections.
However, founders should remember that accelerators will take a percentage of their company in return at a relatively low and non-negotiable valuation.
- Venture capital
One method of raising investment that has grown substantially in awareness and popularity over the last ten to fifteen years has been venture capital (VC).
It’s an attractive route for the high levels of funding available from private investment companies or VC funds and the non-financial support that backers give. VCs often have broad networks of valuable potential contacts, partners, prospects and other investors they can connect you with. It’s actively in their best interests to help you succeed. Plus, showing that a successful firm believes in you gives your business an extra level of validation.
However, there are some challenges to watch out for. VC funding is fiercely competitive, and the majority of startups seeking it won’t get it. It can be a long journey to raise capital this way successfully. Furthermore, VCs will expect to see a return on their investment which may mean close monitoring of your company’s progress. As sharers of the business, you should expect them to have an element of control over your company and decision-making.
- Angel investment
An alternative route is seeking angel investment from high-net-worth investors, and this is one of the best ways to gather funds for a growing business. Similar to VC funds, angel investors offer valuable mentorship. Being individuals, they can be more engaged in the business and offer practical support to help it grow. Many startups develop a strong relationship with key investors who can then reinvest when capital is needed quickly. For example, to maximize advertising spend during peak periods.
However, startups should note that angel investors typically offer less money individually than can be found through other methods. So founders may need to seek investment from a number of them. This will therefore necessitate a higher level of investor management and communication that startups should appropriately prepare for.
Forget the stereotype: crowdfunding isn’t just for indie filmmakers.
Sites like GoFundMe, CircleUp and Kickstarter give startups a way to raise capital whilst giving their business traction and winning engaged advocates in investors. Crowdfunding is less complex to manage than other forms of funding, such as VC or angel investment, with a single line item on the cap table. Individual contributions may be smaller, but higher funder numbers help with word-of-mouth marketing.
However, it’s important to note that crowdfunding platforms can be very competitive spaces. It can be a challenge to secure the attention and cash of potential investors. Plus, a percentage of the money you raise will go to the hosting crowdfunding site as a service fee.
Choosing how to raise capital depends on many factors, but ultimately this is the founder’s decision. Founders must work out the right route for them, taking into account their future goals, how much control they want to keep and how much they need to raise. This will help you make a well-informed decision on how best to raise funds in a way that fit with your company ethos and projection.