So, you’re searching for ways to fund your startup. But how do you know that it's the right time? Before you do anything, you need clarity on what you intend to do with the funds when they flood in.
How much will you allocate to product development or marketing or recruitment for instance? These are the questions you need to find the answers to.
Secondly, how far along is the business? Understanding the journey can help you target the investor most likely to fuel your startup right now.
So, before we list the different types of startup investors and how to find them, let's take a quick look at a 'typical' business journey and funding rounds.
The clue is in the name; pre-seed is the very start of a business' journey. Pre-idea, pre-production, pre-revenue. Seed is post-revenue. When the business is starting to make money (or about to).
Series A typically refers to the point at which a company matures out of seed funding and is looking to expand. Series B funding rounds are usually about bringing more specialists into the fold.
A mature business is an established business with a loyal client/customer base and competitors. Growth is no longer exponential but steady. So Series C funding is often about buying out the competition to de-risk the business model, ahead of it being sold or floated on the stock market.
All good things come to an end. Inevitably, revenue starts to decline. That's when it's time for a tasty exit, merger or acquisition or a new strategy to diversify the business.
So that's an example of a traditional business lifecycle and investment rounds. But not every business follows the same path, and experts' interpretations of the different funding rounds and stages vary, so take it all with a pinch of salt. It's just good to know the lingo.
Once you’ve established what you intend to do with the funds you receive and the stage your business is at, it’s time to find investors for your startup.
There are lots of ways to raise funds, all worth looking into, like non-repayable business grants, for instance (free money). But to avoid going down the rabbit hole, let's focus on the most sought-after investors and where to find them.
It’s not necessary to get funding from every type of investor or participate in every funding round. It’s about finding what’s right for you and your business.
Sometimes, a founder’s friends and family can fund a startup in the early stages (pre-seed). If they choose to chip in, generally speaking, it's a micro to medium size investment intended to help get the business off the ground.
This funding round isn’t just business, it’s personal. So if you choose to go down this route, tread wisely and ensure that everyone knows the risks involved; it’s said that 90% of startups fail.
An incubator is an organisation that helps entrepreneurs nurture their business idea and refine it. Unsurprisingly, that’s in the early stages, pre-seed. Sometimes, that’s before there’s even a team toiling away.
Some but not all incubators provide cash and non-cash resources, like a co-working space, for instance. And not all incubators are independent organisations; some are government-backed or run by angels or VC firms (we’ll come to those later).
Very similar to an incubator, but not quite the same, an accelerator is for early-stage companies with a MVP hoping to scale more rapidly. Pre-seed to seed stage. Like an incubator, accelerator programmes typically last between two to 12 months.
One of the drawbacks of incubators and accelerators is that they are quite selective and not always accessible to everyone. Often specialising in a specific industry and only willing to take on startups in that sector.
With many, there’s a cost, a rigorous application process and high competition. For instance, Y Combinator, a popular accelerator, accepts only 2% of the applications it receives. Others only accept referrals via partners.
Location is a factor to consider too. An incubator may require all startups they support on-site. But an accelerator or an incubator could still be right for you. You'll find some of London's best in the Founder Institute’s list.
An angel investor is a private individual who provides capital usually in exchange for a sizeable chunk of equity. Generally speaking, they're pre-seed investors.
Angels use their own money and often act as mentors, not just investors. Drawing on their years of experience, an angel is usually aware of the risk that’s involved but a passionate advocate nonetheless.
Typically, they invest a small to moderate sum, often in the tens of thousands but rarely more than half a million pounds. Angels are considered a step up (financially) from the friends and family round. But they don't usually have as deep pockets as a VC.
There are approximately 300,000 angel investors in Europe funding founders’ dreams. Almost 20,000 of those are members of Business Angel networks. So that’s a great place to start. Check out The Entrepreneur Handbook’s list of the top 10 angel investment networks in the UK.
And never underestimate the power of social media; angels are people, after all. Follow @AngelList on Twitter to find angels you think could be right for you. Then connect via Twitter or reach out to them on Linkedin.
Crowdfunding is when a startup raises funds by asking the general public. If enough people are on board and each person invests even a micro amount, that can amount to a significant sum; enough to kick-start a business.
By pitching to the public, a business can build brand awareness (and loyalty) early on. And their feedback could be invaluable. With that in mind, crowdfunding works best for seed-stage startups developing a product.
Online crowdfunding platforms make it all possible. Here's a list of some popular crowdfunding platforms:
Every platform is slightly different. In the case of Kickstarter, an investor will receive some kind of reward or incentive. Whereas Seedrs helps startups raise seed or angel investment in exchange for tiny amounts of equity.
The fees for using such platforms can be quite high. And, to be marketed at all, most platforms will want to see a percentage of your investment already raised.
Last but not least, venture capitalists. A VC is a private equity investor that founders tend to turn to as the company grows and matures. Generally speaking, Series A, B and C are VC territory.
The greater the growth potential, the more likely a VC will invest a sizeable chunk of money. In exchange, of course, for a significant share in the business. Naturally, that can impact decision-making, agreed milestones and timelines.
Like angels, VCs can be a real asset to the business in terms of the experience, market insight and network they provide. Some VCs are lone rangers, but many work on behalf of established venture capital firms with big names under their belt. And reputation can go a long way.
Like angels, Twitter and LinkedIn are useful resources for tracking down individual VCs. Sifted put together a list of 29 VCs to follow on Twitter. As for venture capital firms, London is full of them. Take a look at Beauhurst’s list.
Once you’ve found your VC, it’s crucial that you nail your outreach and your pitch. Follow these tips to impress a VC and how not to impress a VC shared by, VCs! And
This blog isn’t by any means a comprehensive list of all the ways a startup can raise funds. There are other ways to raise capital besides the pre-seed investors and the sources we’ve discussed. And remember, your startup's journey is unique.
But we hope you found our quick guide to be a great starting point. Best of luck!
Did you know about The Enterprise Investment Scheme and The Seed Enterprise Investment Scheme? Under EIS and SEIS, investors can claim tax relief on their investments in early-stage businesses. Learn more.