6 ways to fund your startup – and when to pick which option
Financing is one of the most important – and most time-consuming – elements of building a company. Most startups begin with early seed funding from friends and family, but then what? Below, Sting’s coaches explain some of the good and the bad with six different types of funding.
Before you start your financing journey, it is important to critically think about what your goals are with your company. What kind of pace is needed for your company to succeed? What are the value-increasing milestones over the coming years? How important is it for you to keep control of your company? Answering these questions will help you find the right financing option below.
Grants are funds provided by organizations, such as Vinnova, the Swedish Energy Agency and the EU, for a one-off project. They are primarily for early-stage, high-risk companies with an academic origin, based on science or research and often with a strong IPR.
- You don’t have to give away shares of your company, so it doesn’t dilute your shares.
- It is essentially “free money”, as you don’t have to repay a grant.
- It can fund important early milestones.
- It can help you better structure your product development.
- The application process can be extremely time-consuming.
- Grants often require some level of compliance and reporting, which can be quite tedious.
- The hit rate varies between 5%-20% – most applications fail.
Loans to startups are often provided by for example Almi Företagspartner, especially their “Innovation loan” in early stages. Sometimes, there’s also a possibility to receive loans from banks.
- Helps to finance product development in early stages.
- No dilution of shares.
- You must pay interest and have a possibility to pay back the loan.
- Will affect the balance sheet as a debt and create a risk for control balance sheet.
- Sometimes you need provide personal bail.
3. Customer financing
Another way to finance your company is through customer financing. This is a great way to let a potential customer pay for early test/pilot to develop the product further until final product is ready for launch.
- Creates a strong relationship with customers in an early phase.
- Cost efficient
- Can finance the product development.
- Market credibility, as the startup gets to “borrow” some of the goodwill that the customer potentially has built up.
- Customers see potential disadvantages early before the product is ready
- It can come with a “lock-in” during the pilot, preventing discussions with other interested customers
- There is also a risk of lock-in on foreground IP in joint development projects if you lack experience in negotiating IPR clauses in the development contract.
– These three types of funding; grants, innovation loans and customer financing, are what’s often called “soft financing”. This means money with low or non-existent risk for the entrepreneur and without major requirements for return or ownership. You should use soft financing in the early stage to build value in the company before attracting private investors, says Olof Berglund, business coach at Sting.
Crowdfunding allows many small investors to pitch in and support your startup, either just for the good cause or rewards and perks.
- All communications on one platform – no need to update potential investors through emails, meetings and phone calls.
- Non-dilutive. Your investors are being rewarded with perks not equity.
- Great way to test the market and validate your offer.
- Your investors finance your product.
- Can create momentum and build your market.
- Scammers have reduced the trust between entrepreneurs and early adopters.
- A lot of work – to be successful you likely need a full-on launch campaign.
- Negative feedback can be damaging.
- The transparency and visibility of failure. Crowdfunding puts your company’s performance in full public view.
– The startups best suited for crowdfunding are in general those with tech gadgets or products with wide appeal that already have a large following of fans. It’s more difficult to explain and understand a complex medical device, for example. You also need to be a really good storyteller to break through, says Karin Ruiz, business coach at Sting.
5. Business angel financing
Business angels are private individuals who invest their own money. They are often established entrepreneurs who understand the degree of risk involved with establishing a small business. Usually, the first ticket is in the range of 250 000 SEK – 1 MSEK.
- Business angels invest in the early stages of company development.
- In addition to capital, business angels can provide sector experience, knowledge and network.
- They can also be hands-on engaged in the companies they invest in.
- Business angels can both make investment decisions and act quickly.
- They usually have an investor network and can get multiple people to invest.
- Well-connected business angels can open doors to later stage financiers, e.g., VCs
- You give up a share of your business.
- If you give up too large a stake in your company to business angels early on, you may run into troubles securing later-stage financing
- Business angels invest with the expectation of a return on investment. This may create extra pressure to deliver results quickly.
- Business angels are individuals who invest their own money, pay attention to personal chemistry and reputation.
– Startups often bring on business angels early, when institutional investors feel that the risk is too high or the tickets too small, says Krim Talia, active angel investor and business coach at Sting.
6. Venture capital
Venture capitalists (VCs) are investment companies that takes a percentage of your company in exchange for capital. VCs invest other investors money with an objective to deliver a significant return on investment. VCs therefore have a limited time horizon for their investments. There are different categories of VCs, investing in different industries and stages of company development, ranging from very early stage (alongside angels) to growth stage.
- VCs can give you “muscles” and help your company grow fast, as speed and timing are often very important.
- VCs can also provide international networks, knowledge and professional guidance.
- This will allow you to take on multiple markets faster than the competition.
- Well-connected VCs will support you in the next funding round, potentially opening doors to new investors.
- You lose a (big) stake in your company and thereby control.
- VCs may want to be involved in your company’s operations and decision-making. You may have to compromise on your goals.
- VCs often have a long and drawn-out investment process. It is not unusual that it takes at least 6 months from the first contact to closing.
- The legal agreement is typically quite complex with tougher terms than business angels.
– Venture capital is a good alternative for companies with a great growth potential in need of financial muscles to speed up the development. However, the entrepreneurs who bring on VCs on their journey need to be open to dilution and loss of control. Many well-established VCs have extensive networks and can be of great help for a startup that is embarking on its internationalisation journey, says Maria Ljungberg, Director of Investor Relations at Sting and CEO of Propel Capital.