How angel investors get you a step closer to venture capitalist funds
Learn the differences between angel investors and venture capitalist funds, and how angels prepare your startup for venture capital investment.
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.
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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.
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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.
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– 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.
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Crowdfunding allows many small investors to pitch in and support your startup, either just for the good cause or rewards and perks.
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– 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.
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.
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– 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.
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.
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– 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.
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