Seeking startup funding & investment - your options explained
Welcome back, and welcome to part 4 of The Startup Series! So far, we've looked at considerations for forming your startup and the best tech stack for remote working, and we've discussed some of the different approaches to really getting to know your market. In this blog, we'll get into how to get funding and investment for your startup.
You might be at the stage now where you've validated your business idea and are trading successfully. This is great! Now could be a good time to start to put plans into motion for those longer-term goals you've set for yourself. Growth.
Growing your business can be hard and feel a little daunting. It usually involves money, sometimes a lot of it. But we're here to help! We've pulled together useful information to help you, with insider tips from our co-founders on how to get startup funding and investment.
How to get investment for a startup
- The Elevator Pitch to win you funding
- Get your timing right
- Types of Investment
- Tax incentives for Investors
- Advice and Legal Support
First things first, when raising investment from any third-party, you will need to be thoroughly prepared to clearly explain what your business does, usually in what is called an elevator pitch.
This is an analogy whereby you get in a lift/elevator with an investor, and you have about 30 seconds to explain your business before he/she leaves the lift. Having an elevator pitch that is simple but creates interest should help get the investor's attention.
Be prepared to answer any tough questions. Investors want confidence and to know that you've already considered the questions they might throw at you.
Our elevator pitch tips to win your startup funding
- Prepare a clear plan and strategy document
- Be open and honest in your approach
- Set realistic expectations about future growth potential
- Be clear about what you want investors to do / not do in your business (if anything)
- Find investors that are also excited about your business
Getting your timing right
Whilst you may think there is a massive rush to raise investment, you should also consider that continuing organically with your business idea will do you no harm either. The further you can get without raising any investment means that ultimately you still own 100% of your business - and there is nothing wrong with this. You need to balance this approach by considering that, by having financial investment, you will be able to grow your business faster. Therefore it will become larger more quickly than if you stay on an organic growth route. You will own less of the business, but if it grows faster, it will have been worth it.
Trying to raise your investment at the right time, so you can fully utilise the investment raised to enable you to scale your business idea is what it is all about. This sounds obvious, but if you do this too early and cannot then deploy the capital raised to grow as you planned to, then you will struggle to raise more funding in the future. On the flip side, if you raise investment too late and stretch yourself, then you are likely to be more desperate for cash and may end up giving away more equity than you initially intended.
Timing and a little luck along the way are key.
Types of startup investment & funding
As a smaller business, it is more about looking at what finance types you can tap into. Usually, the types of startup business funding available is limited based on the stage of the business you are at, growth rates, operational progress, etc. There is no right or wrong way to go, really, as it might boil down to what is best for your business.
Here we look at the types of investment available to you:
Bank loans for startups
Commercial bank loans have long been the traditional route to follow for lots of small businesses, but this might largely depend on your relationship with your bank. Often loans can be provided quite quickly, but usually come with personal guarantees that you will need to make to effectively provide the bank with a guarantee that you can 'cover' the loan if it does not work out. This will often involve you providing equity in your house as a means of guaranteeing the loan, so be careful! If things go wrong, you might find yourself in a position where the bank calls in the loan, and you have to sell your home to cover it.
More recently, due to the global COVID-19 pandemic, you could also tap into funding from providers like the British Business Bank and Starling Bank, who are certified providers of government-backed business lending packages to small businesses through the Coronavirus Business Interruption Loan Scheme (CBILS) and the Bounce Back Loan Scheme (BBLS).
Beyond your own bank, you could also look into services like Funding Circle who provide funding from personal investors with a fixed interest rate. There are many resources online, so make sure you do plenty of reading before making your final decision.
This is a popular route to go down. It involves the investor being totally aligned with your business and your vision, as they are willing to invest in return for shares (equity) in your business. It comes with the added pressures that your investor(s) will likely want regular updates on your business performance, perhaps even a seat on your Board of Directors. They will also likely want terms and conditions to ensure you are totally committed to the business through a formal Shareholders Agreement. This will give them various controls and measures about which you will need to engage with them.
There are various ways to secure equity-based investors, and some popular options include:
- Friends & Family Investors - often the easiest place to start but can also be the most complicated due to placing "strain" on personal relationships with those nearest and dearest to you. Whilst friends and family are likely to want to see you succeed with your business by offering financial support, they will be unlikely to add any additional value to you in the form of advice, support, and guidance that you might need as you progress. Of course, the biggest risk with friends and families' money is that despite you having no intention of failing, we know that approximately 20% of businesses fail within the first year. Therefore if you are one of the unlucky ones, be prepared to explain to your friends and family that they have lost their money.
- Crowdfunding - this is a more modern approach, and platforms such as Crowdcube and Seedrs allow you to present your business plans to their registered investors who can plan aggregated investments into your business. This can quickly add up to large sums of investment through the "crowd" effect and others seeing how popular your business opportunity is. Some great examples of businesses that have successfully raised money via this route are Monzo, BrewDog, PodPoint, and many more.
- High Net Worth (HNW) and Angel Investors - getting to these HNW investors, often referred to as Angel Investors, can often be the biggest challenge. Still, if you can find wealthy investors yourself and pitch them your business idea, then you might be able to secure investment from them on a personal level. It is usually the case that angel investors are part of a small network of other such investors who are business friends and associates. They often invest in things collectively, so by tapping into one angel investor, you may actually find you discover they can bring other investors to the table too.
- Private Equity Funds - of all the options, this is a more formal way to go because a private equity (PE) investor is actually an investment business. It makes lots of investments in developing businesses each year in the educated hope that they will make money on each investment as the businesses they invest in develop. They will bring not only money to you but also a wealth of knowledge and experience in running fast-growing businesses. This can often be a catalyst for strong growth if they like your business, as they will be totally aligned with your vision and help you grow quicker. On the flip side, they will definitely want controls and measures in place, which you might find challenging. This all comes down to agreeing on clear "equity terms" with any PE fund.
Tax Incentives for Investors
The Government has recognised the challenges that smaller businesses have in raising investment and also the high risks that investors take investing in such businesses. Over the years, they have introduced a range of schemes to make it easier for investors to enjoy tax breaks and other benefits from taking these riskier investments.
It is worth being aware of these because any of the four equity-based investors we mentioned above could invest in your business through one of these schemes, which would potentially de-risk their investment through various tax incentives. Clearly, some of their investment capital will still be at risk, but it may give them a slightly different perspective on things.
The key schemes are:
- Seed Enterprise Investment Scheme (SEIS) - this was introduced in 2012 and allows a company to secure up to £150,000 in investment whereby any investors would get 50% of any investment they place back in income tax relief and then they would pay zero Capital Gains Tax (CGT) on any gains made in the future after a three-year holding period. This effectively means that if an investor pledged £100,000 in investment, they would get £50,000 (50%) back in income tax relief. This massively reduces their risk for investing, and in the future, if they sold their shares, they would have no tax to pay on any profit made.
- Enterprise Investment Scheme (EIS) - this is the same as SEIS as described above but allows a business to raise investment of up to £5m per year to a maximum of £12m in its lifetime. The investor would get 30% income tax relief and enjoy zero capital gains on future profits made as with SEIS.
More information on both SEIS and EIS can be found here on the HMRC website.
Advice & Legal Support
We would recommend seeking professional advice for any investment you raise into your business because this is an important step in your business's journey. It is important to have clear legal and financial advice at your disposal so that you understand the facts.
It's always a good idea to find a mentor, too, someone who can help you develop your ideas for growth and scale. This could be a business friend, associate, or, as mentioned earlier, an Angel investor. You can find free or paid-for mentors through various websites too. Being able to tap into this kind of resource will be extremely useful.
There is a lot to think about when it comes to business startup funding, but, with a great elevator pitch, thorough research exploring the options available to you and strategic timing you'll be on the right path. In our next blog we'll discuss what it takes to grow and scale your business.
But for now, if you're looking for a modern cloud-based phone system for your startup, we can help. CircleLoop can give you a local presence anywhere in the UK or internationally with virtual numbers. Talk to us today about our killer phone system features and powerful integrations, or arrange a free demo.