By: Jack Underwood, CEO and co–founder of Circuit
There are a range of factors to consider when starting your own business. Who are your competitors? What sets your product apart from others? How many employees will you need? However, one of the most important questions new business owners will ask themselves is how to fund their new venture.
Most people do not have heaps of money at their disposal, but this should not hold them back with the proper knowledge and a strong business plan. My co–founder Pol and I started the business with just our savings and have since bootstrapped it to $10M in ARR. We received a small amount of angel investment along the way; however, our growth developed the vast majority of our funds.
There is a range of methods new business owners can use – take a look at your options below:
Bootstrapping
Before setting it up, bootstrapping requires some funds and a business model that can quickly return capital. As a result it is an excellent method for SaaS businesses with quick feedback cycles and charge for their service. This is how we have built Circuit.
One of the big advantages of bootstrapping is that there is often a straightforward ownership structure where the founders have, if not complete, then a huge majority control of the business. However, it’s important to note that this method will not be ideal for businesses in highly competitive industries. Bootstrapping needs some sacrifices from the founders. If you don’t hit your initial revenue and profit projections, you will need to have some savings or funds behind you.
Crowdfunding
We’ve all seen crowdfunding campaigns as a popular choice for B2C products.
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.
Angel Investment
An angel investor is someone who offers capital for a new business or startup, often in exchange for part-ownership or as a loan. Some also offer mentorship to guide entrepreneurs through their journey.
As a person is being offered capital, they can be more engaged in the business and offer practical support to help it grow. Several startups develop a strong relationship with investors who can then reinvest when capital is needed quickly. For example, at Circuit, we seek investment to help us maximize advertising spend during peak periods.
Startups should be aware that angel investors usually offer less money than they can get through other methods so founders may need to seek investment from a number of them. Startups need a higher level of investor management and communication.
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.
New business owners should not rush to decide how to fund their business. This decision is an important one and can define the trajectory of your venture. Consider what works for the type of business you have, plans for the future and how much control you are willing to share with an external investor. With these in mind, you can ensure you’re making the right decision.