Much of what defines success for a startup is its ability to get the right type of funding, the right amount of it and at the right time. Failing to do so, can jeopardize the entire business and put into danger of extinction even the most promising venture. According to Statista,
38% of start-ups worldwide fail due to lack of funding.
When it comes to impact start-ups, this point is even more critical. Start-up founders from the impact space are often very focused on the contribution they are making to society or the environment, but neglect the business and financial side. It is a common misconception that making good and making money are not compatible, but the truth is quite the opposite. In the recent years,
impact investing has become one of the biggest trends in the funding arena, since more and more investors are looking for a financial return aligned with purpose.
This is the best moment in time to be an impact entrepreneur. There is a growing concern with the state of the world we are living in, which turns into eagerness to contribute to solving major challenges related to environmental and societal problems. Founders have now plenty of options to fund their ventures, but choosing the right one based on the nature of our business remains a key challenge.
This is the reason why we have decided to prepare this quick guide, highlighting the most common options for impact startups to get funding in their early stage of development.
We will not cover here the more traditional ways of funding related to bank and credit institutions (lending loans against interest, with strict requirements such as detailed business plan, or pledging assets as a collateral). Given their riskier business models, most of the time this option is not suitable for start-ups.
In this series, we will focus on the different funding paths that a start-up can take depending on its needs in the early phases of its life-cycle.
- Seed stage, where the product is still in a prototype stage, while the business is not yet generating revenue from customers or users,
Start-up stage, where the business has a working prototype of its concept, with a proven user traction and ideally also generating early revenue,
Growth stage, where the company is beyond the working prototype stage, showing significant user traction and sales.
- Conventional vs Alternative: the conventional path is related to getting early stage investment through Angels and then growing through Venture capital funds, while the alternative explores a variety of options such as Crowdfunding or P2P financing,
- Dilutive vs Non-dilutive: dilutive financing requires companies to give up equity or ownership, while non-dilutive ones provide cash in exchange (usually) of an interest,
- Private vs Public: most of the start-ups tend to focus more on getting private funding, however, public institutions are a great source of funding for impact-driven businesses, specially in Europe (with its Green Deal policy initiative and funding programs such as Horizon Europe).
