Startups are vulnerable creations. From the very beginning, in order to survive and build a sustainable business around an idea, founders need to get right diverse set of topics, being among others – research & development, product building, marketing & sales, bring talent, etc.. As we saw in the previous article about funding in seed stage, unless a business is able to start generating enough revenue early on or the founders possess substantial savings, it is critical to attract external investments.
Having passed the initial vital seed stage, companies enter in a phase of market validation, their scope of operations grows and so do their funding needs. This phase is often referred to as the Startup stage.
A business enters in Startup stage when it already has a working prototype of its concept, ideally with a proven user traction, as well as possibly generating revenue.
There are many different ways to finance a company in this stage of development. As it was the case during the seed stage, the most natural way for this to happen would be generating revenue through early sales. However, this will not be a viable option for most of the impact startups. Furthermore, for the most part, the required amount of funding will be this time significantly higher (vs. in seed stage). As consequence, where to search for it might also change.
Hereby, we will highlight different funding options for those businesses that encounter themselves in startup stage. Even though our focus is on impact startups, these might be applicable to any startup out there. Under certain circumstances, some of these options might be also suitable for a business in seed stage, too.
Crowdfunding
If there is one concept that has completely transformed the way projects and businesses get financed in the last decade, this is undoubtedly Crowdfunding.
Crowdfunding is the process of raising funds to finance a business venture or project by a large pool of individuals, brought together through online platforms.
Although the concept of a crowd coming together to finance a project is not new, this idea has been facilitated and brought to the masses just recently through the power of Internet. In just about 15 years – since the crowdfunding term was invented – it became mainstream, giving access to funding for many starting businesses, which would otherwise possibly not be able to raise funds elsewhere.
There are many ways to raise funds from the crowd, depending on the type of incentive or return given back to the funders. Certainly, new models are continuously arising. Below we highlight the most common ones:
Equity Crowdfunding
It is based on giving a stake of equity in the company to the pool of investors that fund your campaign. Usually suitable for ambitious businesses with big potential that want to use the power of the crowd to raise funds and scale. The most popular equity crowdfunding platforms in Europe are Seedrs and Crowdcube, both from UK.
Rewards-based Crowdfunding
The project or business raising funds will reward in this case its funders with a given incentive (such as a product, service, merchandise or any other sign of recognition for the support given). This model is best suited for product-based businesses in prototype phase, willing to find product-market fit. Such platforms are Kickstarter and Indiegogo, widely used for raising funds from the crowd globally.
Debt-based Crowdfunding
Often referred to as Crowdlending or P2P lending, in this case the funders act as lenders to the business, receiving in exchange a set interest rate for the loan, secured or not by a collateral. This non-diluting model suits well companies that expect to receive revenue in a given time-frame to cover its debt obligations. There are plenty of platforms offering crowdlending, including specifically for the impact space, being one of them the Portuguese GoParity, the British Abundance Investment or the Dutch OnePlanetCrowd.
Donation-based Crowdfunding
In what qualifies as charitable giving, in this case funders choose to support a given business or project without expecting anything specific in return. This is mostly suitable for content creators, media and artists. Example of such platform is Patreon, widely used worldwide by content creators for monetizing their content through their followers.
Digital securities Crowdfunding
Carried out through the so called Initial Coin Offerings (ICOs), it consists on issuing digital securities (tokens) at a discounted price for the initial funders of the project. Administered through the Blockchain, this type of crowdfunding is best suited for Blockchain or NFT related businesses.
Among others, another crowdfunding models raising in popularity are those related to Revenue Based Financing (RBF) and Invoice trading. These funding methods, which exist also outside of the crowdfunding framework, are applicable for companies with more traction.
The pros and cons can vary greatly between one type of crowdfunding and another, but there are several items that are inherent to raising funds from the crowd.
Pros:
- give chance to your hard core fans to be part of your mission
- creates a strong bond and engagement with the community
Crowdfunding turns your customers and users into main advocates of your business
Cons:
- running a good campaign can be very time consuming
- vulnerability in front of your backers
- not delivering on your promise can unleash a chain of negative reactions
Few questions before considering crowdfunding as an option:
- Do you have a strong community behind you? This will be vital for any type of crowdfunding.
- Business model: do you serve other businesses (B2B) or end users (B2C)? B2C are overall more fundable by the crowd, given their usually higher engagement with the community.
- Type of business: product or service? Products are more suited for reward based crowdfunding, while donations suit more services.
- Scope of operations: local or international? Businesses that have a well defined target group inside a local community often drive a great reaction among their followers, although in other occasions, a dispersed but engaged group of different individuals can also lead to a fruitful campaign.
Given the complexity and the distinctiveness of each type of crowdfunding, we will explore the topic in separate article(s), where we can go in sufficient depth.
Angel Investors
Angel Investors are crucial for a flourishing startup ecosystem. As the name suggests,
these are individuals that support a project from its early stage of development, backing financially its founders and facilitating the transition from a promising idea to a working business.
Even though most of Angel investors expect to see product-market fit before investing in a business, it is also common to find those investors that are ready to fund businesses still in seed stage.
There are plenty of reasons to go to Angel investors. Their area of impact goes far beyond the financial contribution, but with this comes responsibility, too.
Pros:
- equity funding, usually in the range of 25-100k Eur
- mentorship and guidance, helping founders go from zero to one
- they usually possess expertise in the industry or in a particular important area of the business
- partnership opportunities in the Angel’s network (suppliers, distributors, customers, etc.)
- referrals for future investments (to other Angels, VCs, etc.)
- the process of funding is relatively quick
Cons:
- lack of fundraising experience and low bargaining power – founders are not well equiped to negotiate with investors early on
- the above can lead to giving up a high stake of the business
- pressure to succeed and get results
- potential discomfort and friction, if the work ethics of the angel does not align with the founders’ way of operation
Choosing wisely who to get funding from (and who not to) will multiply your possibilities to business success, along with personal growth.
How to succeed in attracting the right Angel Investors?
- go to business events, pitch competitions, connect with people
- search for impact oriented angel investors
- select potential investors based on their expertise in your field or in a business area you need support in
- connect with them also on a personal level, making sure their values match with yours
- when negotiating the deal, seek for advise from a lawyer (specially if you do not understand some of the terms)
- do not accept the deal if this restricts your freedom to develop your business in a way that you do not feel comfortable
- keep an open mind and stay flexible
In the recent years, it is becoming increasingly popular for angel investors to come together and invest as a group, building the so called Angel Syndicates or Angel Networks. Their funding commitment is usually much higher, being suitable for companies in Growth stage.
Government funding
Public funding is often neglected by many startups because of the rigidity and lack of flexibility, being also often associated to non-for-profit organizations and more traditional businesses.
Fortunately, in the recent years more and more governments are willing to provide financial support – usually in the form of grants and subsidies – to encourage the development local entrepreneurial ecosystem.
This is even more valid for impact startups.
Given the rising global awareness about the environmental challenges that come from climate change, as well as the increasing consent around building more equitable and inclusive societies, governments are willing to do their part to support people and businesses that are working on guiding us towards a better future.
This is especially true for countries from the European Union, given the above topics have been marked as a high priority and are object of financing though numerous EU grants and funding projects.
There are however many issues to consider before turning your attention to getting funding from a governmental institution.
Pros:
- non-dilutive funding for launching/accelerating your business
- plenty of government funding programs to apply for (some of them being complementary)
Cons:
- high competition – there are many applicants to each program
- difficultulty to pick the right program among many others
- highly bureaucratic, being the entire process very time consuming
- lack of flexibility (i.e. spend money in a very precise way) or rigidity (i.e. develop given solution), which could limit future ability to pivot
- it might create a dangerous funding dependance and potential conflict of interests: absorbing funds vs meeting market needs
- the terms might be very strict on the impact side, which could potentially deviate the attention from the business development & profitability and sustainability over time
How to make a proper use of the government funding possibilities out there?
- search for those programs suitable for innovative impact businesses solving greater challenges
- assess the time needed for application and until getting the funding (if your application is successful)
- if you are not willing to spend the time, hire a consultant to search for a right program suitable to your business and particular needs
Being public funding very diverse, options are widely available for startups regardless of where they are in the development cycle.
Some impact specific businesses funding options:
Ethical Banks
In the recent years, often with the due support from the governments, we have seen the emergence of ethical banking institutions, whose mission is to support companies with positive impact on the environment or the society. Unlike traditional banks, these institutions are more flexible in their risk management, being prone to offer discounted interest rates in the financing of impact-driven businesses.
Foundations
Even though foundations are mostly associated with charitable work, apart from funding NGOs, some of them are also open to financing for-profit ventures. This is even more accentuated for businesses, whose main driving force is doing good. Illustrious examples, among many others, are Bill and Melinda Gates Foundation or MacArthur Foundation.
Cooperative model – the alternative route
A very different strategy for growing and funding an impact company is through the so called Cooperative model (COOP). Based on the original idea of agricultural cooperatives, we see this type of organizations emerging in many different industries and across Western countries. Based on meritocratic principles and owned by their employees and/or users, if managed well, these organizations can become very successful and benefit from multiple network effects.
In the next article, we will explore what are businesses’ funding needs once they have proven their concept and are ready to scale (Growth stage).
