“What’s the best way to fund my business?”: Ten founders give the lowdown on the best way to fund your business

One of the fundamental questions at the front of most founders’ minds – and the most frequently asked question – is “What’s the best way to fund my business?” As part of Global Entrepreneur Week, Hatty Fawcett of Focused For Business asked ten founders who have raised investment for their businesses to share the pros and cons of different funding options.

A quick question to ask, but a complex question to answer. And, of course, it depends: On the stage of your business; your objectives for the business; your reasons for seeking investment; and the speed at which you require it. It will also depend on what you are willing to offer in exchange for investment. Will you sell shares in your business, for example, or are you looking for a loan which will eventually be paid back?

What is the best way to fund my business? Ten founders offer suggestions

Bootstrapping – a good way to get the business off the ground

Bootstrapping your business usually means funding your business with your own money to get if off the ground, and then continuing to fund it with revenue generated by the business itself. When I started my first business, I wasted a lot of time talking to potential investors explaining why they should back my business. At the time, “the business” was little more than a well-crafted business plan and financial forecast. I remember the moment when the “penny dropped” and I realised no one was going to invest in my business until I had actually created it and it was earning some revenue. That meant investing my own savings to get things moving. I had to put my money where my mouth was.

A big advantage of starting your business in this way is that you are in control of the business. It puts you firmly in the driving seat. When it comes to the direction you want the company to take, the key decisions are down to you.

Tim Martin, CEO of WorkInConfidence,  who bootstrapped his business puts it very succinctly

“You do it because you have to.  It means you can build value before funding and get it [the business] going.” 

Always assuming you have some money you can invest, there are some disadvantages to this route. Tim found

“You are often unable to make key decisions, such as spending more on marketing.”

So is bootstrapping the best way to fund your business? Be aware that a lack of money can slow down the speed at which your business grows.

Bank loan or Start-up Loan – a helpful cash injection to achieve an important milestone

Even a bootstrapped business will probably find there comes a point when you need a cash injection to achieve an important milestone. It might be that you need money to pay for tooling for product manufacture, or you need to purchase materials or premises in order to start generating revenue. If so, might start-up loans and bank loans be the best way to fund your business?

Jaya da Costa, Founder of Pause Cat Café, saw a number of benefits in going for a start-up loan.

“It gave me the opportunity to maintain my own vision for my business and was a quicker option.  I was asked to complete a business plan to gain funding, which has been very useful during the set-up and also since opening.”

One drawback of this route is that you will have to pay interest on the loan which, as Jaya highlights

“The repayments can take a big chunk of your cash flow especially in the early stages of your business, try to negotiate an interest-only period to help with this.”

Angel investment – investors bring not just their cash but their skills, experience and contacts too

Business angels (high net worth individuals who have very often run and sold their own businesses) do not expect an immediate return on their investment. They don’t ask for interest or dividends but want to see any revenue generated by the business put back into the business so it can grow faster. What is more, business angels bring not just their cash when they invest in your business, but also their skills, expertise and contacts too. They may also have useful sector knowledge which can help you grow the business faster than the cash injection alone would suppose. They often act as mentors and can provide practical help and hands-on support. Could business angels be the best way to fund your business?

Sue Frost, Co-Founder & CEO of Curamicus, discovered many benefits of this investment route

“We were fortunate to find business angels with a wealth of business experience in particular areas who were willing to share with us for the benefit of the business. The best business angels can become key people in your startup team.”

Jason Lowe, Founder & Director of FYB London, echoed this

 “As well as the capital investment, the most valuable advantage [of accepting business angel investment] is having an experienced business mentor to work with. They help you avoid common potholes and provide an outside view on long term strategy for scaling the business.”

One of the challenges of raising investment from business angels, as Sue points out, is the time it takes:

This route to funding can be very time consuming as [business angel] groups meet probably only once per month/quarter and they only see a handful of startup pitches per meeting. We found angels within these groups can be looking for specific kinds of businesses such as entertainment apps or traditional retail businesses [and this may not coincide with your business sector]”

Jason also pointed out that with business angel investment, although you benefit from mentoring and practical advice, you are also relinquishing some control in your business. As he put it,

“You may have to compromise on some of your ideas and plans to attract investment.”

It’s important therefore to find a business angel with whom you are aligned in terms of the strategic direction of the business. It also helps if you build good rapport, openness and trust.

Angels may be more patient than banks in getting a return on their investment but they will expect a return so you do need to offer a clear “exit”. Typically, this will involve selling the business in a 3-5 year time frame so that the business angels can sell their shares at a profit.

Crowdfunding – a good way to raise funds but also to test product demand and build brand ambassadors

On the face of it, crowdfunding could be the best way to fund your business. The media is full of stories of businesses raising phenomenal amounts of money in remarkably short time periods. And crowdfunding brings other benefits too:

For Kellie Forbes, Co-Founder of YUU World, crowdfunding proved a brilliant way to market test a new product and boost sales

“[Crowdfunding provided] amazing feedback regarding the new product. That’s been insightful. We know we have a desired product, but we now realise there is another way to deliver this – as an add-on option rather than a bespoke product. It was feedback by via the crowdfunding campaign that has caused us to re-think this decision. We have a better product as a result.”

Peter Ramsey, Founder & CEO of Movem, has done crowdfunding twice and he agrees there are benefits to crowdfunding above and beyond the money raised

“Crowdfunding gives you a lot of exposure…I know that our shareholders talk about Movem all the time, so there’s an unknown amount of network effect going on there. But that’s the biggest benefit, the exposure.”

Kellie Forbes also sees PR and marketing exposure as a big upside to crowdfunding

“Our sales are up almost 20% which is thanks to the crowdfunding campaign exposure.” 

Crowdfunding is not a quick route to investment.

There is a lot of work done behind the scenes to ensure a successful crowdfunding campaign. James Courtney, Founder & CEO of Lux Rewards, explained

“For early stage startups, it is very difficult to get viral spread like Monzo etc. managed to. Realistically you need to bring 50-80% of the raise through your own connections or angels.”

Peter agreed

“Crowdfunding isn’t as simple as just ‘making a video’. Months of work go into a pitch, and even before then you have to be pre-raising and getting momentum. My advice would be to be realistic on the amount of money you need. Raising £500k might sound glamorous and you might be pleased that you’ve got 3 years of money in the bank, but it’s considerably harder. Only raise as much as you need.”

Venture Capital – the holy grail of raising investment?

For some founders and entrepreneurs, venture capital (VC) investment feels like the holy grail of raising investment. VCs typically manage a fund made up of other people’s money. The funds can be large which means VCs are in a position to make big investments, and cash-starved founders may be tempted to see pound signs in front of their eyes. Perhaps this is the best way to fund your business?

VCs are also generally very well connected and, like business angels, they want to see the businesses they back succeed. Rajeeb Dey, CEO of Learnerbly, found he benefited from his VC’s network by being introduced to one contact who became CTO and another contact with very specific skills whose advice helped them develop proper, scalable systems. As Raj put it

“I’d [recommend VCs for their] connections and expertise…as well as potential business development connections.”

VCs are unsuitable for the majority of startups

As a general rule, VCs are looking for businesses which offer not just fast growth but exponential growth. They are often focused on particular sectors and industries, and have a preference for companies that disrupt the status quo, not just “me to” products. As a general rule they don’t invest at “seed” stage but will wait until the business has proved the market and is ready to grow. For all these reasons, VC funding is not the best way to fund every business.

VCs manage other people’s money, so they have to be ruthless in managing the investment.  This drives a different agenda and a certain amount of governance and bureaucracy.Raj at Learnerbly put it this way

“The amount of governance increases – ie monthly board meetings in our case – I doubt it’d be so frequent had we just had business angel [investment]. That said, I’m actually finding these meetings useful…it’s something to schedule, prepare for and ensure you are aware of the reporting/governance requirements VCs may have.” 

Harinder Sandhu, Founder of EmpowerRD wasn’t comfortable with “overbearing beaurocracy” and loss of control. She described her situation,

“I hadn’t appreciated the level of control the VCs would look to exert – they had a specific mould they were looking to shape each company into. I decided to execute a break-clause I’d baked into our contract to cut short the funding and therefore the VC’s equity stake.”

Thomas Beverley Co-Founder at Fy also felt uncomfortable with his situation

“The VC will typically be operating [on the basis that] ​‘one-in-twenty of my investments are going to be huge; 5 [will provide] ok returns and 15 [businesses will be] write-offs mentality’. [As the founder] they obviously want you to be successful but they have 20 bets to your 1 so [motivations] aren’t entirely aligned. Therefore, they might push you to do irrational things post investment.”

The consensus with regards to Vc investment is, before you take the money, make sure your motivations and expectations are aligned.  Taking references can be a good way of ensuring this

So, what is the best way to fund your business?

There is no one best option when it comes to funding your business. The best investment for your business will be the option that is right for your stage of business, your ambition for growth and what you are willing to offer to investors in return for their investment.

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If you want to know more about the pros and cons of different forms of business investment, why not attend the free webinar “What’s the best way to fund my startup- quickly?“. Find out more, see dates and reserve your place

Riding the roller coaster: Motivation for Startup Founders

Let’s face it, running a start-up (or any small business) is a roller-coaster. There are plenty of ups and downs, highs and lows. Maintaining motivation as a startup founder is challenging. You need resilience and persistence to cope when things aren’t going to plan – but also the ability to recognise and celebrate successes when they occur.

Photo by Pedro Velasco on Unsplash

Managing your motivation as a startup founder isn’t easy. Running my start-up, I can vividly recall days when I was as high as a kite with a product breakthrough, a partnership secured or a revenue target smashed. But there were also dark, despondent days when it was all I could do to stop myself giving up and throwing in the proverbial towel. I ranted about how impossibly hard it was, I certainly cried tears of frustration and sometimes just sat, staring into space unable to even summon up the energy for emotion. Perhaps you recognise this?

Many of the startup founders I speak to recognise that maintaining motivation is part of the startup journey – and that you have to dig deep, and look in unexpected places for that motivation.

Founder and MD of Small Pharma, Peter Rands reflected

“At my lowest points the thing I got most pleasure from was reading stories to my daughters before bed, so getting back in time for bedtime became my north star. “

Alessandro Santo, Founder at Last Mile Ventures recognised the frustration of hours of hard work seemingly getting you nowhere but he pushed himself forward by 

“being stubbornly optimistic and willing to show the world that sooner or later I will be right.”

Tom Rogers, Founder at MusicGurus recalled his lowest point was when his co-founder left the business but he kept himself motivated by 

“focusing on short-term, achievable goals such as finishing a product. I also thought about the thousands of customers around the world that love MusicGurus and share our passion for learning music.”

Another founder, who wished to remain anonymous, was clear about his lowest point – but also about the surprising benefit that came from that

“Early on in our development, we had a conversation with someone who had decades of experience in our particular sector. He challenged us on every single point of our proposition, expressing a serious amount of doubt on our ability to pull it off. We left the meeting shattered, but then we took a lot of the feedback on board and pivoted to a much easier product to launch. It ended up being valuable feedback, despite the pain.

Having a true sense of our purpose has been our North Star. Committing ourselves to this goal (rather than a particular solution) has allowed us to adapt and pivot when it was required.”

Six things you can do today to keep motivated

  1. Focus on one or two things that you can do, influence or change – and then do them! Being in action, focused on something you can do, distracts you from festering and worrying about the things you can’t influence.
  2. Search out at least one thing (there may be more when you start looking) every day that you can feel positive about. Acknowledge and celebrate that.
  3. Talk to someone you trust about what you are going through. Whether its a founder of another business, a spouse or partner or a trusted friend, share what you are going through. Chances are that they can empathise with the situation, offer a suggestion or put, a more positive spin on the situation than you yourself can see. After all, a problem shared is a problem halved. 
  4. Look at the bigger picture. What is important to you in life – not just in your business. Commit to doing one thing a day/week/month that reminds you that your business isn’t everything.
  5. Remind yourself why you set-up your startup. Get back in touch with the passion and vision that had you start this journey.
  6. Visualise how you will feel when your start-up turns the corner and things are going well. Imagine the feelings of achievement, excitement and – perhaps – pride you will have. All the pain and frustration you feel now is just the aperitif to that main course.

For every “low” there will be “high” coming

Remember, your startup journey is a roller coaster so for every “low” there will be a “high” just around the corner.

Tom Rogers commented on how these “highs” can come from unexpected places

“A most unexpected high came from doing a boot camp in the rain and the mud with our partners from Rockschool (and aching like hell the next day!)”

Of course, you never know when the “highs” are coming – but you have to keep the faith that they will. In the last month I have had two conversations with one startup founder. During the first conversation the founder was close to giving it all up – cash flow was tight, everything was taking at least twice as long as planned and potential investors were sitting on the fence, seemingly unable to make a decision about investment. It was all a waste of time – or so the founder was beginning to think.

Just two weeks later that same founder rang me and was ecstatic, brimming with excitement and enthusiasm again. They had made a product breakthrough, signed a contract with their perfect partner for a trial and the investors had come off the fence and backed them. Like buses, the “highs” had come three in a row!

Next time you are experiencing one of the inevitable lows of your startup journey, remember it can all change in the twinkling of an eye.

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Hatty Fawcett offers one-to-one coaching for startup founders and maintaining motivation, getting business traction and accessing funding are common themes in her coaching. Find out more about coaching