Mix and match funding options together to launch your business
When it comes to funding, startups are spoilt for choice like never before. Gone are the days of having to rely on the whims of investors or wealthy relatives; now the process is often more democratic, driven by consumers who believe in your product and are willing to invest, or by small loans and grants from companies who think you’ve got what it takes. Only a tiny fraction of startups win multi-million investments off the bat, but that doesn’t matter any more. Variety is the spice of life, and sometimes a small amount to get you started can be a stepping stone to bigger and better things. Here’s how to mix and match funding to fit your needs, and examples from our startups who’ve done it before.
Early stage funding
It can start with just £500, the amount we offer. It can start with less, like the coins Richard Branson fed into payphones to sell advertising for Student magazine. While it can be frustrating not to have as much money as you’d like at the start, a little can go a long way – it’s not called ‘seed’ funding for nothing. Here are some of the options.
Not to blow our own horns or anything, but as we’re specifically designed to get early-stage businesses off the ground we had to throw our hat into the ring. A Virgin StartUp loan is a personal loan of £500-£25,000, with a fixed-rate repayment of 6%, and flexible repayment options. Other loans, such as bank financing, might not be willing to take a chance on your startup; but for us, that’s kind of the point.
A great example is startup Mous, creators of innovative phone cases that keep your headphones from getting tangled. They received a £7000 loan from us to get cracking on creating their first phone cases. This led to them starting a crowdfunding campaign in order to expand, smashing their Kickstarter target to raise over £12,000. This was just the start – they’ve since raised £110,000 from equity crowdfunding with Angels Den. All from a £7000 loan.
There are many sorts of crowdfunding out there, a rapidly-diversifying industry that’s expanding as startup needs become ever wider. But probably the best for early-stage businesses is reward-based crowdfunding. It allows you to prove an audience is there and eager for your product, it allows you to raise seed funding on your own terms without the pressure of debt financing, and it helps you validate your idea – useful for when you reach the next stage of your funding cocktail. However, on the downside, if you have an unsuccessful campaign it can have long-term negative repercussions – so ensure you’re ready for it.
Particularly if you’re a tech or innovation business, there are hundreds of grants out there for businesses that are changing the game. You’ll generally be expected to match at least part of it with your own financing, but hey – you’re mixing up a funding cocktail anyway, so it’s not like you don’t have options to make up the shortfall. And did we mention that grants are non-repayable, aka free money, aka the startup’s dream?
Friends and family
If raising money from friends and family is an option, either as a loan or as an investment by them, it can be a way of funding that enables you to work out flexible terms for repayment, as well as acting as a positive springboard for future investment – showing that you have a supportive network willing to invest in your product looks fantastic to investors. On the downside, failing to talk through what the expectations are on either side for the funding agreement can lead to disagreements and ill-feeling down the line.
Once seed funding has been secured and used to help develop the business – and you can build up a track record, prove the idea is viable, prove demand and show off your ace, newly-fledged project – it’s easier to gain bigger investments.
Angel investors are generally individuals or syndicates who invest smaller amounts than venture capital funds – typically less than a million pounds – in return for equity. Angel investors can bring their experience to the table, but tend to be less hands-on than venture capital investors. While more and more investors are willing to take a punt on unproven early-stage businesses, having experience and a track record behind you is definitely a bonus.
Without property to secure a loan (and with the risk of losing your home if the business runs into difficulties), bank loans can be difficult to get for a startup. When you have proven financial records, a profit stream and loyal customers, you’ll find that the bank is more amenable to giving you the cash to take your business to the next step.
Equity crowdfunding is the next level when it comes to crowdfunding. Rather than giving people pledging you money rewards, you give them equity in your business, turning your customers into your stakeholders or allowing smaller angel investors to club together – so you need to have established a business with value first.
For example, the two founders of app Frugl received £40,000 in total from Virgin StartUp, and after spending a year building up a solid customer base and the company value they’re now looking to raise £150,000 on Syndicate Room – a platform that lets angel investors invest in businesses.
Later stage funding
So where do you go from mid-level funding, when you’re looking to take your business internationally or to expand significantly, with a solid and thriving model to show investors?
The main option is venture capital, the dream of every business longing for a multimillion cash injection. Venture capital funds are set up to invest in businesses that will see a huge return on investment, and generally don’t offer less than a million pounds. However, the VC investors will be stakeholders in the business, meaning that they’ll have a say in how it’s run – you’ll lose some control.
Case study - MiPic
Carl Thomas is the founder of MiPic, a social gallery - ‘think Instagram but with products’ which allows users to monetise their creative art or photos by sharing and selling them as art and fashion products, ranging from framed art, iPhone cases to flip-flops and more.
MiPic are the embodiment of the power of the funding cocktail. As a tech startup they were self-funded in development when launching in BETA last year, before winning Pitch to Rich 2014, scooping £5500 in the process. But to gain further traction and scale the business they needed larger Seed investment. They began with a £25,000 Virgin StartUp loan, which gave them the funds to develop their product further and launch a new app, before starting the pitching process to investors. miPic went on to launch a crowdfunding round with Crowdcube, raising an impressive £170k and further funding from a private Angel investor.
“Trying to raise angel investment was an all consuming and challenging experience,” says Carl. “I pitched at several London events, but none of them felt quite right. We gained ‘Yes’s’ from ‘Dragons’ and lots of people promised introductions to investors but didn’t follow through. Many people we met were either looking for non-exec roles at miPic or brokers asking for 5% cash commission for the intro.”
“At the serious end of the spectrum, we were invited to a well known VC in London to introduce miPic and remember waiting in reception in awe of the gold plaques on the wall of the companies they had previously backed. Unfortunately, we were too early stage for them, as they typically invest £3m to £15m in later rounds, but asked us to keep them updated on progress and growth as they liked our traction and vision for miPic. This opportunity certainly gave us something to aim for, but we still had to get over the first hurdle of seed funding.”
“We decided on equity crowdfunding for seed investment as we wanted to offer miPic app users and customers the chance to become stakeholders and join our journey – it’s a social driven business, which is perfect for crowdfunding. In the end, we surpassed our target, thanks to a significant lead investor throwing their hat into the ring during the final few days of the pitch.”
“The main lesson I learnt from crowdfunding was that we should have secured a large Angel contribution first before launching the public campaign. It makes a huge difference starting with 30% secured before going live instead of starting with just friends and family investments – Its like a snow ball affect. When the crowd see that other people have invested, it encourages them to fund as well – if you can get to 70% of your target, the momentum is likely to see you over the line.
We managed to raise over £40k from the crowd, which was fantastic, but it took up a huge amount of my time, doing all the marketing and communications myself. With hundreds of business plan requests it is hard to establish who are the serious investors when crowdfunding. If you can get help with that, it’s a big bonus, as raising funding is more than a full-time job, 18-20 hours a day even.
“Alongside our crowdfunding campaign, we were also in talks with an SEIS fund who invited us to a final pitch at the Shard on Xmas eve. We were successful and offered £150k that day which was a great amount of money and we hoped they could lead our Crowdfunding round. After taking out commission, due diligence fees and monthly management fees, the working capital was much less than expected for the equity on offer. We ultimately decided it wouldn’t be best for the business and despite no plan B we declined. Making those sorts of decisions is very difficult, but we felt it was important not to jump at the first offer – we had to ensure that the investment was in the best interests of the business’s future.”
“Thankfully, we managed to secure the investment we needed on the final day of our crowdfunding campaign with a lead Angel investor who we feel matches our own enthusiasm and aspirations for the business. Now we want to grow and build the miPic platform into a household name, so we can one day have a gold plaque of our own."