Which Financing Method Is Right For Your Startup?

11th August 2021
Scaleup startup Apple Mac

There are a host of options for new startups looking to source their pre-seed and seed funding. These days, financing your startup isn’t a one size fits all situation.

From traditional investors to crowdfunding, and loans, there’s no shortage of avenues to explore. The best solution will depend on your industry, market niche, and business objectives.

Venture Capitalists – This is one of the most traditional ways for a startup to obtain its funding. However, many VC firms will either prefer to lend to established entrepreneurs (with a history of successfully building new companies) or invest in businesses at the scaleup stage.

VCs hold pools of money from individuals and businesses in a fund, which they invest in exchange for equity stakes in the company. Startups are different from other small businesses and usually work on models with an aim to being hyper scalable for rapid, exponential growth and big profit.

peer to peer lending

Angel Investors – It’s an ideal scenario for startups who can attract the eye of an Angel Investor. These accredited, individual investors tend to take an interest in impressive entrepreneurs and are more likely than VCs to invest in early stage startups. However, their investment is usually somewhat smaller compared to what VCs invest. Both VCs and Angels are highly attracted to innovative, modern tech industry companies.

Peer to Peer Lending – A relatively new financial option for financing startups. These online marketplaces allow individuals and business to loan money to new startups and set the interest repayments.

Of course, investors aren’t the only option for startups. Depending on your stage and industry, you may prefer another route to accessing the funds for setting up your business.

Alternative Funding Avenues For Startups

Bank Loans – Another very traditional way to access funds, however, bank loans can be challenging to secure for first time entrepreneurs. Some of the benefits include retaining creative control of your startup, rather than bowing to the will of investors.

Government Grants – If your startup is in certain sectors, such as education or healthcare, you might be able to score a grant with few or no repayments at all.

partner financing

Accelerator programmes – Much like grants, there are a number of programmes for particular in demand industries and sectors. If your startup qualifies, you could take advantage of an accelerator programme, which does more than just inject funds. There is often training available along with access to helpful resources.

Partner financing – Sometimes an existing larger company will take an interest in a new startup and fully or partly provide funding. This is normally with a view to acquiring the company down the line. A good option for startups who were planning to scaleup, in order to sell anyway.

Crowd funding – A excellent way to source funds while doing pre-emptive marketing to your target audience and generating buzz prior to launch. Crowd funding lets ordinary people support business ideas that they love. It is great for niche startups because they can access small amounts of funds from a large number of people.

Boot strapping – This is the term for using your own private money to fund the startup. This is quite common in the very early stages of a startup, before then pitching to VCs and other types of investors to take the company to the next level.

Leasing – It isn’t just capital that can help startups get off the ground. Other financial support can include sourcing equipment and/or training of your workforce. Leasing IT hardware devices can be a great way to spread the costs of business and help funding go further for startups.

It’s worth new startups familiarising themselves with the various financial options available before deciding how to fund their venture. On top of this, entrepreneurs need to pay careful attention to the current economic climate and how it will have a knock-on effect to sourcing funding.

How Has The Pandemic Affected Startup Funding?

The global COVID 19 pandemic and economic downturn have had some interesting effects on financing for startups.

Startups usually access rounds of funding from investors in order to initially finance, launch and grow their business.

2020 and the start of 2021 has been a very mixed bag for startups, although hardly the disaster many people suspected it to be.

While there have been challenges, investors have still been keen to reward innovation during the pandemic.

covid impacting businesses

Early in the pandemic and the first lockdown, most predictions pointed to a downturn in investments and more cautious investments. Times were unprecedented and no one knew what was happening, so it was challenging to make accurate predictions.

 In reality, the outcome was more nuanced and many startups found it easy to score their initial funding.

In fact, there was a big uptick in the number of startup businesses being formed in 2020. While some new companies were destroyed by COVID, others saw opportunities.

Business incorporations increased by 30% in the UK within the four weeks leading up to mid December 2020 compared with the same time period the previous year.

Tech companies, wellness businesses, online courses, logistics companies and delivery startups have surged in number and prospered in the wake of the pandemic.

The predictions of overly cautious investments were mistaken with 2020 being characterised by higher-than-normal investment levels. Investments were up to £13.2 billion, compared with only £10.6 billion in 2019.

Despite a large number of industry experts fearing a reduction in investments, venture funding has risen 4% year on year to $300 billion. The opportunities created by the pandemic for savvy entrepreneurs has actually fuelled that growth with new records observed for startup funding. 

However, it hasn’t all been positive across the board. While some startups are a product of the pandemic, others have seen funding becoming increasingly difficult. It very much comes down to industry, entrepreneur experience and the type of funding you access.

Venture capitalist firms are one of the common sources of funding for startups and scaleups. Certainly, in the UK, VCs have been slightly more cautious during COVID. It’s not that they are not investing, but they are putting larger amounts into less numerous investments. It is likely they are looking for especially strong ideas that will perform well in the current climate and make use of the lockdown lifestyle or re-emerging vaccinated lifestyle.

As expected, many venture capital firms are leaning towards a continued slowing down of activity. Whilst they are still on the lookout for interesting startups, they’re reducing the number of new investments, and intend to maintain this ‘new normal’ for the coming months.

It has been an especially tricky time for very young startups in their early stages looking to pre-seed and seed funding. These have been some of the hardest it by investor caution during COVID.

Unfortunately, one other startup subgroup that has been negatively affected by the current investing trends are female led startups. Female entrepreneurs have always had a harder time scoring funding. Rather than the situation becoming easier, COVID seems to have exaggerated this archaic trend. While more funding was going into to starups overall, it was declining for female fronted startups.

One possible reason is that only 12% of decision makers in VCs are female. While VCs are being more cautious, they may be sticking to contacts and networks with which they are familiar. Since male entrepreneurs have historically dominated it becomes a continued cycle in uncertain economic times.

This is why now more than ever, entrepreneurs and startup directors must do their research into funding and obtaining the right financial support for their venture.