How to raise money for your business: The old vs the new

Almost every business needs to raise funding at some point or another. In particular, for smaller, younger businesses and startups in their early growth phases, cash flow can be a vital life to keep the business going.

Thankfully these days, numerous opportunities exist for you to raise funding. This article walks you through both some of the traditional fundraising methods, as well as some new ways that you might wish to consider.

Bootstrapping

Many entrepreneurs live by the age-old adage that you shouldn’t spend what you don’t have. And nowhere is this more applicable than in business, where bootstrapping is the founding philosophy. Bootstrapping effectively means growing your company using your own resources. Any extra cash generated by the business is then re-invested back into the business, which allows the company to grow organically.

Although this can often be a slower way of scaling and growing a company, the advantage is that you maintain complete control over the company and its direction. Increasingly, this type of organic growth and early validation tends to add to the entrepreneur’s credibility, since the founder may be regarded as somebody who prefers not to risk outside investors’ money until the business shows more visible signs of success. And, with an increasingly competitive landscape of startups seeking funding, or with more entrepreneurs wishing to maintain control of their companies from the outset, bootstrapping is now regarded as the de facto starting point for many young companies. 

That said, there are exceptions of course. Some companies with huge potential for scale realize that the slower organic growth route might potentially lead them to miss out on market opportunities that require significant investment in plant, equipment, or other assets such as technology to allow them to deliver their solutions. Here, timing is essential. 

While bootstrapping may be the only option in the early days, exiting from bootstrapping mode once the company has gained significant market validation and traction and seeking external investment sooner may be a more sensible growth option. And, assuming you’ve already gained that validation, then you’ve also achieved vital credibility with potential investors, and you’re one step ahead of your competitors in securing investment.

How to raise money for a business

You may be considering that the time has come to consider other ways of raising finance. For example, you may have exhausted all your bootstrapping options, you need vital cash flow in your business to keep your operations going, or you’ve reached a point of customer or market validation in your company and you need to scale faster. In these scenarios, the good news is that there is a variety of fundraising sources, depending on your specific situation. We’ll first cover off the more traditional sources of funding that you might already be familiar with and then touch on some of the newer approaches.

Traditional fundraising methods

Apply for a loan

Historically, new businesses had more opportunities to approach a bank in order to secure vital funding through small business loans. Unfortunately today, that’s no longer the case for a variety of reasons. Unless you can demonstrate a very steady and regular revenue stream over at least the previous 24 months, this option will most likely be out of the question for most banks. Since the 2008 financial crisis, banks have now become notorious for not lending money to early-stage companies, even for founders with good credit histories and ample security. What’s more, many government-backed lending schemes that might have underwritten startup business loans several years ago now seem to have dried up. So the guiding principle is this: unless you can demonstrate two years of steady cash flow, bank financing options are limited.

Grants

Grants from government bodies have traditionally been regarded as a standard way of receiving some form of vital financing, similar to bank loans. However, in today’s increasingly entrepreneurial environment, this pool is also drying up and is no longer widely regarded as a real possibility for most business owners - in any substantial form at least. 

That said, governments and regional economic development agencies are at times likely to stimulate growth in certain industry areas - such as supporting the development of certain technologies like AI or nanotechnology, or the migration from fossil fuels to newer, cleaner forms of energy. Governmental support can also stimulate the economic regeneration of certain regions by encouraging the growth of certain businesses within that region or the migration of businesses to that region.

If you think you might qualify for such grants, or if you’re willing to relocate your business, then it might be a worthwhile investment in time to do some research upfront. Applying for government grants can often be an arduous and time-consuming process, and if you’re successful, you then have to think about regular written progress updates. But sometimes these grants, if available, can be substantial and they might spare you the effort of seeking external investors and giving away equity in your business. 

In general, though, government grants are rare. Do the research as part of an initial fundraising “scanning” exercise, but assume in most cases that you may not qualify, unless you fit certain criteria. 

Friends and family

Securing funding from friends and family is one of the most popular ways to raise money when starting out. While your “inner circle” may not have a lot of relevant experience in your industry, they might nevertheless be willing to invest their money based on their trust in you and their judgment of your character. That’s already a lot - especially during the early stages of a business. Also bear in mind that taking any money from friends or family has the potential to sour personal relationships if things don’t go to plan. If you’re taking out a loan, make sure you have a clear written agreement in place. And if you’re seeking equity investment, then treat your friends and family in the same way that you would treat any other investor by providing the same set of risk statements and legal documentation. Always consult your attorney before taking investments from individuals.

More on equity investment can be found in the next section. 

New ways

Angel investors

An angel investor is an individual (or a group of individuals) who puts his/her money on the line when investing in a business. Typically, although not always, angel investors are considered a strategic choice for an entrepreneur during the early growth stages of a business. For this reason, an angel’s investment capital is considered to be “at risk,” and angels typically take a larger equity stake in the business, relative to the perceived lower business risk further down the line.

Most angel investors are considered “sophisticated” in that they know the risks, process, and timelines involved during the angel investment process. Ideally, you’ll want to be dealing with an experienced angel investor with prior experience of investing in small businesses. It might be easier for a high-net-worth individual to write a check, but even experienced investors might get upset if they didn’t fully realize what they were getting themselves into. The promise of an exciting new product or service might lure the right angel investors. However, be absolutely certain you’ve carried out thorough research and that you’re clear, transparent, and realistic about the future prospects of the business. Also, identify any potential red flags in the business plan - this will come out during any investor due diligence, so it’s always better to address any concerns now before the investor discovers them later. And, as always, a clear and compelling business plan and a strong and enthusiastic management team are vital ingredients in attracting the right angel investors.

There are many ways of finding angel investors. Perhaps the best way to get started is by using an online angel investing platform such as AngelList. It allows angel investors to quickly identify and assess the best available investment opportunities on the market and for startups and their teams to showcase their potential.

Investment crowdfunding campaigns

Crowdfunding has become a lot more popular over the past few years. Securities crowdfunding campaigns give investors a slice of the company’s equity in return for investment.

The underlying principle of investment crowdfunding is simple: break down a large funding requirement into much smaller investment “chunks,” so that each chunk becomes more attractive and accessible to the ordinary individual, thereby increasing the probability of closing the investment round sooner.

In addition, crowdfunding is also increasingly regarded as a good initial strategy for validating your business. There can be no better way of securing endorsement for your business than having a large group of small investors putting their money into it when compared to a smaller group of larger investors.

Another added advantage of crowdfunding is the reduction of potential control wielded by larger investors. In the days before crowdfunding, the only source of funding was through high-net-worth investors. Because the investment “ticket” sizes tended to be larger, individual equity stakes were also larger. Therefore larger investors always want to protect their investment by taking a position on the board and/or insisting on a certain share class that will give them a certain degree of control over your company or prevent you taking certain decisions without their consent through voting rights.

The smaller investment nature of “ticket” sizes in crowdfunding typically allows you to circumvent this by spreading investor exposure over a larger number of smaller investors. On the other hand, you’ll have a lot more investors on your Cap Table to communicate with and administer, but this could be considered a small price to pay if it means you can close your funding round and go some way towards validating your product or service. But the good news for you is that Republic largely resolves that.

Rewards-based crowdfunding rewards

Not all crowdfunding campaigns are equity-based, and some offer rewards instead, or in parallel to equity. For example, Kickstarter offers these types of campaigns, where individuals receive different levels of rewards (such as an early release of a product or a special edition), relative to how much funding they pledge.

Bear in mind that in many jurisdictions, “rewards” can often be regarded as a taxable benefit in kind. If you’re an entrepreneur, you might be wise to consider any potential tax liabilities and/or benefits of your reward by talking to your financial advisor and then being very transparent about any potential tax liability to investors upfront. All reputable crowdfunding platforms will have taken this into account, so looking into this upfront and checking in with your crowdfunding platform will give you immediate credibility as well as save you a potential headache further down the line.

Republic is a platform that allows startups to crowdfund from everyday people. It gives everyday people access to great ideas and exciting technology, rather than these deals being exclusive to the whale investors.

Republic breaks down barriers, with mission-driven and diverse startups being encouraged. This form of crowdfunding is definitely one of the most viable options for a business to raise money.

Venture capitalists

Finally, venture capitalists (VCs) are another vital source of funding. Venture capital funds are institutions that assemble funds on behalf of other institutional investors for the purpose of investing in high-potential startups with the potential to scale fast.

Typically, venture capital funds only invest in business once there is demonstrable customer traction, and for that reason, they tend to engage further down the line. However, investments tend to be much larger and will often involve the participation of the VC on the company’s board with much stricter levels of scrutiny.

You should have a pitch deck that explains why your business is different (innovations, a shift in the industry, persistent problems that are being solved), what exactly the business does and outline the facts about the company’s story and financials, as well as detailed evidence of traction and progress.

Finally, you'll want to highlight the experiences and abilities of the team. Condensing all of this info down into a simple elevator pitch can be the make or break of your pitch.

Key takeaways

As you can see, there are many different ways to raise money for your business. Every business has needs and preferences which will dictate the approach you will take. Raising money through the traditional approach is more restricted than ever, although not entirely impossible. That’s why it’s worth considering newer and more flexible ways of securing funding.

Angel investors and crowdfunding are perhaps the most promising route for a lot of businesses, so checking out AngelList and Republic should be high on your priority list.

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This educational article is provided by Republic to help its users understand this area of the market, it should not be construed as investment advice as it is impersonal, disinterested and was produced by Republic for Republic’s users, without remuneration received or expected.