Do you want to know how to raise capital for your startup? Are you looking for the best financing alternatives outside the traditional options?
Startups are an engine of innovation and growth in the Spanish business fabric.
However, if you are an entrepreneur, surely you already know that a good idea and a lot of motivation are not always enough, and that these types of projects face the important challenge of raising capital, both to start up and to be sustainable over time.
Limited funding, the main challenge for startups
Unlike SMEs, which are designed for long-term profitability, startups are designed to “hatch” very quickly and scale efficiently, which requires making short-term decisions, adjusting their business model to the needs of the market and seeking different types of financing.
Although high competition or lack of experience are often cited as determining factors in the failure of a business project, the most common challenge faced by startups is the lack of financial resources.
In fact, most startups begin their journey with very tight budgets and rely heavily on investors, loans and equity to continue growing and be considered “investible”.
To overcome this challenge, startups must:
- Diversify their funding sources.
- Manage their capital efficiently.
FFF: a “reliable” source of capital for startups?
Today, many startups are still getting off the ground thanks to the famous three F’s, i.e. Family, Friends and Fools.
However, this form of financing, although it has some advantages, has many drawbacks.
Although this type of investor is not usually very demanding, has great confidence in the entrepreneur and is willing to take the risk, they are based on emotions, do not usually bring value to the project (except for their money), have limited capital and can complicate decision-making and even the signing of documentation.
That is why, although some startups start with FFF funding, over time almost all of them decide to raise a round of investment to raise funds.
How can startups raise capital?
To raise funding, companies can go for:
Bootstrapping
Or, in other words, using the founders’ capital and the capital generated by the business itself.
This formula has some advantages, such as speeding up decision making, ensuring the participation of the entrepreneurs in the project, maintaining a certain fidelity to the original idea and demonstrating to future investors that the founders believe in the project in economic terms.
Equity
The second type of financing for startups is the issuance of shares, the so-called “equity funding”.
This is where the famous “business angels” usually appear, who, in addition to money, provide knowledge, experience or contacts in the sector.
This formula also admits venture capital or investment funds.
Debt
This is traditional financing through banks or credit lines.
This is an option that not all startups can access and that, in addition, requires repayment within specific timeframes, regardless of the development of the project.
Even so, this alternative is still used when it is necessary to obtain financing in a short time, funds that are not too high for something very specific (for example, to buy equipment) or entrepreneurs want to keep 100% of the shares.
Public and private funding sources
To raise capital, startups can turn to funding sources:
Private
In this case, an investor or a group of investors decides to channel their money to new business projects for personal and/or professional reasons among which we can list:
- Proven seriousness of the entrepreneurs.
- Empathy with the type of project.
- Stage of the business (some investors want to enter in the initial phases, while others wait for the second or third round).
Public
If you are thinking of seeking funding for your startup through public funds you have many lines, among them:
- ENISA
- Neotec (promoted by the Center for the Development of Industrial Technology – CDTI). Horizonte Pyme.
- Emplea Call for Proposals.
- AEESD (of the Ministry of Agriculture and Tourism).
- Eurostars (of the European Commission).
- PID (from CDTI).
- ICO credits for startups (direct financing or credit mediation lines).
Although each of these public institutions has its own philosophy when it comes to financing new business projects, none of them provides more than the disbursement made by the entrepreneurs themselves, hence the importance of seeking professional advice for each type of startup.
Patronage
Some large companies and holding companies have developed their own programs where, in addition to financing, they provide mentoring, advice, support and networking networks to help startups present their projects to potential investors.
These types of programs, known as “accelerators”, take the form of sponsorship and to participate in them it is usually necessary to pass very rigid filters (only 2% of the ideas presented come under their “umbrella”).
How to raise capital for startups: the best alternatives
Due to the significant growth of startups, both entrepreneurs and investors have developed new formulas that facilitate the exchange of capital between them.
They all share a common goal: to develop cutting-edge, innovative and profitable projects.
Venture debt
Venture debt or venture capital basically consists of loans that combine debt with the sale of shares.
In this way, entrepreneurs obtain capital for their project and maintain their representation within the company.
Growth loans
These are loans offered when the project is already oriented towards internationalization or the capture of new markets.
The Growth Loans formula is one of the safest, and usually marks the success of a project in the long term.
Capital Lines
More than an investment formula, capital lines are an instrument that allows venture capital funds to increase their liquidity when they wish to invest in a startup in a second round of fundraising.
Business angels
As we have already mentioned, this figure is very common in the business world, especially in the so-called seed rounds (when entrepreneurs begin to turn to professional investors and seek, in addition to money, guidance and impetus for their project).
Crowdfunding
In this case, a group of investors (generally non-professional and not linked to the sector) make donations or collective microfinancing to develop a project or product.
Widely used in the field of research and culture, crowdfunding is the best financing for innovative products that require short-term capital, although the project must be very attractive to attract the general public.
Within this formula, we distinguish between:
- Equity crowdfunding: money is invested in exchange for a % stake in the company.
- Product crowdfunding: money is invested in exchange for a good or service.
In The Startup CFO we help you to get funding sources for your project and we help you to draw a roadmap with the best options for you.
Call us now and find out more!
