Raising funds is crucial but often challenging for start-ups. Different funding options suit different business needs and growth stages. Maximizing the right source at the right time relies on factors like goals, risks and investor control preferences. While friends, family and crowds can provide initial funds, scaling up demands more capital sources. Let’s explore seven key ways for start-ups to raise funds, each with its pros and cons.
Three “Fs” of a very early entrepreneur
In the case of a very early-stage entrepreneur, the first source of funding is the three “Fs”, i.e. friends, family, and fools. The advantage of raising money this way over other options is the speed and simplicity – as these people are familiar, the company is not subject to due diligence, i.e. checking for compliance with the company’s business legislation and other regulations and permits.
Funding is also largely based on trust, and corporate documents are not formalized. The disadvantage is the small amount of money because such investors invest their personal money and are unlikely to have extensive investment experience. Thus, if higher amounts are needed, one should look beyond the three “Fs”.
An angel investor as the next step
If the option of the three “Fs” has already been exhausted or if higher amounts of money are needed, there is reason to look to angel investors. Angel investors also invest in early-stage companies, but because the investments are made in syndicates, the amounts are in the hundreds of thousands rather than tens of thousands.
However, there is much more competition for angel investors’ money, as they are well-known financiers, and the process of raising money is also longer and more formal than in the case of the three “Fs.”
Accelerator as a combination of know-how and investment
Accelerators continue to be valuable for start-ups seeking both expertise and investment. Participating in an accelerator program can provide essential guidance and connections. However, gaining access to prominent accelerators might require navigating rigorous selection processes, making it essential for start-ups to explore alternative funding options simultaneously.
Conducting a crowdfunding campaign
For start-ups that have gained traction and recognition in the market, organizing a crowdfunding campaign can be an attractive option. Crowdfunding platforms offer simplicity and readily available contracts. However, the success of such a campaign relies on the start-up’s reputation, product quality, and ability to generate interest among potential micro-investors.
Investors of previous rounds as familiar financiers
If the start-up has already raised money in the past, the shareholders’ agreement may even oblige the company to first contact existing investors and offer them the opportunity to make an additional investment. The advantage of existing investors over an external investor is their familiarity with the start-up’s business and team.
Thus, it is faster to attract money from existing investors, as there is no need for a start-up to introduce the specifics of the business and prove themselves to the investors. This is exactly the path Bolt took to meet their funding needs caused by the corona crisis.
If you need more money, risk capital might help
If there is a need to raise a larger amount, the source of financing is the investments offered by venture capitalists. Venture capitalists in the Baltic market mainly invest between 200,000 euros and 5 million euros.
When raising venture capital, it must be taken into account that the provider of venture capital usually wants to contribute to the company’s operations and have veto rights or at least significant influence over strategic decisions. At the same time, by attracting risk capital, it is possible for an entrepreneur to gain valuable contacts and thereby further develop its activities.
Involving a strategic investor as a strategic move
It is also possible to involve a strategic investor for whom it is important to enter the business of the start-up or strengthen its position in it. The involvement of a strategic investor can take different forms: a strategic investor can simply invest in a business, the possibility is to create a joint venture, there is also an option to sell the entire business to a strategic investor and not be involved in the ownership role.
In conclusion, every start-up, regardless of the stage of its business journey, has the opportunity to raise capital for entrepreneurship, but as always, it all depends on the needs and opportunities of the entrepreneur and the conditions for raising money.
