Seven ways to raise capital for start-ups

A start-up is often faced with the question of where to find financing for the company’s growth and development, whether there is an ongoing corona crisis or not. There are seven main options to choose from, each with their own 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.

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

The corona crisis forced offices and shops to move online, and accelerators also operated. By participating in the accelerator, the start-up company can get both know-how and, in most cases, an investment. Access to larger and better-known accelerators requires passing through rigorous selections process, so this is not a definite solution, and in parallel with applying for the accelerator, the start-up could also look for alternative funding.

However, successful participation in the accelerator can give start-up wings similar to Red Bull and open doors that it could not even dream of.

Conducting a crowdfunding campaign

If the start-up has already gained a foothold in society, one good option is to organize a crowdfunding campaign. The advantage of a crowdfunding campaign is its simplicity – the platforms have ready-made contracts and the only concern is to set up the campaign and market it enough to achieve the goal.

There are many good examples of crowdfunding campaigns, such as the recently completed Barking campaign or last year’s La Muu campaign. However, the success of a crowdfunding campaign largely depends on the reputation of the start-up company and the products-services offered: the more complex the product-service, the more difficult it is to create the necessary support and interest for 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.

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Hedman

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