Ultimate guide to startup funding

A version of this article was originally published in October 2018.

Most businesses don’t make it big on passion and graft alone. To properly get off the ground and start proving your ideas in the real world, you’re going to need some capital. Stock, equipment, marketing and skills – all of these things cost money and, until you start turning a profit, that early-phase spending can be tough.

Unless you’ve got some fairly hefty savings behind you, investment and/or loans are usually the only way to get the early cash injections you need. But the world of finance can be pretty daunting to the uninitiated.

To help you out, we’ve put together the ultimate guide to everything you need to know about startup funding, including the pros and cons of the main options, the process you’ll go through, as well as some hints on how to land the big bucks.

Skip ahead ⬇️

1. Why you neeed investment

2. What are your options?

3. The startup investment roadmap

4. Getting prepared

5. Deciding on a valuation

6. Crafting your pitch deck

7. Time to connect

8. Pitch with pizazz

9. Was there a spark?

10. Don’t give up!

1. Why you neeed investment

To start off, it’s worth asking a crucial question: do you even need investment?

If your overheads are small, or you’ve already got capital behind your idea, you may think that it’s not worth the bother or the additional risk. And that’s perfectly fine. However, investment isn’t just about making a quick buck so you can buy shiny things. Investment is about buying time.

When you’re starting out, the most important thing to do – the thing which will guarantee your success later down the line – is to prove your product and/or business model. This is where you should be concentrating all your energies. You can worry about profit margins later – right now, you need to get to grips with what you’re doing, why you’re doing it and how you’re doing it.

That’s tricky if you’re spending half your time trying to sell, sell, sell. Selling is important, of course, but everything is experimentation at this point – including your marketing and sales process. Investment will give you a buffer so you can hone and refine your techniques, so that you can build up some metaphorical market muscle without crashing and burning.

There are disadvantages to bringing in investors, of course. Investors don’t (usually) give something for nothing. You could end up tied into more responsibility than you really want at this stage, with restrictive contracts or external controlling stakes. Or you could find yourself moving too fast, too soon, as investors push for returns.

If you’re careful about getting the right kind of investment – the right kind of deal for your business – you’re likely to set sail in a more stable position than may otherwise be the case.

2. What are your options?

This is where it can get confusing for the unprepared. There are many, many options for startup funding. The world of investment is large and rarely straightforward, which can be off-putting for many startups. But it’s really not as tricky as it seems at first glance.

There are several basic options for investment, which we’ll walk you through below:

Angel investors

These are affluent (high net worth) individuals who provide capital for startups, usually in exchange for ownership equity. Angel investors can be anyone, from a well-resourced personal friend to a stranger who simply likes your concept.

Angels have more autonomy than venture capitalists (more on them later), which often means that you can negotiate more flexible terms with them. However, they’re also taking a greater personal risk than a VC investment firm, so may well want to see more equity or business influence in exchange for their investment.

Networks and syndicates

This is a group of angel investors, normally led by one or two individuals that have a better understanding of your industry or business idea. This is where the line between angels and venture capitalists starts to get a bit blurry. Angel networks and syndicates tend to be a bit more risk-averse than single investors, but on the plus-side they do have greater resources in terms of finance and connections.

Learn more about angel investors, networks and syndicates in our ultimate guide.

Crowdfunding

Massively on the rise right now, crowdfunding involves pitching your idea to a large audience (usually through certain dedicated websites such as Crowdcube and Seedrs), and inviting the public to donate.

If you can engage the public – or your existing loyal customer-base – you can potentially get large cumulative amounts from thousands of small investors. One business that has done this really effectively is Brewdog, due to its distinctive attitude and cult following. But, if you’re an unknown brand, crowdfunding can be an uncertain process and requires a lot of promotion behind it to be successful.

Venture capital

A step up from angels, VC firms invest in early-stage, emerging growth companies on behalf of high net worth clients, usually offering 50% or less of the business equity. These are professional investors – the investment big leagues. They usually have all kinds of protocols and due diligence procedures in place, which on the one hand can reduce the risk, but on the other hand lessens the flexibility of the deals they can offer.

If you manage to secure the interest of a VC firm, you’ll be in line for a ton of incredible resources. But be careful – VCs can be tough about what they want to see in return, and you could end up sacrificing more equity in your business than you care to. If you’re looking to source VC investment, here's a list of just a few in the UK right now.

Grants

In this world, where there is no such thing as a free lunch, grants offer a refreshing reprieve for early-stage startups. With the government’s focus on emerging technologies, there are a wealth of grants available for small businesses.

There are a number of government and private grants just an internet search away. They require some consideration to ensure you fit the criteria, but the application process often isn't complex. The funding, however, can be limited. We've pulled together some information about the grants available to small businesses which should kickstart your research.

Accelerators and incubators

Startup accelerators provide early stage companies – and especially first-time founders – mentorship and support, as well as a limited amount of funding. Accelerators help develop your product and your founding team, and also offer warm introductions to traditional investors in the VC and angel space.

Similarly, incubators support founders in speeding up the growth potential of startups by bringing together entrepreneurs and co-founders to build new companies.

Bank loans

Bank finance is a lot tougher to get hold of than it used to be, but it’s not impossible. Business loans have a major advantage in that you keep 100% of the equity in your business. However, you will be paying interest on the loan, and bank loans usually represent greater personal risk than funding from investors.

Check out our guide to small business loans to learn more.

3. The startup investment roadmap

It’s not just about knowing what kind of investment options are out there, it's also helpful if you know what the process is likely to look like.

Investment timescales and procedures can initially seem confusing. From seed funding to Series A, B and C, it sounds worryingly like a conveyer belt that you jump on as a founder, before being automatically shunted along to the different stages.

In fairness, it is a bit like that. But everyone’s conveyor belt is slightly different, depending on the individual business and its needs. So if you know how each stage works, you’ll be better able to decide when and how your business should source the funds it needs to keep moving forward.

To give you an idea of the typical timeline of the investment stages, when they tend to happen and what they’re used for, take a peek at our roadmap for startup funding guide.

4. Getting prepared

So, you know roughly what you should be looking for and when. Now it’s time to start honing in on potential investment partners. But before you start blasting out emails, lay the groundwork through the following:

1. Prepare in advance

Make sure that you know how much investment you’re looking for, when you want it, what you want it for, what kind of deal you’d like attached and the kind of investor you seek… you get the picture. Seeking investment is a big, time-consuming project, and it needs to be taken extremely seriously.

Your success in finding investors could very well prefigure your success as a business in the future. So really pour yourself into it. That’s likely to mean taking your focus away from the day-to-day running of your business, which is why it helps enormously to have a co-founder or trusted team to pick up the slack.

2. Get your bearings

Do your research. Study the investment market and get as clear an idea as you can of what’s available, how it operates and where you stand in relation to your ideal investor-type. Talking with fellow founders who have already been through the process can be a great starting point. If they’re not in competition with you, they should happily give you names, numbers, dos, don’ts – maybe even introductions.

Also try to attend any relevant conferences, seminars and networking events, where you can interact with investors and companies who have been where you are. Just watch out for events with more people looking for cash than those who have it. If you’re spending most of your time talking with other startups, it might be time to reassess your strategy.

3. Draw up a wish list

If you’ve got your bearings properly, you’ll probably have identified a few potential investors you might like to get involved with. Draw up a wish list of your ideal investors and the ideal terms you’d like to end up with. This will help to focus your efforts.

Investors often like to build a complementary portfolio of businesses, so try to find those where there’s a synergy and think about how your venture fits alongside that. This can give you a useful "in" when you start connecting.

4. Work out what you’re prepared to offer

Most investors have had a successful business career of their own, so many understandably want a voice in your business. You may have heard the term "smart money" – this is what it means. So, have a good think about what you’re willing to offer an investor and how much input you want them to have.

Their experience, mentoring and guidance could be invaluable, but what are the implications of that – would you give away a board seat, for example? Setting boundaries early on will influence which investors you approach and how you respond when you meet them.

5. Deciding on a valuation

Many a founder has tied themselves in knots over valuations. But to know how much you can expect to get, you need to have at least a rough idea of how much you’re worth.

Search online and you can find various complicated models for how to approach pinning a price tag on your business. Feel free to browse the intricacies of EBITDA or delve into comparable analysis and DCF analysis for some cosy bedtime reading!

The truth is, however, that when you’re fresh out of the box – and your figures and your forecasts are more guesswork than anything else – fitting your burgeoning business into a headache-inducing equation can be a waste of time and effort. And in many cases, it isn’t the first thing investors are looking for anyway.

Valuing a business can seem like a big deal but try to keep it in perspective. The key is finding the right team of advisors and investors who understand where you’re going and want to help you get there. Get that right, and everything else should fall into place.

Our guide on how to value a business should help answer your most burning questions. We've also spoken to Alexander Mann of Concentric Venture Capital and Angel Investor Lucy Viggers about how to value early stage businesses for investment.

6. Crafting your pitch deck

So, you’ve done your research and you know what you’re after. The next step is preparing a pitch deck – probably the most important tool in your investment arsenal.

Contrary to what the name suggests, you won’t always be using your pitch deck to "pitch" – not in the Dragons’ Den sense anyway. Networking and getting introductions to the right people is central to winning investment, which means your deck will often get forwarded around various people before it hits its mark. Your deck must therefore stand on its own, containing all the key information you want to get across, even if you’re not there to physically present it.

So, what should a winning pitch deck cover? There’s a pretty standard structure that most businesses follow, and luckily, we've rounded up everything you need to know in our startup investor pitch deck guide.

The key points include:

• Keep the deck brief, 10 slides is ideal, and no more than 15.
• Avoid jargon and complex words.
• Maximise strong imagery to illustrate your points.
• Send it from a professional email, with your branded signature.
• Attach the deck as a simple PDF. Avoid Dropbox and other platforms that require the recipient to sign onto a platform or jump through hoops. Make it easy.
• Spot the typos. Have somebody else check the document and your cover email for you.
• Protect your intellectual property (and show you’re savvy to its value). Send the document copyright protected with the phrase: Confidential and Proprietary. Copyright (c) by [Name of Company]. All Rights Reserved.
• Have the deck professionally designed. It should convey your brand, your expertise, your processes and resources. The investment is worth it.

Ensure you spend plenty of time honing your pitch deck, as well as perfecting it based on feedback from investors and others in your network. Then with a bit of luck, you’ll soon be rewarded with plenty of investor meetings in the diary.

7. Time to connect

First, a word of warning – investors receive hundreds of "world changing" business ideas every week. Perseverance is the name of the game.

A good first step is to drop them an email or give them a call to pre-qualify your interest. Keep it short, relevant and personal – they can smell a bulk email a mile away.

Many investors provide guidance on their website on how to approach them – read it. And if you can get an introduction from a mutual contact, all the better. Check LinkedIn to see if you know any of the same people.

When it comes to setting up a pitch, if you have the option, aim for a more casual introduction or meeting over a formal process. But you should always be ready for every eventuality, including more structured pitching processes.

8. Pitch with pizazz

If you’ve done your prep properly, you should be all set. But here’s a few final tips for making a good impression on the day:

Don’t ramble on

If you’ve been given a time limit, stick to it, leaving plenty of time for questions. Your presentation should be tailored for every pitch – don’t try to fit a ten-minute presentation into a three-minute time slot.

Clarity

Be totally clear about what you need, what it’s for and the anticipated return for investors.

Show your passion

You cannot be too enthusiastic in a pitch. So give it some welly!

Look sharp

Whatever you do, don’t rock up in your "just got out of bed" look. Remember, first impressions count and investing in some new threads could (quite literally) pay dividends.

9. Was there a spark?

So the pitch is out of the way and there’s an offer on the table – job done! Well, not quite. Before you bite their hand off, just take a moment to evaluate whether the chemistry felt right from your side of the table.

For example, did they ask the right questions and show that they understand your vision? Do they meet any other criteria you have, such as industry experience, contacts or complementary skills? Did you get on with them?

If the answer is yes, then fantastic. If not, then consider whether you can live with the sacrifice – or if you’d rather hold out for a better offer.

Also, it might seem obvious but do your investors actually have sufficient funds to finance the deal? While it’s not unusual for investors to finance some of their investment with bank loans, make sure it’s not more than 50% of the equity. Otherwise you could end up with a mountain of debt you didn’t bargain for.

Finally, do your best to avoid time wasters. Some investors have lots of meetings, but never commit so don’t get sucked in.

10. Don’t give up!

The kind of startup funding you secure really can make (or break) your business. It’s so important to get it right.

This means not just thinking about the number of zeroes, but also the kind of person you want to deal with, how much equity and control you’re prepared to relinquish, your future (and exit) plans – and much more. You'll have to make a serious commitment to putting a lot of graft in. Pitching for finance is a full-time job. Every investment round feeds into the next, so your approach to investment has to be nuanced and fit in to a long-term strategy.

Nothing is set in stone. At the end of the day, you’re dealing with human beings, and there’s a lot of variation in what different investors will offer you and what they’ll expect in return. The best you can do is research your options thoroughly, polish your pitch deck until it shines and put your negotiating hat on.

And last but not least – have persistence! If your "perfect" investor says no, don’t be disheartened. They are plenty more fish in the sea, so be resilient and try to learn as much as possible from each experience.

Further reading

• Startup funding - what happens when?
• Getting your head around early stage funding
• The five stages of VC funding
• Startup insurance - a guide for founders