Updated 04 June 20
The biggest risk associated with starting a startup is financial welfare. Because of this, sourcing the right kind of investment is paramount to the success of your startup - especially for first-time founders. There are two main types of investment; ‘equity’ in exchange for a stake in the business, or ‘debt’, a loan against you or something you own.
As funding is so important to starting a business, it can become frustrating when trying to find the type of investment that meets your requirements. Common questions include:
Who do I talk to?
Do I need to give up my job?
Who can I trust?
What information should I prepare?
Will I fluff my lines?
How do I know that I’m getting a good deal?
We’ll take you through some of the different methods of investment and weigh up the pros and cons of each.
The option to start a business with your own cash can be attractive at first - especially if one of your main drivers for starting a startup is to be your own boss. By having total control over your company and how the money is spent, there’s an added gratification that you’ve succeeded on your own.
Taking on the extra control and responsibility that comes with going it alone means funding your company yourself is the riskiest option. If the business fails, (and most do) then you are liable for all of the debt.
The idea of doing it on your own is usually associated with pride and honour, but in reality, the life of an entrepreneur can be lonely. Alternative investment options come with much more than just capital. You can receive crucial advice, mentorship, resource and/or expertise with other funding opportunities.
Sourcing money from friends and family can be a great short-term fix to get your business off the ground, but this type of investment isn’t sustainable. Depending on the nature of your relationship and the person, it's unlikely they'll have the expertise to help with your business plan, so you'll mainly be gaining a short term cash flow.
This funding solution doesn’t alleviate many of the risks associated with personal savings, and has the added burden of potentially putting a strain on personal relationships.
Angel investors have become a buzzword in the startup world in recent years. They’re willing to provide funding in exchange for either a percentage return on their investment or equity in your business. Angels are more likely to invest in riskier business plans than venture capitalists, although they are unlikely to invest in business ideas at vapour stage.
Otherwise known as idea stage, vapour stage is when you think you have a great idea and through research and speaking to your target audience, you’ve identified that there is room for a better solution compared to what is currently available. At this point your product hasn’t been built yet and you won’t have a team.
Angel investors also expect their founders to contribute some ‘hurt money’. They want their founders to invest some of their own cash into the business to ensure founders share the same pain if the business fails. It also works as a driver to succeed.
Venture capitalists (VC’s) share many similarities with angel investors. They provide large sums of capital in exchange for equity in your business plan. VC’s, however, expect startups to be much further ‘down the line’ as they try to be as risk-free as possible. They normally look for you to have an existing customer base with traction before they’ll invest.
Although VC’s bring a vast amount of experience in building successful companies along with their considerable investment, it could cost you significantly in equity.
Bank loans have long been synonymous with starting a business. As they are heavily risk averse, banks will require a full business plan with assurances of success, meaning they almost certainly will not invest at vapour stage.
If you’re lucky enough to be granted a business loan from a bank, you’ll hold onto complete control of your business. However, the money will need to be repaid whether the business fails or succeeds. There is also a lot of documentation that will be required to fill out, which can be both stressful and time-consuming.
Crowdfunding is a source of investment for projects where large amounts of the public make small donations. This type of investment is risk-free, however it requires a lot of time and effort to convince people to donate. Raising money through crowdfunding brings cash directly into the business, but you’re still required to build your product, hire the right people, and strategise growth.
One of the big positives that crowdfunding brings is that you can validate whether people want your product. Those who donate are more than likely going to be your early adopters. On the flip side, if you don’t reach the targets you promised your reputation could be damaged before you start.
Cofounding is a term that you might not be familiar with. It's completely unique to We Are Nova and it's our process of building great tech businesses starting from idea stage.
Cofounding with Nova is an alternative to the other investment routes. It has the benefit of being risk-free of cash debt whilst helping to bridge the gap between the idea stage and the later stages. You’re not expected to invest any of your own cash and you don’t have to quit your job. As Nova provides the resource, expertise and guidance needed to succeed, you won’t be responsible for hiring your own team.
We Are Nova focuses on all of the ‘inside the building’ services allowing you to focus on the problem or opportunity your business idea explores. You’ll also be freed up to find and research potential users of your product. Choosing the Cofounding investment route means you don’t just get funding, you get a partner who will meet your passion and ambition to succeed.
Not only does Cofounding bring a tried and tested approach to building successful startups, it also means that your relationship with your investors is closer than ever. It gives you a direct line to future investment which allows you to concentrate on your product instead being distracted with chasing investment. Continuity of capital, as we call it, means you have the funds to help sustain growth over the coming years.
At Nova, we provide an 8-week mentoring scheme to help entrepreneurs with great ideas and problems to tackle, ready to pitch to our investors.
Just remember, the most important thing when it comes to choosing an investment route, is it has to be right for you. Learn more about our process here.