So many cakes out there: chocolate cake, applesauce cake, butter cake, vanilla cake, and the list goes on and on! So many ways of funding your startup: government programs, VC funds, angel investment, crowd-funding, and so many more buzzwords wearing you out! In this article, I’ll take you step by step through all these big words, clarify to you how you can successfully fund your startup, and hopefully make you a better entrepreneur! Let’s take them slice by slice.
Funding your startup. Slice by Slice
1. Government programs (the perfect taste of chocolate). There are many government programs out there, just waiting for you to grab their hand for funding your startup. I’ll show you:
- Are you a Canadian? If so, you got lucky, in a way. Canada is said to have the greatest number of government programs. Even so, it is harder than anywhere else to get to the grants, because of the decentralized administration. You should know that the money isn’t disappointing. In the Canadian Press, David Padon states : “Cisco Canada plans to invest $150 million over 10 years in a variety of Canadian startup companies, technology development incubators and new technologies that it thinks have the potential to affect the global market.” What’s more, in January 2013 the Venture Capital Action Plan was launched, which will invest $400 million over several years, with the hope of raising about $1 billion in the private sector investment in small and mid-sized innovative companies. $250 million of the sum is used for establishing large “funds of funds”, which will partner with institutional and corporate investors.
- Now… What about living in Australia? The Australian government (business.gov.au) offers programs for businesses of all sizes. They offer startups incentives, support, tax and duty cuts, and assistance. They encourage collaboration between industry and researchers, so navigating their site could be worth a go.
- Well, if you’re neither a Canadian, nor an Australian (like me) and you’d like a simple way of finding a government program, you should look at The Funding Portal, which is international, and that’s awesome. It’s also online, and that’s way up the hill! In a recent article, Marjo Johne gives us all the major details about the program, pointing out how it was founded and what it does for entrepreneurs. The Funding Portal is “a Web-based service where businesses can find and apply for government or private funding.”, in her own words. What it does is to offer information on more than 7.000 funding sources online, one-on-one support services, 85 experts in entrepreneurship at your disposal, in-house expertise, and of the funding programs on The Funding Portal, about 4500 are from the government, while 2500 are private. Not to mention, it takes only about 30 seconds to review one of the programs. And the application is easier than ever, at just one click away!
- The world’s best startup hub: Startup Chile. Giving us 5+1 reasons why Startup Chile rocks! Ioustinos Sarris shows us why the program is so worth every minute! He is quick to point out that Startup Chile is an incubator, while Rockstart (we’ll talk about it in a sec) is an accelerator, because of the way it offers speed and progress. A year ago, when they attended the event there were about 100 startups, and there were workshops and mentoring sessions. It is great if you are a native there, as the program offers great connections, and it makes you feel part of a greater community. It is a program created by the Chilean Government, which aims to help the local entrepreneurs improve their startups and go global. In 2010, the program brought to Chile 22 startups from 14 countries, providing them with $40.000 and a 1-year visa, in order for them to develop their projects for 6 months. They also had access to the most potent social and capital networks in the country. Those selected were voted by Silicon Valley experts and the Chilean Innovation board, who focuses on globalization. In 2011 they brought 300 startups to Chile during a year, and in 2014, 1000 participated in the program. There’s still place for more!
2. Venture Capital Financing (a few drops of rum). You can’t like something new if you don’t try it first. So it’s with the rum essence in your cake, and so it’s with the VC funding for your startup. Let me give you a few explanations.
VC financing is a type of financing by venture capital (VC) provided to startup companies, which are at an early stage and have the potential to succeed and achieve their goals. In order for your startup to break through the market, the venture needs to attract funding. This can be done either by small venture rounds, through family and friends funding and loans, personal bank loans, or by larger venture rounds, through crowd funding and angel investors. (We’ll speak about all of these possibilities in detail). Now back to the venture capital. It is provided as seed funding at first. Seed funding is a form of securities offering, in which an investor purchases part of a business. It is meant to support the startup until it can make money of its own, or until further investments are on the way.
Initial Seed money (or pre-seed) can come from internal sources, such as family, friends ( and fools 🙂 ) or personal accounts, or from external ones – such as crowd funding, angel investment, or financial bootstrapping, which involves making use of the cash flow of an existing enterprise. After the seed funding round, comes the venture round, by which further investment is obtained. The rounds of the process have their own names, pertaining to the class of stock being sold.
- Seed Funding, which has already been explained – internal financing or external financing
- Series A, Series B, Series C, etc., which suggest if the price and progression of the stock is balanced, if a company is progressing as expected.
- Series A’, B’, etc., which are small follow-on rounds being part of the major ones, used to raise additional funds.
- Series AA, BB, etc. Initially, it was used to suggest the come-back of a company after a downround, showing sometimes that they are now funded by other investors. However, it is more and more used together with convertible note financings or stock financings, such as ‘Series Seed’ or ‘Series AA’ preferred stock, and they support less-capital business growth, because the investments are not that big.
As I’ve already mentioned, Venture Capital financing consists of 5 stages:
- Pre-seed Stage: you’ve already tasted the first slice of our cake, so there’s no need to describe it further.
- Seed Stage: at this stage of the investment process, your product or idea has been qualified for further investigation. So, the team or board of the VC firm checks it, by taking a look at its value, feasibility, usage, etc., also at the market research, finding out if there are enough consumers who’d want to buy it.
- Series A: the idea is now a product, made and sold out. Now you encounter the market. The main goals at this stage are getting shared on social media, finding out the costs, minimizing the losses and reaching the break-even.
- Series B: you expand what you’ve done till now, the market share is expanded, by selling more products and improving your marketing strategies. The costs are tried to be cut down, and you also start to investigate follow-up products and services. Usually a new objective or an improved one is mentioned.
- Pre-public stage: the last stage of the process, whose main goal is to go public, and now the investors can quit the venture with a profit to put into balance together with their risks.
3. Micro VCs (grate some soft nuts). This type of financing is rather a new term (Look at “Super angels”) and it appears in two cases: when the projects are too small to attract the attention of the traditional VC, or too big and risky to do it.
One of the first micro VC funds is sponsored by Agora Partnerships. It is a non-profit organization, and invests $25,000 to $250,000 in early stage startups in Central America.
There is also Inventure, a social enterprise that invests between $1,000 to $15,000 in micro-enterprises. It currently has operations in India, Mexico and Mali. Other known and popular funds( at least on TechCrunch) are Lowercase, Founder Collective, IA Venture Partners, Harrison Metal, and Felicis. Among individuals, we have Ron Conway, Keith Rabois.
4. Crowdfunding (add a little sugar). On the Squirrly blog there are many posts related to crowdfunding, if you’re interested in this you can subscribe to our newsfeed, and we’d make sure to keep you well informed.
As Lee Hower suggests in his guest post , when it comes to crowdfunding, “people use this as a catch-all term encompassing a range of different activities across distinct ecosystems’, so it’s really necessary to make a “glossary” of the term. Well, let’s see.
Crowdfunding involves having a group of people/backers – the crowd – who finance your initiative/idea/startup. It usually takes place on the internet. The initiative could be nonprofit, political, charitable, commercial or a financing campaign for a statup company.
Crowdfunding involves the participation of many. We have the people or organizations that propose the ideas and projects to be funded, and the crowd of people who support the proposals. Crowdfunding is then supported by an organization (the “platform”), which brings together the project initiator and the crowd.
There are many types of crowdfunding, which you can resort to for funding your startup. I’ll take you through them and give you some examples.
- Equity-based crowdfunding is a type of crowdfunding in which investors buy equity (or convertible debt) in startups. This type of funding can only come from “accredited” investors, who meet some thresholds of wealth or income. In this category we have AngelList and FundersClub.
- Donation-based crowdfunding. It was introduced by GoFundMe, “the world’s most prominent donation-based crowdfunding platform”( Read more…). In this type of crowdfunding people can raise money like in charity, for their personal problems, for accidents and traumas, for social causes and healthcare costs.
- “Project” Marketplace Crowdfunding , in Lee Hower’s words. This type of crowdfunding is so varied and different, many platforms adhere to this category. A wide range of projects fit in here, such as launching some art – a book, movie, music, paintings – technological breakthroughs and inventions, and non-profit organizations. Widely known platforms are IndieGoGo, Kickstarter, Quirky, etc. The startups get funded by backers, and usually there is a percentage from the donors’ sum that you need to return in case you fail or succeed.
- Vertical Crowdfunding, which is something very new and popular. It is industry specific and it has been in trend for the last 12-18 months. Like CrowdStreet for real estate business projects or DragonInnovation for hardware/device companies, they target specific types of business. (Read more…)
5. Angel Investment( a layer of whipped cream) represents an essential source of funding for early stage, new ventures. An angel investor is a high net-worth individual who provides capital for a business startup, usually in exchange for convertible debt or ownership equity. Sometimes, angel investors get together in angel groups to share and pool their investments.
“Angel investors are estimated to provide 90% of all seed and start-up capital, while the venture capital community provides less than 2% of start-up financing.” (Read more…)
While the term “angel” appeared at the beginning of the 20th century to describe rich businessmen who invested in Broadway productions, nowadays it refers to private individuals who offer their resources( money, skills) to startups.
We can also talk about “Super Angels”, who have very recently appeared from prominent angel investors, who have raised small funds to invest more broadly in seed stage companies. The idea is there is no strict delimitation between “super angels” and venture capitalists.
Asking you Do you know what an angel investor is? Scott Adams suggests that nowadays angel investors are similar to venture capitalists, with the only difference that the latter invest higher dollar amounts. Both of them prefer investing in proven businesses, which seem to develop fast. Moreover, he shows that an angel investor is a bank “that looks at virality instead of cash flow”, happy to invest in a fast growing startup, but not in an unproven one, in which typically family and friends invest.
If you’d like to find out who are the most prominent angel investors, CBInsights recently analysed 2000 of them and made a top 20. Here, take a look:
6. Accelerators (some maple syrup). Startup accelerators or seed accelerators are built in order to support the rapid growth of the companies which work with them. They are programs, usually on the Internet, which include mentorship and workshops, courses, which have as their peak a public event or a demo day. They offer access to technology, office space and great communities, funding, usually in exchange for company stock. Accelerators can be either privately or publicly funded, and focus on many industries.
While anyone can enter an accelerator, the competition is pretty high, Y Combinator and TechStars have application acceptance rates between 1% and 3%. Moreover, the focus is on teams, not on individuals. You also have a deadline to fulfill, typically after 3 months, while you receive training and mentoring, and you are expected to grow rapidly. You’ll also get peer support and feedback, which is very important.
Basically, I’ll follow you through 2 types of accelerators:
- Accelerators acting like micro VCs early on, where there are many partners, who share, and pool small amounts of money and invest them into many startups. Such are:
- Y Combinator. Twice a year they invest a small amount of money, about $120k, in a great number of startups( “most recently 68”). Next, they help these companies improve, by moving together with them for 3 months to Silicon Valley, where they work intensively. Each cycle ends with a Demo Day, when the startups present what they achieved to a select audience.
- TechStars. They provide $118.000 in seed funding, they offer intensive mentorship, a great online community and alumni for 7-10% equity in your company. They suggest that after joining them for 90 days, your company will reach an average of $2M in follow-on investment. More than 35 startups joining them have already been acquired. e
- SeedCamp. They provide seed-funding. They have a 3-pillar strategy, helping startups build global companies, by offering Learning, Network and Capital. Initially, they invest from $0-$250K, and they accelerate the startup from seed funding to IPO. They offer you connections with their Mentors – 1000 Operators and 500 Investors and Founders. They also provide a learning platform which helps founders to access the billion dollar playbook of their Mentors.
- 500 Startups. They provide great connectivity, a network of 1000+ founders and 200+mentors, experts in marketing, startup accounting, user testing, product design, sales, etc.
- Rockstart Accelerator. They help and support startups in all possible ways. They offer startups in their program up to 15.000 pounds in seed funding. They’ll take care of all those annoying papers, such as the legal and administrative distractions and they’ll offer you 99 master-minds with whom to share your ideas and to tackle problems. However, it will take 8% equity stake. Find out more details from their own founder, Oscar Kneppers:
- Accelerators which are backed by greater businesses and firms. Let’s see:
- Mediafax. It’s a Romanian media company, founded in 1991 and settled in Bucharest. It’s a part of the MediaPro Group and it mainly produces news and photography service, which covers 90% of the Romanian printed media needs and 70% of the national TV and radio stations. In 2003, Mediafax content services expanded to Mediafax Mobility to offer mobile content, to firms such as Orange and Vodafone. Nowadays, Mediafax has 4.5m euros in revenue.
- Working Capital Accelerator. It began in 2009. It supports the development of startups. It has supported 179 startups up till now. It offered 109 Grants, 19 startups were funded and incubated, 36 pre-incubated, and they started in 2013 for the first time, 15 acceleration programs. In 2014 (may 26th), 41 projects of Call for Ideas were added.
- Hub:raum. It is a German accelerator, belonging to Deutsche Telekom. It provides connection to one of the world’s leading telecommunications companies. It invests in early stage startups, backs them with co-working-space, mentors them and offers them connections.
- The Evernote Accelerator. It is a very new program and it facilitates apps which work with Evernote. It comprises 4 weeks, in which teams from different startups study startup curriculums, attend workshops held by Evernote engineers and designers, in the space provided for the activities in the Evernote building. They also get to connect with Silicon Valley influencers. The event has as its climax a demo day, on the 14th of November. Such an event already took place last year, when all teams won their spot with their apps by competing in the Evernote Devcup competition.
- Wayra. It’s an English accelerator which facilitates startups in Europe and Latin America. In the first 6 months they will offer your startup up to 50.000 euros. They help you access private funding, such as financing rounds, and public funding, such as grants and subsidies. They even have their own network of Business Angels, mentors and partners. They provide direct management and mentoring, technological resources: Telefonica I+D, which is one of the leading private R&D centers in Spain. It also has one workspace in each of the 9 countries it works with.