How Startups Get Funding

Grace Holden

We know what it’s like. The letter comes through the door. The letter opens. ‘We are sorry to inform you…’ It’s letter fifty and you’re running out of options. But are you? Though you might believe there are just a couple of routes to investment available, there are far more ways of funding your startup than you think. Trust us, we know!

Looking for any type of investment requires dedication, perseverance and a huge belief in your business because rejection is hard and waiting for the perfect people to put their faith in you can sometimes feel like watching paint dry (and trust us, we’ve done that too). So, regardless of whether you’re just starting or are on rejection letter number 100, this is for you.

How do startups get funding?

1.     Crowdfunding

Let’s start simple. You don’t always have to turn to investors every time. Sometimes it’s simply not the right time to seek one out. Crowdfunding online refers to raising money to finance projects. For founders of startups, this means they can raise money to start and grow their business without fear of retribution or failure. There are so many crowdfunding websites, including Kickstarter and gofundme. There are even sites that specialise in helping founders from diverse backgrounds. For example, iFundWomen aims to boost female founders. You can find a list of the best crowdfunding sites as of 2022 here.

Crowdfunding has the potential to be the most valuable financial asset to your business. Indeed, the famous board game Exploding Kittens raised over $9 million in the first 31 days of their Kickstarter page. However, this kind of success is not guaranteed, and crowdfunding can be just as much of a slog as looking for investors. It requires an intensive marketing strategy to get the page to go viral and forces your business to be open to the public before you are ready. Ultimately, whether or not you choose to crowdfund your business is down to whether you think it works for you. If it doesn’t feel right, it probably isn’t!

2.     Government Startup Loan Scheme

Through the startup loan, the UK Government offers £500-£25,000 to support founders with the creation and early development of their business. What’s more, they also offer support to help you create a foolproof business plan and provide up to a year of mentoring! This scheme is amazing for startups trying to get off the ground and for founders who would benefit from expert guidance. Unfortunately, it is a loan, however, and charges a fixed interest rate of 6%, so you could potentially lose money if your startup fails to turn a profit. Moreover, by and large, the maximum loan is not a huge amount of money in the grand scheme of things. This might mean you’re better off investing it in one particular aspect of your startup, such as space, technology or employees it needs.

3.     Angel Investors

An angel investor is a person who provides capital to your startup in exchange for a (usually) small stake in your company. In some cases, angel investors can be, quite literally, angels, saving a company from having to disperse or allowing another to grow. Unlike government loans, they are far more willing to take a risk in your startup and can offer up their valuable experiences so you can learn from them. The good news is you don’t have to pay any of the money back as there is no interest rate. The bad news is, when you’re tied in with an angel investor, you may no longer have complete control and are essentially handing over money you’ll make at a later date. Before seeking out an angel investor, it’s best to ensure you know the individual's intentions and purpose with your business so you can both be on the same page.

4.     Venture Capital

Unlike angel investors, venture capital can be provided by investment banks and financial institutions as well as high-earning individuals. These investors look specifically for businesses they believe have big-profit potential, so it’s vital to have a robust business plan and deep knowledge of the financials of your startup before you approach any investor. If you are part of a minority group, many companies specialise in providing funding for women, black and Asian founders and founders with disabilities!

5.     Incubators and accelerators

Incubators and accelerators (I&A) might seem like complicated business concepts, but they simply refer to boosting the success of a startup by providing funding and materials. Incubators usually give access to workspaces and offices, whilst accelerators provide the funding. These two methods of support can open founders up to a network of other companies and provide mentoring and advice. On the other hand, like most of the other sources of investment we have discussed, I&As will have a stake in your business. Some of the best incubators and accelerators include Seedcamp, Founders Factory and the Founder Institute. The top five UK startup I&As of 2022 can be found here.

So, there are plenty of ways in which startups get funding. As well as the five investor routes we have detailed, there are also business loans, local government/council grants, friends and family and bootstrapping. Before making any decision about your business, you must do further research and ensure the investor will work for you. However, regardless of which investment opportunity you choose, having belief in your product and knowledge that you know your startup best, will allow you to make your business the very best it can be.