Not Sure Investment is Right for You? Here are 6 Alternative Funding Routes for Your Startup

Raising Investment is a big decision so whilst asking yourself if you’re investment ready - also take time to look at alternatives. Although investment can feel like “free money”, it is in fact the most expensive cash you’ll ever raise, as the returns investors expect, along with the rights and privileges you must be prepared to grant them, can be very onerous to a business. Below are 6 alternatives for you to consider.

1. Self-funded business model

You could plan your growth in a way that would allow the business to fund itself from its profits. Start small, by developing one product that you can sell straight away. As that product makes a profit, you can re-invest that profit to fuel your next stage of development. You don’t have to grow quickly or to a very big size. You can instead opt to grow in steps, or incrementally. Although this will take much longer, you can still have a very successful business and remain independent.

Pros: you remain independent and in control of your business and its growth.

Cons: it will take much longer to grow the business.

Who it’s good for: for a product that can be sold profitably at a very early stage. For a founder who wants to remain in control of the business.

Who it won’t work for: a business that needs a lot of cash up-front to build up their product, inventory or customer base, for marketplace or crowdsourcing businesses that need a lot of users before their product becomes of value to paying customers.

2. Friends and family

Around 40% percent of founders report raising funds from friends and family. The average amount invested is about £17K. This is a good option if you are at very early stages and you don’t have many proof points to show to investors. Friends and family who believe in you are often more than willing to support, whether through an equity investment or a loan. If you do take cash from your loved ones, it is crucial that you ask them to take independent professional advice and that you document everything, as if they were a professional investor. Be clear that they will receive the same terms, rights and information as other professional investors. Also professional funders later will want a clear picture of how much cash has gone in and how. The other thing to keep in mind is that when cash comes in from friends and family as an investment, it is common for it to come at a slightly inflated valuation. Make sure your valuation is fair, as you don’t want to have to bring your valuation down for your first professional round.

Pros: it’s a great way to get some cash into your business from people who really believe in you.

Cons: friends and family can be quite demanding in terms of updates and information, especially if they haven't made other investments of this type before.

Who it’s good for: entrepreneurs who are well networked on a personal level, and have professional or semi-professional angel investors in their circles.

Who it won’t work for: founders who like to keep their private and professional lives separate.

3. Loans

Local Enterprise Partnerships provide Startup Loans that are funded by central government. Startup loans are typically around £25,000 and need to be repaid within the first 3 months. See here for more information:

Additionally, banks are becoming more open to supporting high risk startups. This has been recently evidenced by:

  • Natwest’s take-over of Entrepreneurial Spark

  • Barclays Eagle Labs

Speak with your bank to see if they have any facilities available for you or your business. Do bear in mind however that loans sometimes have to be personally secured, meaning your personal assets (such as your house) could be used as a guarantee for repayment. We recommend you seek independent financial advice before making financial commitments of this type.

Pros: You won’t need to give any equity away.

Cons: You will be creating a liability for the company, and depending on the size and terms of the loan, this can be a turn off for investors at a later stage, as investors don’t like to see their investment being spent on paying back loans to someone else.

Who it’s good for: for businesses that have been trading for at least 2 years, and / or founders who are happy to use personal assets to secure the loan.

Who it won’t work for: very early stage businesses who have not yet launched and do not have any paying customers.

4. Grants

Grants can be a great way for you to get started as you won’t have to give away any equity or pay interest. However you will be expected to provide some kind of Return On Investment to the funder. Typically, grants are made available to businesses that aim to have a positive impact, and ROIs are typically around these themes:

  • Employ new staff

  • Grow UK GDP

  • Have a positive social or environmental impact

Remember, that you will need cash available upfront, as most grants ask that you show how cash has been spent, before you can then claim it back.

Websites below are a good place to start:

Don’t see grants as a pot of free cash, as you will be expected to report - sometimes in quite a lot of detail - on the use of funds and the impact your business is having, which can be quite a strain on staff. Make sure the grant’s objectives are directly in line with a project you are already undertaking. Don’t build a project around a grant, as you don’t have the money, time or resources to focus on a project that isn’t totally core to your main objectives.

Pros: no equity or interest given to the funders.

Cons: grants can be quite draining on the team.

Who it’s good for: businesses that have a wider mission and aim to have a positive impact, typically social enterprises, or businesses with a social, medical, or environmental purpose.

Who it won’t work for: founders who are still experimenting and want to have the freedom to pivot quickly.

5. Crowdfunding

Crowdfunding leverages the power of the crowd: lots of people giving small amounts of money that total a larger sum. Some of the top crowdfunding sites are Crowdcube, Kickstarter, Indiegogo . There are 2 types of crowdfunding, Equity or Rewards based crowdfunding.

Don’t expect the platform you choose to do the work for you in terms of generating traffic to your fundraising profile. You need to bring your network or community with you and create a brilliant marketing campaign to sell your story and kickstart the fundraise.

Pros: crowdfunding can be a great way to raise awareness of your product and reach potential customers and partners.

Cons: It can be hard to manage a large base of donors or shareholders, although some platforms, such as Crowdcube, have implemented legal structures to make this easier.

Who it’s good for: typically companies that sell a B2C product, or have developed an appealing brand and have a large community of users and customers who buy into their values and want to support them.

Who it won’t work for: companies that have a very technical product or a product that has been developed for a niche market.

6. Peer to peer lending

Also known as crowd lending, peer to peer lending works in the same way as crowdfunding but the money raised is in the form of a loan. Peer to peer lending typically offers better rates for both the borrower and the lender versus the more traditional bank loan. Funding Circle is probably the most popular platform for peer to peer lending.

Pros: offers the advantages of a loan as opposed to an equity investment, and with better rates than you would get from a traditional bank loan.

Cons: the loans still have to be secured and paid back within a reasonable time frame, so you do need to have realistic prospects of cash coming in in the near future.

Who it’s good for: businesses that do not want to give away equity and have enough history to show repayment capability.

Who it wont work for: businesses that are at very early stages still, and cannot guarantee repayment.

Take Five Years Time's Introductory Module on Investment Readiness to help you decide which route is best for you. Retweet this blog and get 50% off the course.