Nowadays the possible funding sources for startups have expanded and diversified: new opportunities have arisen largely made possible by the internet and the fact that we operate in a globalized world.
In the startup growth process, there is a tendency to use a phase-based approach in which new financing is progressively sought. In the initial period (seed) the founders mainly draw on their entourage, apply for grants and try to enter incubators and accelerators.
In this regard, it is useful to check the Crunchbase website which lists the 100 best accelerators in the world.
But for the next steps, what are the possible funding sources for startups? With regard to the search for capital, venture capitalists are undoubtedly still an important source, corporate venture capitalists and crowdfunding are another effective option to consider, as well as royalty-based financing and new ways of financing based on blockchain and cryptocurrencies.
In any case, whichever way you decide to follow, it should be considered that after the financing has taken place, a part of the company and/or its future profits or its future products or services, have in fact been transferred.
Venture Capital financing
Venture capitalists (VCs) finance companies that show high growth potential and the main sectors in which they invest are biotech, semiconductors and “tech” and “digital media” in general. VCs first ask for equity and places in the Board of Directors of the companies they have selected and financed and, once they have granted the capital, they expect the startup to be able to use it efficiently.
It should also be kept in mind that receiving funding from a VC involves the establishment of a very close bond whose term and conditions will be decided by the VC, moreover, the liquidation of his investment will take place only at the time of the sale of the company or its IPO, therefore, this type of investment usually lasts between 5 and 10 years.
Over the years, even non-financial companies have started to invest (Corporate Venture Capital) directly in startups, financing companies in their sector used to experiment with technologies and business models to be eventually bought and integrated into their own company. For the financing company this is a further way of doing research and development, and also serves to have control of technologies avoiding that they end up in the hands of competitors. Examples of some large companies that practice corporate venture capital and have internal units dedicated to this function are Google, Intel, Salesforce, etc.
The website Foundersuite has a database of over 120,000 investors and provides a range of tools to get in touch with those who are interested and to manage the relationship.
Venture financing via royalties
Royalty-Based Financing (RFB), on the other hand, consists of acquiring financing in exchange for sharing the revenue with the lender. The costs of financing are lower than those of equity financing, but higher than those of a bank loan. This method has been widely used in life science and energy companies. First, you agree with the lender the percentage of monthly turnover to be returned to him, how long and in what range will be the total amount that will be returned. Typical figures are 2-20 % of the turnover for 3-5 years, with a total figure in the range between 1.5 and 2 times the capital granted.
For some years now crowdfunding has become another important tool to finance startups and projects. It is a method to collect small amounts from a large number of people using one of the hundreds of dedicated internet platforms that act as intermediaries and retain a percentage of the funding. In a crowdfunding campaign you must first define a deadline and the amount you want to reach by that date. As far as the lenders are concerned, they contribute small amounts and receive incentives in return: discounts, early availability of products and equity.
A further effect of a crowdfunding campaign, however, is that you also get feedback from users and significant visibility. In fact, this tool can also be considered a marketing tool as it tends to turn lenders into customers and the financing becomes a sort of pre-order for the product that will be realized. Before considering crowdfunding as a source of financing it is important to be well aware that if you don’t already have a significant follow up on the internet and at least one prototype of the product, you will hardly be able to be accepted by a platform.
There are 5 fund-raising models: donation, reward, debt, royalty, equity.
The reward model provides that the investor receives a non-financial reward (early access to the product, discount, merchandise, etc.).
The main platforms that are based on this model are Kickstarter and Indiegogo: the first one requires to have a working prototype and if the campaign does not reach the objectives it is cancelled and the money returned. The average contribution of an investor is 70 dollars.
In the debt crowdfunding, the company receives a loan that will be returned with some interest, between 3 and 8%.
In the royalty crowdfunding you will give the investors rewards based on turnover as soon as you start selling.
In the case of equity crowdfunding, on the other hand, you give equity to the investors. This model is particularly suitable for startups at an advanced stage and for this type of financing some platforms only give access to accredited investors. In fact, accredited investors are venture capitalists who use the platforms and are also those who usually have access to the best opportunities.
Blockchain-based crowdfunding is a decentralized and international crowdfunding system that, if successful, can very quickly raise large amounts of money. The mechanism used by this system is the Token Sale. A Token Sale can only be proposed by startups that have their roots in blockchain technology and through it startups can sell to the public their tokens that are not a currency intended as a means of payment, but a kind of coupon that can be converted into company products or services (utility tokens). Initially, startups publish a white paper in which they describe both the company and what they intend to make and on this basis the public can adhere to the proposal made by deciding to buy tokens. To take advantage of this financing method it is necessary to have a business based on blockchain and the support from experienced lawyers to avoid the violation of regulations that are different from country to country and are often unclear. Switzerland is currently the most advanced country in this respect.
It is clear that it is impossible for a startup to grow without adequate capital. In this regard, a certainly positive factor to consider is that today you can find capital at a global level, although then obviously also the competition will be global.
Moreover, incubators, accelerators, Capitalist, Corporate Venture Capitalist, crowdfunding and all the options described so far, can certainly help in a concrete way to progressively grow a startup. After having deepened all the possibilities of choice, the startup can follow the path most appropriate to its characteristics, also considering its willingness to give up participation within the company.