Sources of funding for early-stage startups and where to find them

At Fundacity we want to help connect startups and investors, so we have prepared a presentation to guide startups that are looking for funding. We called it “Hacking your fundraising”. In this blog post we would like to give you some tips about where to look for finance if you are an early stage startup. This means you have at least a team, some form of a validated idea (preferably a Minimum Viable Product) and lots of drive and passion to grow the next big thing!

At this stage your financial needs are probably not that big. Assuming you have technical skills to build your product, you may need money to:

  • Pay basic company expenses like cloud server, non-free software, co-work office space, accountant, etc.
  • Survive: pay your rent, eat and occasionally go out to disconnect (important!)

Even if you can survive for some time from your savings, you will eventually need additional money to keep your business going. There are three main sources of funding for early stage startups:

1. FFF: Family, friends and…fools

The FFF are people who know you well and are ready to support your idea financially, because they believe in you. FFF can be your parents, a rich uncle, or a successful/wealthy best friend. Getting money from them is also a very important first test for you. If you manage to get money from FFF, it should be easier to raise money later.

The amounts will be small (unless your uncle is very rich and not that smart), but good for a start. It is probably best to take money as a loan and not formalize too much. This funding is 100% based on trust, so they know you will repay them nicely when you become the next big thing. Common mistakes here are giving too much equity (10%+) for a non-active role, including non-dilutive rights or agreeing to pay monthly cash interest which is tricky for a growth stage company.

2. Angels

Angels are a bit like FFF in the sense they are individuals with some disposable income who are ready to make a bet on you. The difference is that you probably don’t know them yet. Angels are often former entrepreneurs, who like helping build new businesses. They may also be wealthy people who like startups and want to invest in something with a big potential to diversify their investment portfolio. The important thing is that they are also prepared and can afford to lose this money.

There are several ways to find angels:

  • Angels like to form groups, so check online if there is one in your area. For example in Brazil you have Anjos do Brasil, Angel Ventures Mexico in… Mexico, or Tech Coast Angels in the US.
  • Many will have a formal way to be contacted, through website. For example, Juan Martin from Club de Business Angels de IAE in Argentina told us that startups can contact him directly through their website. He will review the idea, ask for additional information if your business seems interesting and then present the business to the other angel group members.
  • Personal introductions are however the most effective ways to get introduced to angels. For that, you need to network with your local startup community. Go to events, talk about your idea with many people, then establish relationships and ask for introductions. The best events to attend are accelerator demo days. They are generally neither costly, nor difficult to attend and angel investors go there to find interesting opportunities. You don’t have to pitch on stage to get a chance to talk to them.
  • Investors usually have LinkedIn or AngelList profile, where you can see what companies they have invested in. This will not only give you information if the angel is the right fit for your startup, but help you find ways to get introduced to them, for example through someone you know in their portfolio startup.

Securing angel investment depends a lot on personal relations and trust you build with them. They need to believe in your idea and that you are the right person to deliver it. For that reason you cannot expect that securing investment will be a fast process. It can be however really worthwhile as many investors can offer valuable advice in addition to money. Speaking about money, angels will invest typically up to $100k in exchange for equity in your business.

3. Accelerators

Accelerators invest in early stage startups not only by providing money, but, more importantly, by offering valuable services (mentoring, work space and contacts).

The way they work is by inviting startups to participate in short programs, which usually last a minimum of three months and require you to relocate to their offices.  During that time you not only work hard on your business, but go through a structured program of workshops and meetings with mentors. The idea is that in this short time they will help you, well… accelerate your business, by teaching you essential skills and advising you on your business model.

In return for their services and cash (usually around $20k, some offer more), you will have to give up a small amount of equity (6 to 9%).

How can you find accelerators and incubators in your area? The most famous accelerators are in the US, such as Techstars, 500 startups or Y-Combinator. In Europe you have Seedcamp, in Latin America Nxtp.Labs, Aceleratech or 21212 in Asia JFDI, etc. You can look for them on Fundacity or AngelList. All of them can be easily contacted online, some take applications all year round.

4. Others

There are a number of other options you can consider looking for funding.

Venture Capital firms usually do not look for early stage startups, unless you have a rockstar team, previous relevant experience and a product that already has some good results – impressive user growth in a big market is the best.

Take a look at government programs, grants or loans such as CORFO fund in Chile and Startup Brasil. There are also various funds provided for entrepreneurs by the European Union if you happen to do business in one of the EU member states. However be aware that government grants often come with lots of headaches as you need to report your plans and later expenses very diligently and there is little flexibility to pivot your business. However, it is worth investigating them as conditions for some are really attractive (cheap or free money).

Crowdfunding is a good option to get not only funding, but also help to promote your product by your backers or investors. The most popular type of crowdfunding is when people give you money to build a product and then you usually offer them this product on attractive conditions (or for free) once it’s ready. For obvious reasons it works best for consumer products that people can actually buy and use themselves. It is much more difficult, if unheard of, to crowdsource e.g. an enterprise SaaS solution this way.

The most popular sites to get funded by people this way are Kickstarter and Indiegogo. Another option for startups is equity crowdfunding, where sites like AngelList or Seedrs can help you find many small investors who pool their money to fund your business in exchange, you probably already guessed it, equity.

 

Thank you for visiting us, stay tuned for more posts. If you want to receive notifications for new posts, please subscribe to our blog.

 

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2 thoughts on “Sources of funding for early-stage startups and where to find them

  1. Pingback: Startup funding – what you get and what you give up | Fundacity blog

  2. Pingback: Finding the right investor for your startup | Fundacity blog

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