Equity-Based Options for Raising Startup CapitalGuides
Equity-Based Options for Raising Startup Capital

Taking your business to the next level, no matter what stage you’re at, usually requires capital. There’s an abundance of options available, but which one is best for you, your business and current situation? You may also find that you need more than one source of funds for your business over its lifetime. Let’s take a more in-depth look at the top equity-based options available for companies looking to raise capital.

Equity Crowdfunding

Suitable for: early-stage businesses of all stages.

We’re an equity crowdfunding platform at Seedrs, so it makes sense to start off by taking a look at the way we support the growth of early-stage businesses!

How it works: Equity crowdfunding allows a diverse group of investors, from individuals to institutions to invest capital through an equity crowdfunding platform, such as Seedrs, in return for equity in the business raising. In short, business pre-establish how much they need to raise to reach their next level of growth, and the amount of equity they are prepared to offer investors. They then run a campaign, pitching the investment opportunity to the platform’s community.

Advantages of Equity Crowdfunding

  • Get fast access to capital from a diverse group of investors. On Seedrs we have one of the world’s largest investment communities and you can easily combine this alongside your existing investors, customers and family and friends.
  • Customer engagement – the platform makes it easy to give your early supporters a chance to share in your success by investing in your business. At Seedrs, the investor relations portal allows you to continue building loyalty with your investors.
  • Brand engagement – reach new audiences in new markets and gain exposure across mainstream media. By putting your product in front of potential customers, you benefit from attracting customers at the same time as investment.
  • Customer acquisition – benefit from the bespoke marketing packages and exclusive deals on promotional activity that include digital marketing, email marketing, dedicated PR and even advertising on the London Underground which will drive your customer acquisition while you raise funds.
  • Support as you scale – at Seedrs the nominee structure provided means that you only have one name on the cap table, making looking after 100s or 1,000s of shareholders straightforward. Equity crowdfunding platforms can also support with further fundraises as you continue to scale and may also provide growth services, such as those provided by the Seedrs Alumni club.
  • No repayment of capital raised.

Disadvantages of Equity Crowdfunding

  • With many equity crowdfunding platforms, there is a heavier administrative burden with a large shareholder base of the crowd. There are certain decisions taken by companies which require the consent of shareholders so it can be more arduous and costly if you find yourself having to contact literally hundreds of shareholders, but it is unlikely that small investors will respond to any contact. However, as mentioned, the legal structure provided by the Seedrs Advantage Nominee means that you only have one name on the cap table, making looking after 1,000s of shareholders much easier.
  • As with all equity-based financing options you will be selling some equity in your business but this is often preferable to taking on debt that then requires repayment and can actually hold back your growth.
  • To underpin a great equity crowdfunding round you’ll need to ensure you have found a significant, pre-established proportion of the investment funds from your contacts, before going live on the crowdfunding site. This is sensible when you think about it; like a business, a crowdfunding campaign stands a much better chance of gaining momentum if it already has a solid backing, but this does mean that it is not as easy as you might imagine to crowdfund successfully. However, at Seedrs we do offer our Anchor Investment Service which can help you find that pre-aligned capital.

Finding an Equity Crowdfunding Platform

You’re in the right place already! Over £600 million has been invested in campaigns on the Seedrs platform, and we have funded over 810 deals to date since 2012. Find out whether equity-based crowdfunding could be right for your business by applying to raise on Seedrs here.

 

Angel Investors

Suitable for: early-stage startups, but also suitable throughout a company’s lifetime.

How it works: Angel Investors can be either an individual or a group of individuals (who often invest together through networks or syndicates) that invest cash to finance startups. With significant assets, Angels are looking to invest in early stage businesses with high growth potential, in return for company shares. Investments usually range from £10k upwards (the average Angel investor invests a median of £25,000 according to UKBAA), and they will typically expect a 10-15% stake in your company if it’s a seed round.

Advantages of Angel Investment

  • Often, Angel Investors are ex-entrepreneurs or business leaders, so if they are experienced in your business area, they can provide an essential value-add that makes Angel investment worth so much more than just the cash. Their experience and advice can be invaluable, and you should also look for an ability to follow on, providing more later-stage capital to continue to support you through at least your early-stage funding rounds.
  • In many instances, Angel investors are friends and family of the founders, so if you have a personal connection to an Angel, it can make it easier to obtain capital if you have a prior established level of trust from an existing relationship.

Disadvantages of Angel Investment

  • While an Angel Investor’s key selling point is their value-add of expertise, it can also be a key downside if they start to dictate or interfere with your business.
  • If your Angel investment is through friends and family, handling their money could cause tension in your relationships with them.
  • Usually, Angels offer a smaller amount of capital compared to venture capitalists.
  • You do need to take care that you pick investors that you feel you can relate to and work with long term, as some Angel Investors like to be hands-on. There may be times when you come into conflict, so be sure they’re someone whom you can have an honest, frank discussion with.

How to find Angel Investors

Securing Angel finance is dependant on high-quality research. So, where do you start? Here’s an introduction but you can also check out our guide on how to find Angel Investors for further guidance.

Personal introductions always work best, but not all of us know someone who knows an investor. An hour’s research on the internet will show you any number of investor syndicates and networking groups that hold pitch events, which will allow you to pitch to a group of investors, but always try to get personal recommendations before pitching. You would be surprised about the extent to which some of these events are made up of professionals who provide services to startups rather than investors themselves.

There are businesses which will offer to find you investment for a fee, often a cut of the invested cash. Provided you appreciate that this effectively makes the investment more costly for you (as you have to give a percentage of it to the introducer), these are not all bad. However, be very careful about the terms as some will try to get you to agree a very high percentage commission (e.g. 8% or 10%) or to give the introducers a cut of all investment you raise for evermore, whether introduced by them or not. Again, at Seedrs we have our Anchor Investment Service which can help connect you as part of your funding round.

 

Venture Capital (VC)

Suitable for: startups generally at stage Series A and beyond.

How it works: VC funds invest in new ventures using funds raised from limited partners such as pension funds, endowments, and wealthy individuals. The main distinction between VCs and Angel Investors is the weight of investment and generally control rights that VCs will have in their portfolio companies.

VCs look to invest large sums (£2m-£50m) into very high-growth companies that can demonstrate huge potential. They’ll hope to see a return of up to 40x on their investment, and they’ll expect a 15-25% stake in your business, as well as a fair amount of strategic control and expectations.

VCs generally invest at the stage that a business model will have been proven, and the focus will be on looking to scale. However, there can be exceptions – micro VCs who specifically target seed stage businesses or traditional VC’s who have specific seed stage funds.

Entering into a relationship with a VC is just that – a relationship, and they can be good, bad, or indifferent. You need to remember that their entire reason to exist is to invest in companies, grow that investment and exit, so they will only invest in you if you are a good prospect for high growth. Once they have invested, they can become much more demanding and may push growth more aggressively than you may want.

Advantages of VCs

  • One of the only ways to raise significantly large funds of over £1m, with a strong potential to follow on and put more money into your company in future investment rounds.
  • VCs are very well connected.
  • You often have a single investor to deal with, or at the most two, and they are professionals who, like you, understand the world of your business from the outset.

Disadvantages of VCs

  • Loss of control. Receiving a large amount of money from VCs typically results in a more significant expense of your ownership stake.  
  • VCs may demand a high level of involvement in your business to help drive growth and see a return, as they’re acting on behalf of clients who are seeking significant returns. The terms they require in the investment documentation relating to their minority protections and control on decision-making in the business will be far more onerous than anything you will have been required to agree to with an Angel Investor, and they will want to have oversight over your management concretely.
  • VCs operate on the principle of high risk, high reward. However, this risk might mean they take a long time to decide whether to invest.

Finding VC Firms

It’s not an easy task to work out which VCs are worth approaching. At Seedrs, our Anchor Investor Service can help connect you to VCs and Institutions that are looking to make investments in businesses like yours.

It also doesn’t need to be the sole source of funds and increasingly early-stage businesses are raising funds on Seedrs from a diverse combination of investors including both self-directed investors and VCs. Crowdfunding can bring with it validation for a VC considering investing in your company, answering their ultimate question: “will people buy this product?”. Similarly, the crowd’s interest will be roused by a startup that has attracted the support of a recognised VC firm, effectively snowballing the success of a raise. By combining VC expertise with an engaged audience that you can use as a testing ground, you can achieve maximum impact during your fundraising.

Learn more about how VCs and equity crowdfunding can work well together in our blog post, written by Kirsty Grant, our Chief Investment Officer on, ‘Why Your Funding Round Can Never Be too Crowded’.

 

Accelerators and Incubators

Suitable for: very early stage businesses.

Accelerators and incubators are often talked about synonymously. Although similar, there are key differences. For example, an incubators’ priority is to direct and nurture startups for a longer period of a year or more, whereas an accelerator programme tends to be shorter. Further, unlike accelerators, incubators don’t just concentrate on business aspects either; some focus on the science or industry-specific side, for example, by providing access to specialised equipment for biotech research companies. Moreover, incubators are more likely than accelerators to be run by non-profit organisations such as universities, government bodies, or civic groups.

Accelerators operate to help startups grow quickly throughout a programme that usually lasts three months. Startups need to apply to be accepted into an accelerator programme, with only a small number of applicants being accepted based on certain selection criteria. Following a successful application, startups will be expected to offer part of their equity to the accelerator.

Like accelerators, incubators also require an application process and provide collaborative programmes to help founders solve problems related to launching a startup by offering a place to work, seed funding, mentoring, and training. However, as already mentioned, these programmes will last for far longer than an accelerator.

Advantages of Accelerators and Incubators

  • Extensive mentoring from old-hands in entrepreneurship, ranging from founders of startups to titans of your industry, and FTSE100 Executives.
  • Seed investment.
  • Typically provide a workspace.
  • A programme will typically have a cohort of a few selected small businesses, providing the opportunity to work with other budding entrepreneurs to collaborate with, learn from, or maybe teach, which potentially may open doors for you in the future.
  • Introductions to investors and face-time with them. Many programmes are difficult to get into, so when future investors see that you graduated from a programme of a certain calibre, it acts as social validation for investors, setting you apart from similar startups at the same stage.
  • (Accelerator specific) Most accelerators are formed to conclude with a demo day, where the cohort of startups will pitch to many investors simultaneously. Done right, this is a golden opportunity to jumpstart a seed funding round.
  • (Accelerator specific) Programmes tend to last 3-4 months, but can be one of the most concentrated educational programmes, often likened to an MBA but distilled over the course of a few months. Entrepreneurs will have access to extensive training resources on business plans, pitches, and technology.

Disadvantages of Accelerators and Incubators

  • Not all startup accelerators and incubators are created equal; a lot of them aren’t worth participating in if they have weak relationships with investors. For newly established accelerators and incubators, they are unlikely to have a proven track record of supporting startups that have gone on to be big successes. This might cause investors to be more hesitant about investing in graduated companies from these companies.
  • Participation (particularly in incubators) will eat into valuable time in your company’s lifecycle. If you walk away without gaining enough value from your time, it can mean a massive time loss for your startup in an environment where even a matter of a few days can lead to startup survival or demise.
  • A cookie-cutter process. Often, programmes have a predefined structure that every cohort goes through; it’s a formula that works for most startups most of the time. However, that is meaningless if it doesn’t work for your business, which can waste your time with pointless events or advice.
  • The application process for both options can be tiring, rigorous, and highly competitive.

Finding Accelerators and Incubators

Similar to VCs, it’s difficult to navigate which accelerators and incubators are worth approaching. At Seedrs, we partner with accelerators and incubators, and our team mentors, judges and participates in the selection of cohort companies in a lot of accelerator and incubator programmes. By leveraging the support from Seedr’s coaches, startups have access to a wealth of knowledge and advice to find the right fit for their company.

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