How to find the right route to funding
From grants and competitions to angel investors and crowdfunding, Tutorful's Scott Woodley shares a guide to the sources of business finance for start-ups
In 2016, Tutorful (formerly Tutora) raised £150,000 for a 10% equity share in its online tuition marketplace.
The campaign was completed in just four days – and was said to be the fastest education technology (edtech) raise in the history of crowdfunding platform Crowdcube.
Here, Tutorful co-founder Scott Woodley shares his top tips on the different funding routes entrepreneurs can pursue…
We all love our own businesses, but the ultimate aim is to make everyone else love them too. To make that dream a reality, the majority of us will, at some point, need to seek additional funding.
Whether this funding is to build a prototype, advertise your product or hire staff, growing a business costs money – and few businesses generate revenue to the extent that they can bootstrap to scale. The question, then, is how can you secure this funding?
Here, we’ll look at the sources of business finance currently available to start-ups, including their benefits and drawbacks, and hopefully help you to decide which will best suit your business and current situation.
My summary of each route is fairly simplistic but is designed to give you a good initial overview of the options available. Remember, the routes are not mutually exclusive and can be combined in any way you see fit.
Non-equity funding options:
Best for: All businesses, especially those seeking investor contacts and media coverage.
Competitions, by definition, have winners and losers and are therefore obviously a hit-and-miss approach. I’ve included competitions because, for many pre-investment start-ups, they can be a great way to get your idea tested and off the ground.
More realistically, they are a fantastic way of getting the word out about your business, making contact with other founders and even attracting a pool of potential investors to tap into.
Competitions should not solely be the domain of the early stage business, as the media coverage for those shortlisted can be extensive (see the Startups 100 index for example) and will benefit all companies.
Bursaries and grants
Best for: Early-stage businesses in specific sectors.
The holy grail of the start-up world: free cash. If you are working in a niche field or developing a socially beneficial product or service, there is a good chance that you may be eligible to apply for a grant.
Many entrepreneurs assume that you can only get grants from the government (check the government’s Business Finance Support Finder to see what’s on offer), but there are also many initiatives attached to universities – especially if you are a current student or recent graduate, run a charity, or run a private collective.
These grants are often designed for early-stage businesses or for research purposes; although they can vary greatly.
Many grants do come with strings attached though, and there can be a heavy bureaucratic toll in applying, with competitive selection procedures. So assess the rewards on offer against the focus and time required to apply.
Best for: Businesses with cashflow and the brave.
There are many providers who will happily provide credit or loans – whether in the form of bank loans, credit cards, peer to peer lending, or something else (for example, a business cash advance if you’re processing transactions through a card machine).
The terms of these loans are varied and I will not go into detail here. But, suffice it to say, debt financing can be a risky but potentially justifiable option – especially for businesses who have confirmed orders which funding will allow them to meet.
Best for: Product-based businesses who are happy to offer products.
This is a great method of not only gaining investment but also developing early brand ambassadors.
Kickstarter is perhaps the most famous platform offering this service, in which investors pledge funds in return for being sent a product at a later date, or in exchange for a reward such as a discount on future purchases.
You can be incredibly inventive with your offers, and, if done well, such a campaign can build a real following for your company. The levels of funding available can be very high, depending on your product.
Read more: Find more advice and insight into crowdfunding on Startups’ dedicated crowdfunding channel.
Best for: Those in need of a quick cash loan or speedy injection of working capital.
In simple terms, asset-based financing is when you offer a lender some of your assets – including accounts receivable (or unpaid customer invoices; this is known as invoice factoring), short-term investments, inventory assets, equipment, and even sometimes buildings – as collateral in return for a fast cash loan.
This is a route to consider if you’re in urgent need of working capital – perhaps because you’re still waiting on payments from customers – so you can do things such as pay employees or order supplies.
Equity funding options:
The following forms of investment are for those seeking equity funding, in which you receive investment for giving away a percentage of your company:
Incubators and accelerators
Typical funding amount: £15,000 to £20,000
Best for: Those seeking both funding and support.
Incubators and accelerators offer a fantastic means of gaining both funding and support. There are various programmes out there which you can apply to participate in, either directly through the providers’ websites, or by making contact with individuals involved.
Some programmes will specialise in certain sectors, which would be a boon for any founder with advice tailored to their industry.
The majority of accelerators and incubators run over a 13-week period in which you generally work in the accelerator’s space under the pupilage of previously successful entrepreneurs. Many programmes will include traveling to larger companies, and will be geared towards fast-tracking your business for further growth and potentially additional investment.
Whilst this is a great opportunity for those start-ups who feel they need additional guidance – or are still trying to finalise their product-market fit – accelerators and incubators are best seen as a hot house for developing your business as the investment terms are fairly fixed and typically require you to give up 6% to 8% of your business in exchange for around £15,000 to £20,000.
These programmes can often come with the allure of travel and working with investors in a cool location – if you’re looking for a great experience, go for it. But if it’s all about the business, try to remove these attractions from your decision-making process.
Typical funding amount: £10,000 to £1m
Best for: Those with traction in their market or an idea others can be passionate about.
Angels are high-net-worth individuals who are looking to invest in businesses.
They can vary greatly in the amount they are willing to invest, the sectors they are open to and the level of involvement they are seeking to have with a business.
Their motivations will also be personal to them, whether they’re looking to make profit, get involved in a great project, pass on their own experience, or solve a problem they can empathise with.
They will, however, almost certainly want equity in return for their investment, on which they will ultimately be seeking a return. A great source of advice in this area is the UK Business Angel Association website.
Angel investors can come to invest in businesses through a variety of methods:
Many angels will be happy to invest directly in a business, without any intermediary. This is a simple process in which you will be responsible for sourcing investors and negotiating the terms of their investment.
A great place to start would be seeking out local investors by attending events and making personal contacts – take your business cards! LinkedIn is also a great way of contacting angels who you’ve not met in person. Ask other business owners to make an introduction to those investors they feel would be a good match – it’s all about being proactive.
It may be that a handful of investors will come together to invest in your business. The process and legal contracts will be for you and the investors to decide on, and you should seek legal and financial advice – be wary of those pushing their own representatives.
Angel syndicates and networks
You can also approach angel networks: local business owners who have grouped together to invest through a syndicate, sharing the risk and rewards of their investments. They tend to hold regular local events at which you can apply to pitch.
Many networks of angels come together to invest in a specific sector or at a similar level of capital. You can seek these out by using the UK Business Angel Association’s members directory and other listings online.
These syndicates will typically have their own procedures for signing off on investment and creating investment contracts. Funds such as the Angel CoFund can also make investments alongside syndicates of business angels.
Equity crowdfunding takes place on websites where people can view business pitches, and invest an amount of their choosing until the equity investment limit is reached – or, in other words, an online investment totaliser.
In accordance with the host platform, you will decide on the level of funds you require and the equivalent equity you are willing to give up to secure it. Different sites will have different demands, but all will have due diligence processes which you will need to pass through before you are accepted to pitch on their sites; only a small percentage are accepted.
Sites will only allow pitches that they feel have a strong chance of completing a round to proceed, as they generally only receive a commission when you secure funding (and some will have additional fees).
Equity crowdfunding is a great way of bringing higher numbers of investors together, setting standardised terms for all, and building brand awareness.
Platforms such as Crowdcube ask for a minimum investment of £10 from investors, so you can build mass support and gain additionally from the coverage you can generate. This approach still requires a large input from businesses, and should be approached strategically, with a marketing and social media campaign to funnel potential investors to your pitch.
There are many hybrids of these systems, such as Angels’ Den which can act as a funding platform and organise events for businesses to meet potential investors.
Venture capital investment
Typical funding amount: £200,000 and above
Best for: High-traction businesses with excellent product-market fit or highly ambitious, technical projects.
Venture capital (VC) funding is generally the preserve of businesses with particularly ambitious, innovative or technical projects, and high growth potential. Whilst VCs manage investment from a wide range of investors, they often represent pension funds and company investment schemes.
With this type of investment comes a far more regulated and stringent examination of future company decisions – VCs often take a more hands-on role within the running of the business, thus gaining both equity and decision-making powers.
For most businesses, VC investment will come in the second round of investment (a Series A round, as opposed to the initial seed round), when the business model has been proven and the business is looking to scale further. Many VC firms will only consider pitches from businesses introduced to them by existing contacts, so get networking!
Choosing your route to finance
Deciding on which of these methods to follow is tricky, and you will worry about making the wrong decision. But, remember, no-one will know better than you what suits your business and personal situation best.
The best way to decide is by pursuing any funding options which you feel may be applicable to your business, speaking to as many people as possible, and being open to discuss your business in detail.
Aggregating the opinions and weighing up the options that remain viable (many doors will be closed as you go along) will ultimately lead you to the right decision.
Whichever route you follow, good luck!
At Tutorful, my co-founder Mark Hughes and I initially bootstrapped the project, investing our own savings to get it off the ground.
Early on, we sought support from the University of Sheffield through their alumni and enterprise network. We found office space and guidance, which removed the need to seek angel/incubator input earlier in our journey, and saved us a great deal of cash.
When seeking our seed round of investment, we considered an offer from an incubator, but ultimately felt that the equity-cash deal was lower than we’d have hoped, and the business was already scalable to a point where we didn’t require a sustained coaching course. Instead, we approached angel investors and worked hard to build a team of lead investors.
After contemplating organising a private collaboration, we felt that an equity crowdfunding campaign would allow us to bring the investors together, remove the hassle of dealing with the legal contracts and benefit the business through increased exposure to potential clients.