Getting your head around early stage funding
Updated 6th September 2018
So, you have a great idea, which you just know people will love. You’re bubbling over with enthusiasm and you’re all ready to bravely present your concept to the world...
And then you hit the Great Wall Of Finance.
Unless you’re lucky enough to have plenty of savings in the bank, you’ll find yourself up against impenetrable terms like ‘angel investor’ and ‘seed funding’. And you haven’t a clue where to start. We get it. We sympathise. But there’s no way around it. If you’re dreaming big, then sooner or later you’re going to need some cash and support to get your idea off the ground.
The Labyrinth of Support
If you’ve got as far as moulding your concept into a decent business plan or even a fledgling start-up with an MVP (Minimum Viable Product) or prototype to work with, you’re already doing better than 90% of the innovators out there. But this is usually the point at which you need to push yourself into strange and unfamiliar territory.
One of the first obstacles many start-ups face is the labyrinth of early funding. You’re barely out of the gates when you’re lost in confusing business jargon. What’s the difference between an ‘incubator’ and an ‘accelerator’? What’s a ‘Venture Capitalist’? Where should you turn?
Let us help you out:
As a basic rule, incubators and accelerators are your first port of call, because if they like your idea, it’s their job to preen and prep you for angel investors and venture capitalists further down the line. Consider them a kind of business finishing school, which gives you that essential polish before your debut.
Angel investors and venture capitalists probably won’t work to improve your basic idea. They’ll look critically at what you already have and, if they like it, they’ll plunge funds into developing it further, often providing mentoring and advice along the way.
Incubators and Accelerators
There’s a lot of confusion around the terms ‘incubator’ and ‘accelerator’. The clue is in the wording – ‘incubate’ is what you do to nourish something in its infancy. ‘Accelerate’ is what happens when a fully-formed object is propelled onwards and upwards.
Both incubator and accelerator programmes will usually (although not necessarily!) provide what’s known as ‘seed funding’. This is not a major investment - it’s a trickle of finance which will support the business until it’s off the ground and able to support itself.
Incubator programmes are for businesses in the earliest stages. They’re often not time-fixed, but it’s generally accepted that at some point your business will naturally emerge from beneath the incubator’s wing.
Their job is therefore to nurture and encourage your start-up through its beginnings, while often providing business space and some funding on top. They’ll counsel, provide reality checks, and prod opportunities your way. Crucially, an incubator programme will coax the best out of your concepts and help shape them into a solid product.
They also help you to find product-market fit and work out what you should be looking to achieve, and how you’re going to achieve it. They may also (and this is where the distinction between ‘incubator’ and ‘accelerator’ blurs) help you out with growth opportunities if and when they present themselves.
Accelerators are often seen as the next logical step from an Incubator programme. However, not all incubated start-ups need an accelerator. It depends on the amount of momentum you’ve built up during the incubation stage.
If you’ve successfully coaxed your concept into a fully-fledged business but are unsure how to progress any further, an accelerator programme could be what you’re looking for.
While incubator programmes will work on building your concept, accelerator programmes will take that concept and start booting it up the ladder – where hopefully you’ll start grabbing the attention of potential customers and the next level of financial support when the time comes.
Well known Incubators & Accelerators
Angel Investors and Venture Capitalists
It would be misleading to say that either of these financier-types ONLY invest in established start-ups. But, if you’re an untested business, without a product on the market and some customers, it’s likely that you’ll need to bootstrap for a bit longer before VCs will look your way. Angel investors are a bit more of a wildcard, however.
Angel investors can be anyone, from a well-resourced personal friend to a stranger who simply likes your concept. And they can float into your business at any stage, providing cash injections in exchange for equity, or even buying controlling stakes in your company.
The basic difference between AIs and VS is that angels have more autonomy. The flexibility of angel investor deals depends entirely upon the motives of the parties involved. As they’re individuals, the sums they invest are also likely to be lower. Plus, they’re likely to invest in industries where they have some prior knowledge and experience, so can also make excellent advisors.
Venture Capitalism is a whole new league, as it means you’re dealing with a professional investment firm. They’ll not only invest in your business – they’ll also work hard at monetising that business in order to make returns on their investment, and you’ll be expected to report back regularly on how things are going. If you manage to secure the interest of a VC firm, great business resources could open up to you. But if you’re not careful, you could also end up sacrificing a degree of autonomy and control.
Most VC firms adhere to strict codes of conduct and due diligence processes. While this bestows confidence in their dealings with you, the flipside is that your own business may be subjected to rigorous scrutiny before the firm agrees to be associated with you. So make sure you’re up to date with your accounting and paperwork before crashing straight into the world of VC investment. This is why early-stage incubators are handy, because they’ll help you to put all the necessary structures and processes in place before you get to this point.
It might all seem daunting when you’re starting out, but all four options can give your business a much-needed leg up, through advice, support and of course, cash. Most of those involved in funding start-ups are ex-entrepreneurs themselves, or passionate about building businesses, so if you find the right partners, you’re sure to build some fantastic, mutually beneficial relationships. Just ensure you do your research and due diligence before signing on the dotted line.
For more tips on raising investment check out our blogs on start-up funding - what happens when and 12 steps to finding the perfect investment partner.
And remember that most investors will require you to have certain insurance before they’ll hand over the cash, including professional indemnity and management liability insurance (also called directors & officers insurance cover.
What do startup incubators do?
Incubator programmes can make all the difference in the early stages of a startup’s existence.
Small business workshops and training providers
While there’s a lot to be said for learning on the job, it certainly helps to have expert advice to fall back on, when starting a small business.