How to fund your startup 101
Where to acquire funding for starting your own business? Here we have gathered a list of some of the most common ways to fund your startup. The list is not all-inclusive but it should give an overview of the currently available general options.
Self-financing or ‘bootstrapping’ is one of the most common ways by which entrepreneurs get started. While starting your own company naturally has its own risks, the original self-financed capital gives you plenty of freedom to create the type of business you want prior to having to deal with investors. Investing in your own company is usually not just financially needed but also gives a strong message to potential investors that you are serious about your company, and that you are ready to put your skin in the game as well.
2. Friends and Family
You can test your idea by pitching it first to people you know such as friends and/or relatives to see if they are convinced enough to invest in your company. When approaching your friends and/or relatives for funding, you should always make sure they understand what they are investing in and that they are able to say “no” to you as well without affecting your relationship. If someone you know decides to invest, make sure that you always make it official. Remember that the wealthiest investor might not always be the best choice: knowhow, experience and potential networks the investor can bring can be even more valuable in the long run.
You have surely heard of Kickstarter or GoFundMe? Through crowdfunding you are looking to attract a number of investors, usually through an online platform. There are several ways to do crowdfunding, and e.g. in reward-based crowdfunding, the investors expect a non-financial reward; usually the product or service that your campaign was created to fund. This form of crowdfunding allows your company / idea to launch with ready customer orders from the very start, and it also increases your recognizability before the concept is even launched.
In addition to reward-based crowdfunding, there are other types of crowdfunding as well. In equity crowdfunding the investors will get a share of your company: You will have to choose how much of your company’s ownership you are willing to give, at which price, and how investors will be rewarded. This requires good expertise in how to properly value your venture.
4. Incubators and accelerators
In addition to mentoring, guidance and networks, some incubators and accelerators also provide funding in exchange for equity. Moreover, some accelerators (especially those run by a venture capital fund) may possibly reward the “best” company in the program with funding.
5. Angel Investors
Angel investors usually invest at the early stages of a start-up when most investors are not yet ready to invest in the company. Angels typically invest their own capital in exchange for equity or convertible debt. Some angel investors invest through online crowdfunding platforms as well. Angel investors usually come in when the initial funding is already in place but larger investments (e.g. from a VC) aren’t yet needed or accessible.
6. Venture capital (“VC”)
Venture capitalists usually invest in a company when the initial funding has been obtained and the company is planning on scaling quickly. Unlike with angel investors, funding most often comes from a venture capital firm or a fund. Venture capital investments are usually made on early-stage companies in exchange for shares or an ownership stake. The investments are usually quite large and venture capitalists typically expect the possibility to not only impact the decision making process of the company but also have an exit strategy for their investment. Helsinki Education Hub has been happy to collaborate closely for example with Sparkmind.vc: it is the first Nordic venture capital company focusing on the learning sector.
Compared to getting capital from VCs, the process for a bank loan is usually faster and easier. However, while VC’s and angel investors might be ready to take rather big risks for potential major rewards, banks are usually more conservative with their approach. Taking a bank loan however means retaining full ownership of your startup but requires strict financial responsibility as well. Oppiva Invest, an investment company operating under the ministry of education, grants capital loans especially to learning innovations for vocational education as well as to education exports. Finnvera, a state-owned financing company, offers guarantees to SMEs to obtain bank financing; including a start guarantee for new businesses.
8. Public Grants
For start-ups and growth companies that already have a solid foundation, we advise you to get to know what Business Finland and ELY-centre have to offer. When you have a product or service that still needs development, ELY-centre is often the place to turn to. ELY also offers a startup grant (“Starttiraha”) for the very first 6-12 months of your own business. If you are looking to grow your business internationally, Business Finland offers both grants and loans for this purpose. For example, the Tempo grant from Business Finland is aimed for companies with innovative products/services which are seeking growth from international markets.
Many of the public subsidies are ‘de minimis aid’. This means that they are governed by the European Commission and the maximum permissible sum of the aid is 200,000 euros over the current and two previous fiscal years. However, not all grants are subject to de minimis ruling. E.g. ‘Business financing for rural areas’ (Maaseudun yritysrahoitus) from ELY-centre is not considered as de minimis aid and as such the obtainable grants can potentially be much larger.