Startup funding: how to secure capital to start growing your business

Thousands of startups are born every day. According to French statistics bureau INSEE, there are currently over a million startups in France alone.

But for every 100 startups that spring up somewhere across the EU, 90 more are winding down, and 10% of new companies exit their market within the first year of trading. Why? Some companies realize that there simply isn’t enough demand for their product or service, while others struggle to gain enough traction in a saturated market. The most common reason given, though, is difficulty accessing cash.

The game-changing innovative solutions that these seedlings of companies could bring to the market need financial backing if they’re ever to see the light of day. The good news is that startup founders can benefit from a whole host of financial levers at their disposal, ranging from traditional fundraising and crowdfunding to government-backed loan and grant programs.

Let’s take a closer look at the opportunities for financial backing that are open to you to help fund your project and kick-start your startup’s growth.

The preparation stage of a startup project is crucial. At the very least, this should involve carrying out some market research and putting together a business plan.

The market research you carry out can be valuable to you in two ways:

• It enables you to define your target audience and understand the challenges they’re facing and the solutions they’re looking for.
• It gives you a deep understanding of your market, from sizing up your competitors to identifying any potential opportunities or pitfalls that are inherent to your industry.

This may seem obvious, but that doesn’t make it any less essential. Startups that over-estimate the size of their market and the level of demand for their product or service tend to fail.

Your business plan is the keystone of your entire project. Remember, you’ll be asked for your business plan every time you seek funding from traditional investors, banks, government bodies, and not forgetting startup incubators.

Your business plan lays out all the key components of your future startup, such as:

• a description of the workings of the project itself,
• the team involved in achieving success,
• market research (snapshot of the market, competitors, target audience),
• key goals and global strategy – in other words: what success looks like,
• financing options,
• detailed financial projections, generally up to year 3.

Financial projections are some of the most important details of your business plan, so make sure you take the time to properly evaluate your figures.

This cannot be overstated, because entrepreneurs have a tendency to minimize their financial needs.

Setting out comprehensive and realistic financial projections helps you avoid this particular pitfall. All your future financial needs should be accounted for, including:

• investments you need to begin producing and selling your product or service (raw materials, research and development, etc.),
• startup costs: rent, utilities, insurance,
• enough salary to cover your teams’ first months of pay,
• social security contributions and taxes,
• marketing and advertising costs.

These elements are crucial for knowing what resources you require for your business to skyrocket.

You could, of course, launch your product or service with no personal investment whatsoever, but let’s face it, it might be an up-hill struggle.

A common way to help you access funds and reassure investors is to show that you’re bringing a personal financial investment to the table, too.

When you approach traditional banks for a loan, they tend to ask for a proportion of the loan amount as a down payment, generally between 20% and 30%.

So, before you embark on your pursuit of seed money, take a close look at your personal finances first. Don’t panic, though, you don’t necessarily need to have thousands to spare; putting up even a part of your personal savings is already a green flag to investors, who will recognize your commitment to the project.

When it comes to startup funding, you instinctively think of fundraising as the best financial tool for startup founders to leverage.

While many international factors contributed to a decline in fundraising across the board in 2022, it undeniably remains the go-to option for getting your startup project up and running. Businesses in Europe managed to raise a whopping $94 billion in funding in 2022. Despite the slow-down compared to the previous year, that’s still $40 billion more than any other year before 2021.

But before you start thinking that investors are just giving away their money these days, in reality, the bar keeps getting higher. So, how can you convince an investor to back your project?

Fundraising is simply a financial transaction whereby an investor gives a business money in exchange for shares in the company.

For the investor, the motivation is mainly financial. They invest with the goal of achieving a return on their investment and making a profit when they come to sell their shares. Fundraising in this way is typically carried out by innovative companies with strong potential for growth.

There are two types of fundraising:

1. “Seed funding” takes place at the beginning of a project in order to get it off the ground and launch the product or service.
2. “Growth capital” is used to boost a startup’s growth. The amounts invested in growth capital tend to be more significant.

Before diving into a round of fundraising, it’s important to identify whether it’s the right type of funding for your company. Exchanging shares for cash can have far-reaching consequences on the overall structure of your business. Fundraising is synonymous with equity dilution, which in turn means giving up some control over your company. You’ll have to start taking into account investors’ interests as well as your own, and your strategy will be steered toward rapid growth.

To be clear, fundraising does not mean easy money. It’s up to you to decide if it’s a worthwhile option for your company. Start thinking about the compromises (if any) you’re willing to make, and how these align with your ambitions for your company.

So, you’ve decided to begin a round of fundraising. Great! But where do you begin? The first hurdle is finding investors who value what you’re offering.

Investors come in many shapes and sizes. You’ll no doubt have heard of business angels and venture capitalists. But what exactly is the difference?

This rather poetic moniker is given to fellow entrepreneurs who have enjoyed a certain success and now invest some of their assets (as well as their experience and contacts) into growing other promising projects.

Funding your startup this way can benefit you both financially and strategically.

Business angels usually get involved around the seed capital stage of a startup’s fundraising to nurture its early development.

VCs are investment funds that raise investments from the super-rich and inject that capital into innovative startups with strong potential for fast growth. VCs typically have more money to invest and so tend to contribute when a startup founder needs to build growth capital in exchange for equity.

Potential investors can be found in a multitude of different contexts: from attending networking events and pitch competitions to applying for grants or simply networking on LinkedIn or by old-fashioned email. It’s essential to find out as much as you can about each investment company before you reach out to them, in order to see which profiles seem best suited to the opportunity you’re pitching.

Finding people willing to invest in your venture is no mean feat. Investors receive dozens of pitches every day; they simply don’t have time to look through every page of each proposal. The minute you walk through the door, you have to be convincing and your arguments must be compelling.

You don’t have to go it alone, though. Your trusty pitch deck – the window into the workings of your concept – should be crafted in a way that grabs a potential investor’s attention. If this is your first time raising seed capital, your pitch deck should introduce investors to your vision by including:

• the journey that led you to creating the company – why this project?
• your market and market position,
• your product roadmap,
• your strategy, ambition, and future plans,
• your company’s financial credentials.

Above all else, be clear and concise. Keep deeper-level information for your business plan, which will likely be examined later by any interested investors. For now, it’s best to keep things surface-level.

The road from making contact with your first investor to completing a full round of fundraising can be rocky. It can take months – even years – to reach agreements. There are several necessary rites of passage that everyone goes through before that coveted lump sum shows up in your professional bank account.

1. The letter of intent is the first step that officially puts the investment process into motion. It is a legal document that confirms an investor’s interest in your startup.
2. Important due diligence is then carried out on your company, including a financial audit and compliance check on your company and overall project.
3. Then, it’s time for the negotiation stage, and this is where you have to be prepared to be patient. Negotiations involve coming to an agreement on essential details like the amount of money to be invested and the percentage of the company you’re giving away in exchange. It’s advisable to seek guidance from an experienced lawyer and a trusted accountant to ensure that investors’ demands are in line with the overall wellbeing of your business.
4. And finally, it’s time for closing, which involves making everything official and signing the deal.

For one reason or another, you may not want to go down the road of classic startup fundraising. Perhaps you’re not ready yet, or the winds of the current economic climate aren’t blowing in your favor. Or maybe you’d rather not dilute your equity and lose the control of your business.

Not to worry – fundraising is far from the only way to find financial backing. There are plenty of alternative ways to boost your project’s development that don’t involve balance-shifting equity dilution.

The concept of “love money” was born in the US in the 1960s and is all about seeking equity investments and other financial support from the people who have a vested interest in your success: your friends, family, and loved ones.

Love money comes in various forms:

• Friends and family members may like to support your project by lending or gifting funds to you.
• Or, they may prefer to invest or purchase an ownership interest in the business venture instead.

Similarly, you could try to obtain loans, donations, and investments from a much wider audience through crowdfunding. The added bonus with crowdfunding is that it gives you the opportunity to present your concept to potential future customers and analyze how they respond to your offering.

The most successful crowdfunding campaigns gain traction fast with slick presentations and punchy communication. Take the time to tell your story, help potential investors understand what drives you, and lay out how you will be using the funds.

There is a plethora of crowdfunding platforms that can help you unleash your project on your audience for the first time, from the most mainstream to those specializing in niche industries. Choose the platform that you think is best aligned with your goals.

While this seems like the most obvious financing solution, particularly for small and medium-sized companies, getting the green light on a business loan can often prove challenging. Banks are increasingly demanding and they don’t give out their money easily.

If you’re going down this avenue, make sure you provide:

• a solid loan application, including your detailed business plan,
• enough of a down payment to reassure the bank.

Also, it’s important to be aware of a few key details:

• Interest rates can fluctuate, so make sure you compare offers from different banks.
• Business loans are generally given on a relatively short-term basis, anywhere from two to seven years.

Pitch contests offer generous financial rewards that can be used to help create your startup. They’re also perfect events for gaining new contacts, widening your network, getting exposure, and perhaps even meeting your future investor.

Local, national, and European-wide business loan and grant programs provide financing to help hundreds of companies get started every year.

Want to find out more? We have a whole article listing the types of government support you can reach out for to create your company in France.

Are you ready to launch your startup? Use Qonto to create your company and you’ll get a 100% digital business account, packed full of tools to make managing your finances easier.