It can be hard to know how much funding fo your startup you actually need, and where best to get it.
There is no shortage of ways to fund your exciting startup or business idea, but if you dive headfirst without correctly understanding which approach fits you best, you might wind up regretting it later down the road.
We at Jexo went through two rounds of funding one year apart, and both have been the best steps we could take at the time for our strategy to grow. I'll tell you exactly how we successfully got funded but first, let me explain the various investment options you should look at and, most importantly, when you should avoid them.
There are plenty of ways to get money to sustain your early business. In this article, I will talk about six common options, amongst them, a couple that we used as well.
A quick disclaimer, I am by no means a financial advisor or expert in funding, but I'm running a company that sees success on the back of two investment rounds, and I also had to look into this topic. So make sure to do a bit of digging after you read this and make your own mind. 🤓
1. Self Funded / Personal savings 💰
Some of you are probably rolling an eye or two on this one. "If I had the money to fund my startup business, I wouldn't be looking for options," you might say.
But the reason I have this option here is that, honestly, putting your own money into your business is the option that enables you to retain all of the equity and less stress about making enough money to repay loans.
If you have some funds somewhere aside and pondering if to use or go for alternatives, consider that funding yourself gives you independence, even if it's for a short term.
What do I mean by "short term"? Having the ability to sustain your business to grow for a while will place you in a better position to bargain better conditions for raising capital for all of the other options I'm going to mention. Be it better loan terms, more family trust to fund you, or giving away less equity for the same capital.
Now, you might not be comfortable putting your personal savings in the business because it may turn into a risky affair where you wind up losing everything. And honestly, that way of thinking is entirely ok and normal!
I'm afraid I have to disagree with all these "gambler entrepreneurs" and "attic" angel investors telling you how no one will trust in you and your start-up if you don't put your money where your mouth is. Apparently, if you don't risk absolutely everything, you don't believe enough in your business, and you're bound to fail. I'd argue that you're more likely to fail if you put your livelihood on the line without a contingency plan and without even considering risks.
Starting and growing a startup business is risky, and you need to be calculated rather than reckless because if you flop, you hit the ground hard if you bet everything. If instead, you prepare for any type of hurdle or flop, you'll manage to pick yourself up faster.
2. Friends and family loans 👨👧👦
Asking family or friends for small startup funding is standard practice, and although, personally, I'm not too fond of this option, that doesn't mean it is not for you.
Many entrepreneurs get started with financial support from family and mainly because small loans from individuals have better terms than any other financial aid. It's also easier to convince your aunt to back you than a venture capital firm or a stranger.
Where things kind of fall apart for me with this approach is the risk of ruining relationships. As I mentioned before, no business venture is entirely risk-free and a "sure thing," so why would you try and convince aunt Polly of it? You know she's not gullible like that.
And no matter how much you believe in our potential to succeed, you have to evaluate the risks and have a sincere discussion with the people who will give you the financial support you need. Set the expectations right because the last thing you want is to be in a situation where you lose their investment and their trust.
Think about it. You can't hurt the feelings of a bank or venture capital firm, but you sure can ruin relationships with your close ones, so think if this is the option you want to go with and if you do, make sure you set the right expectations with those involved.
3. Bank loan 🏦
Getting a small business bank loan to boost your growth is usually considered good practice. That extra capital injection should give you a boost in revenue later down the road and enable you to repay the loan back.
Small business loans also not that hard to get. Depending on the bank and country, you could get a loan of $50k or $100k without a personal guarantee. Here in the UK, we call it "Unsecured Business Loan" and you can find a max £150k loan without providing some security.
Like with everything else, you need to make sure you do your due diligence. If it's a loan you're after, find the right one for you, think of how much money you need, for how long, research options, and find one with the lowest fees and best terms. And it's very important you think of your company's projected revenue growth and understand if you can afford to repay the loan with the terms provided by the bank.
4. Startup Accelerators 🚀
Let's say it's not just money you're after. You need mentorship, business support, training, networking, and resources. In that case, you only have two options fit for you from my list - strategic partnership funding, and Accelerator programs. The first is what we chose at Jexo, but I'll talk about that in detail in a second.
What is startup accelerator?
Start-up accelerators, also known as seed accelerators, are fixed-term, cohort-based programs that include mentorship and educational components and culminate in a public pitch event or demo day. (source: wiki)
Basically, for a defined period, you and other founders like yourself participate in a program to provide you with guidance and resources to get you ready for a good investment round. Over this period, the focus will be mainly to get your business in shape and nothing else. You also usually get a bit of seed investment from the accelerator in exchange for a small chunk of equity in your company. The average is around $25k and it's excellent because it usually means you can dedicate yourself fully to the program rather than having to chase money to keep you afloat.
Some of the bigger, well-known Startup Accelerators are Techstars and YCombinator. But accelerators like these are notoriously hard to get into, and most often, they are structured to help you get ready for an investment round. If you're already in a good place, you developed your business plan, proposition, and you're ready to start pitching and getting investment, then accelerators might not give you that much value.
5. Angel investors 👼
What is an Angel investor?
An angel investor is an individual who provides capital for a business start-up, usually in exchange for a convertible note or ownership equity. (source: wiki)
Angel investors are usually high net-worth individuals looking to invest in the early stage of start-ups when things are a lot riskier. It also means the equity offered to angel investors is usually larger than when getting venture funding later down the road after the start-up builds momentum.
This means angel investors, also called private investors, will usually give you funding with lighter terms compared to VC because they're funding and supporting you and your potential rather than your business worth, which might not have all the credentials.
Most of the time, private investors will be investing using crowdfunding platforms or through angel investor networks.
And I mentioned convertible notes earlier, this is an alternative to giving an investor equity straight away.
A convertible loan note is a type of short-term debt that is converted into equity shares at a later date. Investing in a start-up via a convertible loan note typically allows the investor to receive a discounted share price based on the company's future valuation.
If you and the investor disagree on your valuation, let's say the investor thinks they should get 20% of your company for $100k, but you think your company is worth more than that and want to give them 10% for the same money. Instead of giving up, you could agree on a convertible loan note where the investor pays you the 100k in advance and gets to convert that into equity at a later stage, when there are more results and a fair valuation can be established. These agreements usually come with terms, for example, a conversion latest date and a percentage discount from the valuation at the time of issuing the shares.
Strategic partnerships 🤝
Private investors do usually have connections and can help you with mentorship and business opportunities. But not at the level that other companies in your market can support you!
Typically strategic partnerships happen between two companies where one possesses more business assets or expertise that will help the other by enhancing their business. When you think of partnerships, you might not necessarily consider funding, and you might have the perception that both need to provide equal value to each other. But this is not always the case.
There are well-placed companies in your industry that see your potential and are willing to support you with funding and resources to help you accelerate your growth in exchange for a percentage of your company.
There are two good reasons why you should consider strategic partnership as a startup funding:
- You learn all the growth tricks from a company that is few steps ahead.
- You get presented with opportunities and doors open for you because your established partner company is endorsing you.
Both of these factors will create an acceleration vortex for your start-up that can multiply your growth way faster than any of the funding options discussed previously.
But it does come with a price. The partner company might be interested in a significant portion of your company and some level of driving control which ultimately might not make you feel you're in control of your own company.
That sounds intense and maybe spooky for some, and if that's the case for you, then don't give up just yet. There are suitable companies out there that are willing to come to a balanced agreement with you. And whatever you do, make sure you properly think of and contribute to the partnership terms to not have regrets down the line.
So, how did we get funding?
Speaking of suitable partner companies, Resolution, an Atlassian App Vendor, is similar to Jexo but the older and wiser version of our company. They have the funding, the resources, and most importantly for Nikki, my co-founder, and me, the culture fit. So when Cristian, the founder of Resolution, mentioned he'd be interested in discussing investing and a strategic partnership, we were open to it.
I knew Cristian from Atlassian events where we talked in person, and the topic of funding actually came up in a casual call about a topic completely different. And this is why networking and making friends with people in your industry is so powerful. Without that, you're a stranger to everyone and less likely to be listened to when you need help.
Nikki and I were at the time employed, doing Jexo on the side for less than two years, and we were just starting to look out for options to move and focus on our business full-time. And luckily, we didn't have to look far. Sure, the $6K MRR, quality product, and founders potential contributed to successfully partnering with Resolution, but things could've looked different without already having known Cristian.
So with the help of seed money and expertise from Resolution, Nikki and I spent 2020 focusing on making brilliant project management apps for Jira, growing a solid team, and building brand awareness and trust through marketing activities.
All of this started placing Jexo under the spotlight as one of the most exciting up-and-coming start-ups in the Atlassian ecosystem. With the pace we had at the start of 2021, we were on our way to becoming sustained by our revenue by sometime mid-year the same year. However, we had bigger plans and wanted to capitalize on the momentum, and so we decided to go for another round of funding.
We assessed few options, which included venture capital (VC) or another company partnership. However, we were in a different place now. With a long-term plan of action, all we needed was a capital injection to make the extra hires we required and invest in marketing initiatives. All this and try and avoid giving up a good chunk of the company.
That's why the Atlassian Ventures program was the perfect solution for our needs. Atlassian offers loan notes with really good terms to start-ups like ours. To put it simple, you get a loan that can convert into shares at a future investment event, and if Atlassian decides they'd want to convert, they get shares worth the value of the loan with a discount as a benefit. If the note never converts in 6 years, we repay it with a very small interest.
Our growing positive reputation also meant that getting our submission approved was a breeze. Today we scaled to where we needed to be, and yes, sure, our self-sustainability milestone has moved by a year, but there is nothing wrong with that. Given we'll be sustaining a bigger operation faster, we're more than happy to move that goal further down the line.
As you can see, there are plenty of options for you out there, and every one of them is different than the other. It all relies on you to take what you feel is the right path for funding your business. I hope some of my thoughts and a glimpse into our funding history can help you in your journey.