How to Fund Your Startup
Starting a new business or startup needs a few ingredients: A good idea, a plan to execute it, a team to help you and, last but not least, money. You need to have money to employ yourself and your team as you execute your plan.
Finding a good idea is not easy, planning it’s execution is even harder, but for most people the hardest part of all is to figure out where the money is coming from.
In this post we are going to cover the basics of funding your startup. You can look at it as “Startup Funding 101”. It will give you some perspective on how, where and when to raise money for your startup, or if you should do that at all.
Funding for Startups
When you are coming up with a brilliant idea that can change the world, or planning how to bring that idea into reality, sometimes you forget that you need money to make it happen. But choosing a source of funding for your startup will not only impact the money you can spend, but have huge impact on the shape of your company, the control you have and the company’s culture as a whole. It’s important to understand the different sources of funding so you can choose your path wisely.
Self-Funding or Bootstrapping
If you ask anyone who successfully raised funding, 9 out of 10 will advise you not to raise money too soon. They will tell you to hold off raising investment until you absolutely have to, and they are right. I’ve even heard that from an angel investor who once said “it’s better to take the second or third mortgage on your house before getting money from me.”
The reason for this is that the main reason investors want to invest in you and your startup is to make money. They are looking for a 10x to 100x return. Which means for each dollar you are getting from them right now, they want to make $10 to $100 at the end of the day. So in that respect its most logical to get the least amount of money right now. It means that you stand to make that $10 to $100 yourself if you could get $1 less. That’s why many people self-fund or bootstrap their companies. Depending on your financial state, the amount of risk you are willing to take and the control you want to have over your company, self funding might be the best option for you.
On the other hand, this means you need to invest your own, hard-earned money which is risky. If your startup fails, (which, unfortunately, happens most of the time) you’ve lost your own money.
One other thing to consider is that not all investment money costs the same. The money you raise when you are smaller is usually more expensive than the money you raise when you are bigger and have proven your product or service and reduced the risk. So, if you are a risk taker, the risks are high, but so are the rewards.
Startup loans are another source of fundraising for your startup. Banks and other financial institutions provide these loans at relatively low interest rates. In order for you to be able to access these loans though you will need a business plan, purchase orders (if you have any) and they most often ask for credit checks.
More often than not they will also ask for collateral to secure the loan. Your house or car could be collateral, but again, this raises the risk factor.
Angel investors are usually individuals that invest in early stage startups. Its tricky to concretely define an angel investor, as the definition varies depending on who you ask. The one we will use here are investors who invest anywhere between $20,000 to $500,000 in early stage startups. The two factors we are focusing on are:
- The size of their investment is limited
- They purely invest in early stage startups.
They usually invest smaller amounts of money because they are individuals versus large companies with deep pockets. They are not interested in investing in multiple companies to reduce the overall risk of their portfolio. For example, a few angel investors that I know generally keep their investments to 5 to 15 different companies. Partly this is why they only invest in early-stage startups, because the amount they are willing to invest is more meaningful for those smaller companies.
What they are usually looking for is a 10x return on their portfolio. That could mean one company with 100x return, a few companies with 2x-3x return and the rest all failing. And yes, the failure rate is usually that high for early stage startups.
These are companies usually consisting of multiple partners who invest their (and their investor’s) money in startups. Since they have more people involved, they usually have deeper pockets and can invest anywhere between $500,000 to $100M or more. They usually invest in startups that are in need of that kind of cash to gain high growth rates. What they are looking for are companies that have proven to provide the right solution for the right problem, and they just need the money to gain market share and growth.
They are willing to invest a lot of money in the right company, but for them to consider any company they need to show market validation. So if you are too small or if the amount you are looking to raise is less than $500,000.00, don’t waste your time with VCs. That being said, you can always keep interested VCs engaged as you get bigger.
Grants for Startups – Specific to Canada
Here in Canada we have access to a few sources of funding:
Scientific Research and Experimental Development Tax Incentive Program (SR&ED for short) is a federal tax incentive program for companies that get involved in R&D with a high chance of failure. With this program, the Government of Canada is supporting Canadian companies that invest in research and development by offsetting their costs for up to 60% of their payroll cost. It’s a very popular program in Canada and for those involved in R&D definitely one to seriously consider.
There are some tips and tricks you should know about:
- You have to be an incorporated Canadian company to be able to claim this tax credit
- If you are not majorly owned by other Canadian companies or citizens, the tax refund rate is going to be lower
- The rates for full-time staff is higher than contract staff
There are quite a few consultants helping companies with their SR&ED claims which you can use to make sure you can make the most of this program.
Industrial Research Assistance Program (IRAP) is another federal program provided by National Research Council Canada. Their goal is to help companies accelerate their growth through innovation and technology. Not only do they provide funding to companies, but they also provide technical and business advisory services.
They way they work is by assigning you a mentor, and through that mentor you can can access funds for your company. Their funding can provide up to 80% of the cost of hiring, including payroll, leaving you to make up the other 20%. Unlike most other government funding programs, you don’t need to pay your team before getting access to the funding, and they provide you with the funds you need to pay your team.
Mitacs is a national non-for-profit organization that has designed and delivered training programs in Canada for 15 years. Their focus is to create a connection between industry and universities, providing incentive programs for hiring post-graduate students working on research and development projects.
They have a few different programs, but one of their most popular program is Mitacs Accelerate in which they match a student, professor and company to do a project for 4-6 months. In the process, they provide half of the costs of the project up to $7,500.00 and the company has to match the funding to have the total max amount of $15,000.00.
NSERC Experience Award for Hiring Co-op Students
If you are looking to hire co-op students, NSERC Experience Award is a great program. They offer companies access to talented natural science and engineering undergraduate students for a work term. The cost-shared program allows students to address company-specific R&D challenges while gaining valuable industrial experiences. They provide up to $4,500.00 to cover up to 75% of the cost and the company has to match at least 25%.
There are a few things you need to know before applying:
- This is only available for companies with less than 99 employees
- This only applies to students that are either a Canadian citizen or permanent resident
- The student can apply for only 1 grant in each fiscal year (April 1 to March 31)
- The work term should be between 12 to 16 weeks.