Income, equity or debt?
By far the best financing is your income- basically the retained earnings of your business. It’s non-dilutive (does not dilute your or others’ ownership) and it drives your company value. However, this is not always (or even often) an option, especially if you’re early in your business or if you’re investing heavily in expansion and growth. So, the next step is usually to identify potential sources of capital and find the right match for your business.
Nearly all start-ups and growth companies raise equity
Equity financing plays a major role for a majority of startups and growth companies along their growth journey. Sources of equity are multiple. In the very first rounds, you might collect equity from people close to you; the lovingly called FFF (Friends, Family and Fools). Also business angels (typically wealthy individuals) typically invest in early rounds, and many may invest even at a pre-revenue stage – before your business generates any or at least any substantial revenue.
Other sources, especially after the very beginning, include private equity funds (such as family offices), venture capital (VC) funds and corporate VCs. When approaching these sources, do your homework. Find out what sectors, types of companies and stages does the angel or fund seeks to invest in. This is called their investment thesis. Many tell that publicly (online searches do the trick), and others surely tell that in private. Just remember to ask.
Angels and VCs invest in different types and stages of businesses
Angels and venture capital funds, including corporate VCs, have their own focus areas and fund companies at different stages of growth. Angels and some VCs fund companies very early on (pre-seed), others early in the company’s growth journey (seed, Series A/B), and other VCs in later rounds (Series B/C onwards). Companies on a high-growth trajectory with track record may be better off seeking specific growth equity funds that invest in more mature, high-growing businesses.
Also, every angel and fund has their own preference or investment thesis. Those define the types of companies (e.g. SaaS, B2B, B2C), sector or focus (e.g. IT, healthcare, education, sustainability, green economy), stage (either by funding round or by amount of revenue), and many other factors which they use as a basis when considering investment. If you map out these early, you’re much likelier to focus your time on the sources which are best aligned with your business and needs.
Loans may be the right option, too
Many businesses also turn to their banks for loans, or seek other sources and forms of debt financing. As everything, debt has its pros and cons. The key issue to consider is your repayment capability. In general, debt you always need to pay back at a predefined schedule. You need to have a solid plan to be able to finance your business in the future, and this includes the repayment (or renegotiation) of your loans. However, debt does not dilute your or others’ ownership, and thus may yield better returns for shareholders. This is called leverage. The key is to plan ahead and spend sufficient time in selecting the right instrument for your business.
Remember that also the players who typically invest for equity shares may also consider debt financing. This may include direct loans or subordinated debt (mezzanine funding), e.g. convertible notes, which are loans that have the option of being converted to equity at a later stage.
If you need working capital instead of longer-term investments to fuel growth, it’s also available from banks and other funding institutions. Take your time to research different banks, loans and loan rates. It’s often best to apply for a loan from at least your own bank. If your business lacks the collateral required by the bank, Finnvera, for example, provides startup guarantees to help you obtain a bank loan.
Government and institutional grants and loans
Governmental agencies, such as Business Finland, also have a number of funding programs ranging from research stage (pre-incorporation) to supporting R&D activities and internationalization and expansion. Depending on the program, Business Finland provides either grants or loans. With grants, you usually have to finance a larger part of the project with your own funding (e.g. 50%) but you don’t need to pay the grant back. With loans, your own funding can be lower (e.g. 30%), but you need to pay the loan capital back.
The Centers for Economic Development, Transport and the Environment also provide grants for early-stage business development and internationalization. Development grants can be awarded for SMEs (small and medium sized enterprises) across nearly all sectors.
The EU provides grants for R&D activities in various sectors for SMEs
Horizon Europe is the EU’s main research and innovation funding programme with a budget of €95.5 billion. It provides a multitude of project-based funding opportunities for start-ups and growth companies. Some programs allow SMEs to apply for grants on their own, while other programs fund cooperative development and piloting with larger companies and academia. It is a great source of non-dilutive funding, but be mindful of your focus – a good rule of thumb is to apply for such funding only if it’s fully aligned with your company strategy and roadmap. These grants are also very competitive and the application process takes time, so consider the pros and cons of this option properly before committing your time.
The question is not about availability, but the right match
Financing your business is always a significant step with many aspects to consider. It may also be stressful, as you’re making big decisions concerning the future of your business. However, they who seek, they find. Keep in mind that funding decisions should start by asking “What’s the best option for my business at this moment”, not “Where can I find capital”. Different options exist. Remember to ask for help and tips.