A strong vision, great technology, an outstanding team: your start-up has everything needed to succeed – everything except ample capital. It’s a challenge faced by nearly every start-up and can be especially relevant for those engaged in costly research and development (R&D) work. If you’re searching for reliable sources of capital for your start-up, the team at Easly suggests five smart ways to access the funds you require.
1.) Choose the Right Sources for Equity Investment
It’s easy to assume that all sources of equity investment are welcome as your start-up raises capital. However, remember that just as no two start-ups are identical, so too are the ideal investors very different. You might consider any mix of the following:
- Angel investors: These investors offer capital to help start-ups take their first steps. They may operate alone or as part of a fund, and you’ll need to make the value provided by your company clear to win their support.
- Venture capitalists: A better bet for more mature start-ups, venture capitalists can provide higher-value investments that take your company to the next level. Remember that they may wish to have some input on your business’s operations and that you’ll need to demonstrate sufficient cash flow, a scalable business model, and other signs of success to prove the value of their investment.
- Friends, family, and your network: Turning to investors in your network who believe in you and your start-up can be a significant first step for smaller firms. If you take this route, be sure to clarify your family and friends’ investment’s exact nature, the equity they will receive for it, and how much capital is required.
- Crowd-funding: If you have a captivating pitch and a goal people believe in, crowd-funding is a great way to raise capital. As a bonus, you’ll receive feedback about your offering, and successful crowd-funding can help prove that you’re a reputable firm for investment.
2.) Optimize Your Capital Stack
Simply securing capital is a challenge for start-ups. Next, you must take steps to optimize your capital stack as soon as possible to determine which areas are over-or under-weighted and where new capital should be sought. The capital stack refers to all available capital to support day-to-day operations at your organization. It should include a mix of debt investment, equity investment, and other fund sources, such as grants and tax incentives.
Each type of capital has costs and benefits, and an optimal capital structure can look very different depending on the specific attributes of your business and sector. To optimize your stack, consider one of the following frameworks:
- Cost of capital approach: This model prioritizes using a mathematical approach to minimizing the risk/reward trade-off of your capital stack. The optimal capital stack is one that minimizes your total cost of capital.
- Sector approach: Analyzing and then matching your capital stack to industry peers helps ensure the right mix for the capital requirements of the sector you operate within.
- Lifecycle approach: Understanding the capital stack of companies in a similar growth phase can reveal the optimal capital structure.
In many cases, combining these approaches will help determine what an optimal capital stack looks like for your start-up.
3.) Bring Data to the Table
A vision for innovation may be enough to sway investors. However, in most cases, making a data-backed case for your venture’s investment value is a more robust approach. Potential investors, especially those with an obligation to demonstrate results to a firm or fund, are more likely to lend financial support to a company that can answer in-depth questions about potential, performance metrics, and other details.
This means it’s essential to bring more than a passionate pitch. Ensure you can share detailed financial statements, information on average customer acquisition costs, revenue retention details, and more. Doing so offers a more accurate picture of your needs and justifies the risk of investment.
4.) Remember the Value of Relationships
Your pool of potential investors is not limitless, and it’s essential to build and nurture good relationships – even if they won’t yield capital today. Embrace your role as a fundraiser and take steps to maintain open communication, from consistent follow-ups to regular news updates that keep investors in the loop.
As you cultivate this network, keep in mind that many, or even most, may not be the right fit at the moment. Still, the relationship you built months ago could play a pivotal role in fulfilling your company’s capital needs in the future. With a broad network in place, you can establish desirable investor criteria and target your most significant efforts on creating a dialogue with investors that match them.
5.) Use SR&ED Financing for Faster Access to Capital
If your start-up participates in the Scientific Research and Experimental Development (SR&ED) Tax Incentive Program, SR&ED refunds can be a significant part of your capital stack. Unfortunately, these funds only come once a year, and receiving them takes weeks or months -R&D expenses won’t wait. Financing your refund with a Capital-as-a-Service (CaaS) firm, like Easly, is a great way to receive capital fast and bring balance to your capital stack.
SR&ED refund financing offers an ideal source of non-dilutive capital at a low cost with a short life cycle. Since repayment is made directly from your refund, your start-up remains cash flow positive, and no personal guarantee is required. You can also count on receiving capital in as little as two weeks, thanks to streamlined application and high-speed underwriting processes.
Does your start-up have the capital at hand to maintain daily operations, fuel growth, and support the ongoing R&D work that is so crucial to innovation? To learn more about the role of SR&ED refund financing in your company’s capital-raising efforts, contact Easly today.