Some of the conversations we’ve had recently with founders have involved helping them structure how they want to conduct their fund-raise. Depending on the type of company they want to grow in the long run, they should use different methods of raising money to suit that. The question is, what method best suits? Let’s do a deep dive.
Traditional VC/Angel Investors: These types of investors are generally looking for a 10x-30x return on the amount of money they put in, meaning that they are actively hunting for companies that could potentially turn into massive unicorns. This is because 90%+ of their investments don’t provide a good ROI (or don’t provide any ROI), so they need one big hit to make up for all the losses they’d accrue along the way. Generally, these terms have the lowest amount of personal liability for the founder because VCs and angel investors alike only ask for equity, and thus if the company goes bust then they generally don’t get anything back. This investment direction is great for those who are trying to grow a company that scales very, very quickly and who are confident that they will be able to generate the type of “steep curve” metrics that these investors love. Note, however, competition for this type of investment is very tough.
Eg: Ada Ventures, 20VC, Seedcamp
Revenue Based Financing: These have recently started to pop up around the UK and EU region. These include companies like Pipe, Clearbanc, and Uncapped. These are great for businesses that are already making money that want to accelerate their growth based on projections of their future revenue while not diluting their equity. The challenge to accessing this type of funding is a general requirement for 10K MRR (which is challenging for a lot of businesses) along with the fact that it’s not as suited for non e-commerce businesses.
Bank Loans: These are how new businesses/business ideas were funded for a long time before the concept of SAFE notes/equity investing was invented. Basically, once banks conduct their extensive “due diligence” they would loan you a sum of money to be paid back in a certain period of time with interest. Nowadays, these don’t play as big of a role in the overall startup landscape due to the fact that banks will only fund businesses/people with collateral (physical assets). Thus, these are more suited to those who are attempting to start restaurants or small corner shops. In addition, banks require you to pay monthly no matter what the condition your business is in, and there’s limited ability to defer.
Grants: This is one way to access some no-equity or loan funding at the early stages. Institutions such as InnovateUK give these out, albeit with some strings attached (must be solving this problem, must be aligned with this cause, must have a certain amount of government involvement, etc.). In addition, applications for these are really competitive, so there’s a very high chance that a founder/aspiring founder applying for one of these would be rejected.
Crowdfunding: Platforms like Seedrs and Crowdcube are good ways to gradually build up that 200K needed to get a few units of certain innovative physical products manufactured and out the door without being tied down to a loan or giving up equity. Non-accredited investors can put small sums of money towards their favourite projects and receive perks in return. A slight derivative of this is called equity crowdfunding where creators give equity to small-ticket investors. However, most crowdfunding projects don’t get anywhere near their projected funding total since the competition is very saturated.
Friends and Family: If you have friends and family that believe in you and that are able to back your idea, this is a very good way to get started. (Hell, Horizan VC got started off of friends and family funding!). Generally, they’ll give you a small check in exchange for some equity/repayment, and because of the previously built relationship, the terms generally should be favourable (if not, go find new friends!). The challenge for many founders is that a lot of them may not necessarily come from a wealthy background, and so will have trouble raising that “friends and family” round that is needed to get to the next level. In addition, sometimes relationships can sour if a business investment goes south, so this has to be considered as well.
Horizan VC: And now, we finally come to ourselves. Our option is the best if you are looking for versatility in terms of how you want to eventually grow your business (blitzscale or become slowly profitable), struggling to secure a pure equity investment or crowdfund, don’t have friends and family to give you that first check, or are at the idea/side-hustle stage of your startup. In addition, because of the way our CFEA is structured, we’re more founder-friendly than banks because unlike banks, if your total income is below 2500 in any given month (business + personal combined) pre-tax, you just tell us and you don’t pay. On the other hand, our option is not the best if you want to go down a 100% pure-equity fundraising strategy (and are able to do so), have the means to bootstrap yourself completely, hate the idea of loans, or have wealthy family and friends who are willing to give you money at extremely favourable terms.
In summation, always choose the fundraising route that is right for your business and your dream! Even if that route is not Horizan VC.
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