Having worked in the start-up space for a couple of years now, what I learnt is that there is a plethora of different funding options for start-ups to consider before you choose to raise capital by giving away equity. However, the sheer amount of information on the eligibility criteria, guidance on how to apply for each, what to bear mind and how to prepare can be overwhelming, and many business founders end up not applying at all.
Taking it a step back to the question “how do I choose which kind of funding is best for me?”, I thought I’d map out the pros and cons of some of the non-dilutive funding options out there before you decide to raise capital.
1. Bootstrap first
With bootstrapping, pros are that you invest your own savings into your business to retain control. By adding more value, you can start closing sales and generating revenues.
Cons? The amount you are able to invest can be limited, and it might take some time before you’re cashflow positive.
As you bootstrap to develop your new Product Offering, you will be able to unlock new funding options that allow you to get some of this money back (given that you will have incurred enough expenses for particular activities).
2. Maximise R&D schemes
Most countries run R&D schemes allowing to claim back a percentage of your dev costs, and the definition of an R&D expense is much broader than people think. That percentage is:
- 43.5 per cent back of dev costs incurred in Aus (as an AU entity)
- 15 per cent back of costs incurred in NZ (as an NZ entity).
Working in the R&D space myself, the biggest challenge that business founders note to me is that the applications for these schemes are lengthy, complex, and confusing. Luckily, the governments are starting to acknowledge this too; in the UK, the upcoming Budget for 2021 will see some reforms to modernise their two streams of R&D schemes and make the applications more straightforward.
There are a number of advantages here:
- R&D Tax Credits are a great source of liquidity for growing companies, especially those that are pre-revenue or between funding rounds, where other types of funding are either unavailable at this stage (like bank loans) or expensive (like venture debt).
- Having accessed this funding, you can take your product even further, hire new people, manage your cashflow better. This will improve your financial projections and give you more of a breathing room.
- R&D Tax Credits are a non-dilutive capital option, allowing you to retain full control and ownership over the business, preserving the ownership of a company for a future occasion when the product is more mature and a better valuation can be achieved.
3. Take advantage of the Incubators/ Accelerators
Although the application process can be complicated and competition fierce, Incubators and Accelerators are a great way to build your network, initiate conversions, access advice and mentorship, and a variety of resources specifically designed to cater to the needs of early-stage founders.