A guide to startup funding

Apr 4, 2022

A guide to startup funding

Raising money is a key part of being an entrepreneur. Agrifood has some specific challenges around finance given the typically slower growth rates, the seasonality of cash flow and time needed for a return on investment. Whilst some businesses can grow organically and don’t require any external funding, the majority need cash injection whether it’s in the form of debt, equity or grant money. 

“Figure out how much money you think you need, then double it and go get that money.”

Marc Zornes, Co-Founder at Winnow Solutions

Types of funding

The type of funding strategy you decide to employ will depend on the type of business you want to build. Some business ideas need little funding to get started whilst others require much more capital. An agriculture business such as an aquaponic farm will have heavy initial capital expenditure (cost of machinery, cost of physical location, scientific expertise etc) whereas a business making a food product can start on a small scale with little upfront investment, grow organically & only require more capital to scale. What type of funding you take on also depends on how much control you want to keep over your business and on your risk appetite. If you take on equity investment, you’ll be giving a share of your business to investors whereas if you take on debt, you’ll keep control but will be responsible for repaying it. 

Grant funding

If you can get grant funding, do it! This is money you don’t have to pay back and money you don’t have to give equity away for. The Seedbed Incubator and EIT Food Accelerator network programmes both offer grant funding.  

Crowdfunding

Crowdfunding has become widespread with startups in the last ten years as an alternative way of raising funds. There are two main types of crowdfunding: rewards based, and equity based.

Rewards-based crowdfunding offers people (often known as “pledgers” or “backers”) a reward, usually a version of the product or service the company is trying to raise money for, in exchange for money. These types of crowdfunding campaigns tend to be for smaller fundraisers (the average size on Kickstarter is €18,000) though some campaigns have raised hundreds of thousands or even millions of euros. These campaigns are not free. Crowdfunding platforms charge between 3-7% – most charging more for a flexible campaign (one where you get the money regardless of meeting your target) than a fixed campaign (one where you only get the money if you reach your target). Rewards-based crowdfunding is a great way to raise initial funds for your startup and also has other benefits. It allows you to test the appetite for your idea, to create a community of loyal supporters likely to follow you along your startup journey, and to create a buzz around your brand and product/service.

Equity crowdfunding is similar to raising capital from investors except it is done through a crowdfunding platform such as Crowdcube, WiSeed, and FundedByMe. Individuals invest varying amounts for a share of the company with most platforms offering investment amounts as low as €10. Investors do this with the expectation of making a return within 5-10 years, either through a trade sale (the company is sold to another company), through a buy-back scheme, (the company decides to buy back shares from investors) or through an IPO (an “initial public offering” whereby the company gets listed on the stock market). These campaigns require more thorough work than rewards-based ones as they require business plans, financial forecasts and valuations, whilst rewards-based campaigns do not. Equity crowdfunding falls under the country’s financial regulations with platforms needing to be approved by relevant financial bodies.

Crowdfunding is not an easier way of raising funds than other types of fundraising activities and the amount of work that goes into them should not be under-estimated. They require a high level of sophisticated marketing work.

“I strongly recommend crowdfunding. But not as a way to raise funds, but to build a community. It is a great way to get the word out, reach media and bind people to your brand. But it takes a lot of time and effort. Only do this if you have the marketing power in your team.”

Chantal Engelen, Co-Founder at Kromkommer

Equity

This is the practice of raising capital from investors for a share* of your business. Equity investment takes many forms – you can raise money from private individuals (often known as “angel investors”), from groups of investors, venture capitals, from funds… There are categories of investors like sector specific investors (in this case look out for the ones focusing on food & agri-tech!), impact investors (who focus on environmental and social impact as much as a financial return). Equity investment is a great way of raising larger amounts of capital and finding people who can be instrumental to the growth of your business. Consider whether you want investors who invest and don’t get too involved (generalist investors), or ones who take a bigger role in your business by acting as advisors and helping open doors (strategic investors). It’s key you raise capital from the right investors. Finding people who align with what you want to do and how you want to do it means you’ll have a more collaborative relationship. People with relevant experience will help you speed up your growth by providing key introductions and by helping you avoid mistakes they will have made already.

When building and running a sustainable business, there are advantages to working with impact investors. If you find people who believe in your mission, they will value the wider impact you’re creating as much, if not more, than financial gains. This means they’ll be less likely to push for returns and extracting value from the business early on.

There are different types of shares you can issue. Investopedia provides a good overview of these but we highly recommend getting legal and financial advice to decide which will best suit your business. 

Debt

Borrowing money at different stages of your startup can be an effective way of raising capital and maintaining as much control of your business as possible. Debt can be raised from banks though this is rare at the startup stage, startup focused debt lenders are much more likely. There are government schemes that provide debt facilities as well. The downside of raising debt is that you have to pay it back with interest (unlike crowdfunding, equity or grant money). Some startup loans may even require a personal guarantee meaning you are personally liable to pay the money back if the business fails.

Increasingly popular with startups are convertible notes. These are also loans, though instead of being paid back in cash, they are paid back in equity. These notes allow you to delay valuing your business (an often-tricky operation for startups) and do not require you to pay the money back. Through this mechanism, investors do not receive equity immediately but receive a share of your business in your next round of equity investment (see below). Sounds like a good deal? It certainly is, though remember the hard work of valuing your business and setting up all the proper legal frameworks for investments still need to happen, just further down the road. Have a look at this crash course on convertible notes for more detail on how to make them work for you. 

Access to funding for women and ethnic minorities is also much more difficult, despite the growing body of evidence which shows that they are smart investments. Female-led startups may find this list of sources of funding useful, and this list of useful resources and support networks may be helpful for both female and BAME-led startups.

It’s useful to ask yourself a few questions when deciding how much to raise:

  • What will we use this money for specifically?
  • What do we want to have achieved before raising money again?
  • What do we want to prove before raising money again?
  • How much value will this fundraise add to our business?
  • What’s our plan B if things don’t go according to plan before our next fundraise?

I would recommend researching sources of non-dilutive capital early on, grant funding etc., but be specific and targeted for funds that apply to your business and approach start up competitions with some caution; they can be a great source of publicity, some funding and a bit of a dopamine hit but I would be disciplined about the time spent on applications, pitches etc.

Regarding venture capital funding, again be specific about the investors you target, food and agriculture is a niche sector, but growing, with a number of funds dedicated specifically to technologies in these areas. A warm intro is a hundred times better than a cold email. Fundraising is exhausting and the advice given is to focus on it entirely while doing it.

Abi Ramanan, CEO & Co-Founder of Impact Vision

Useful information and advice for raising money:

Startup investment guide
https://www.boardofinnovation.com/guides/startup-investment/

How To Raise Money
http://paulgraham.com/fr.html

To learn about EU funds and support, check out these websites:

List of EU funding programmes
https://www.welcomeurope.com/list-european-funds.html

EU funds and support
http://startupeuropeclub.eu/eu-funds-and-support/

Programmes

Apply to participate in one of our funded flagship programmes

LAUNCH - Seedbed Incubator

ACCELERATE - EIT Food Accelerator Network

SCALE - RisingFoodStars

Our Network

Join our agrifood ecosystem

Our Network

Corporate Venturing

Investors

University & Research Organisations

Programme Hubs