Skip main navigation

£199.99 £139.99 for one year of Unlimited learning. Offer ends on 28 February 2023 at 23:59 (UTC). T&Cs apply

Find out more

How to finance your startup

A great idea is wonderful, but realizing the idea takes a step by step process. You will have to pass through the valley of death (or survival)
Welcome to the world of financial analysis. You are convinced you have a great business idea. How can you get it financed? A great idea is wonderful, but realising the idea takes a step by step process of investments into a profitable and sustainable business. We call this the Valley of Death, or more optimistic, the Valley of Survival. The graph shows us the cumulative cash flow, and down in the valley, the total amount of cash needed. The cash needed should be the foundation for your funding plan. If you don’t have this overview, you are at risk to be solving crisis after crisis, like a student puzzling each month how to pay the rent for the next month.
An example of an entrepreneur highly capable of funding the business– Elon Musk can be seen as an example of this. Tesla has been for many years a loss-making company, investing billions of dollars in new technologies and factories. During these years, Elon Musk managed to not run out of cash, by attracting new funding year after year. Maybe you will build a company on a smaller scale, and maybe your company will be profitable much quicker. But you need a funding plan. How do you do this? The funding plan can be expressed in a series of balance sheets expressing the needed resources. You can finance this with two main categories– equity financing and debt financing.
Now, how does this work in real life if you try to fund your business startup with equity and debt financing? We can explain this in three steps. The first step is what we call the commitment part. The founders will be challenged to show commitment by bringing in equity. This means putting your money where your mouth is. If you’re not willing to do this, it will be very difficult to convince others to put their money into the company. This can also be done by others who are closely connected to the founders. Experience learns that this part is often more than 50% of all needed funding. Following this, others can decide to also show commitment by investing in equity of the company.
This can be business partners, like suppliers, or professional investors. For example, private equity funds or angel investors. Wealthy entrepreneurs supporting high risk initiatives. This creates an additional commitment part. The next logical step is what we call the leverage part with debt financing. If there is enough commitment, risk-averse parties like banks are willing to provide funding. Because of the lower risk for them, this bank financing can often be arranged to relatively low interest rates, far below the required returns shareholders demand. This gives the startup an attractive additional funding opportunity. That is why we call it leverage. But beware, this is only possible when you have already a substantial commitment part.
This is the reason why, so often, starting entrepreneurs criticise banks for not rewarding their financing requests. There is an important extra step in the process, which I call the support part. This is a simultaneous process while attracting equity and debt financing, and it works like a catalyst. The support part consists of using all opportunities to gain attention, show uniqueness, and build credibility. For example, by winning a university contest, or obtaining a grant or subsidy, or getting support from regional development agencies. The most important impact of these activities is often not the direct funding it creates. It also builds credibility towards professional investors and banks. That is why I call it a catalyst.
This is my main recommendation for startups. Invest, next to your operational business, a substantial part of your time and energy in building up a network for a potential corporation and funding opportunities. In most cases, startups need all the funding opportunities they can get. A broad variety of funding opportunities exist. Crowdfunding is a nice example in the summary of opportunities. Use the enthusiasm of your customers to be part of the funding. Customers participating in the funding is a great sign of commitment. Financing is not something you do when you can’t pay the bills and you are in trouble. Financing is part of building your business from day one.

In this video we explain how to work systematically on your funding plan.

A projection of all cash needed should be the foundation for your funding plan. If you have this, you can develop a three-step approach combining a commitment part, leverage part and support part. This creates an integrated plan combining all available funding opportunities.

This article is from the free online

Technology Entrepreneurship: How to Start a New Venture

Created by
FutureLearn - Learning For Life

Our purpose is to transform access to education.

We offer a diverse selection of courses from leading universities and cultural institutions from around the world. These are delivered one step at a time, and are accessible on mobile, tablet and desktop, so you can fit learning around your life.

We believe learning should be an enjoyable, social experience, so our courses offer the opportunity to discuss what you’re learning with others as you go, helping you make fresh discoveries and form new ideas.
You can unlock new opportunities with unlimited access to hundreds of online short courses for a year by subscribing to our Unlimited package. Build your knowledge with top universities and organisations.

Learn more about how FutureLearn is transforming access to education