In the coming blog series we will take a look at different ways startups can get funds to boost their projects. The funds we will consider are related to technology development, to get tech startups off the ground.
The Ontario startup scene has seen an explosion in the past two years. Thousands of entrepreneurs are starting companies in the province and we want to help you succeed. We’ve put together a list of resources that will help you get started — whether you want to create a technology company, either technology as the core of the business or as an enabler. In the coming months we’ll be publishing additional blog posts on funding options available in Ontario.
Founders look at the Venture Capital sector and decide whether they want to get involved in funding or incubation programs, or whether they are better off starting their own company from the ground up.
The funding options available can make a difference whether your startup gets off the ground or not. Many are wondering where to start looking for funding for their new startup.
This article aims to provide a guide to help entrepreneurs find the right funding option for their startup.
Why should I consider getting funding?
Does every startup need to look for funding?
A successful entrepreneur knows that funding is one of the basic building blocks of business. A great idea and strong will to succeed are just not enough in today’s generation.
Tech startups face competition with larger companies that have more resources available, so they must outcompete them by using their funding, which is why funding is critical to tech startups’ growth. Innovation takes resources, so tech startups need investors to help get them off the ground. A successful tech company cannot grow without investors to help it expand.
How can I find/apply for funding? Where can I get funding for my startup?
The first step in finding funding for your startup is knowing what options are available in terms of funding. Some startups are fortunate enough to have an early investor who offers them money when the company is small enough so they don’t need to look for any private funding. Investors can also offer early-stage funding when the venture has some potential but is not yet profitable enough to attract traditionally-invested money.
What are the different types of funding options I can look into for my business?
There are many financial options available for startups. It is important to understand that early stage businesses require capital at higher risk, compared to established businesses.
A Startup business can be financed by family and friends, venture capitalists, angel investors, or crowdfunding. Let us take a look at the different types of funding options for startups.
1. Personal Funds (Family & Friends)
Can you afford to start a business without a lot of capital? Yes. Sometimes you can get started with as little as $5,000. Or you can get help from family and friends who have money. Founders should be aware of the risks involved in starting a startup, and especially one in Ontario. For example, you need to have your finances in order before you can even apply for a business loan from any bank in the province.
The easiest way for someone to give you money is to just give you a check. But if you are starting a business and need to ask family and friends for money, the process is different. You have to first create a funding request letter. This letter explains exactly how much money you need and sets up a time for each contributor to write a check or transfer money into your account. Be sure to clearly explain what each person will be receiving when they give you their contribution.
Pros
It’s a quicker funding process with flexible terms. Depending on how much interest you pay your friends and family, this could be a great investment for them.
Cons
Mixing business with family and friends’ finances can damage relationships if things go wrong. You’ll need to carefully assess the possible impact of business failure before proceeding.
2. Venture Capital
Funding your startup in Ontario is different from funding in other provinces because Ontario has a Venture Capital Regulatory Framework which requires businesses to seek outside funding in addition to the government support that is provided through the Ontario Business Growth Strategy. This framework was put in place to encourage innovative companies to expand and create jobs in Ontario while avoiding the capital-intensive practices that many startups in other provinces rely upon.
You can use venture capital to help get your company off the ground, or in some cases, to help it grow rapidly. Both methods have their benefits. Venture capital allows you to choose who your investors are, although this can be awkward at first (and it should be). With venture capital, you are typically required to get a relationship with a specific person (e.g., an investor for an early-stage startup). Some investors focus on particular areas/ industries, while others have more general interest in helping entrepreneurs succeed.
Pros
In addition to the funding, venture capitalists offer expertise to help develop the business. They can also open doors to other contacts in their network.
Cons
You’re likely to have to give up a large chunk of your business, because of the significant amount of funding provided.
How to get venture capital funding
There’s no guaranteed way to get venture capital, but the process generally follows a standard order of basic steps.
a. Find an investor
Look for individual investors — sometimes called “angel investors” — or venture capital firms. Be sure to do enough background research to know if the investor is reputable and has experience working with startup companies.
b. Share your business plan
The investor will review your business plan to make sure it meets their investing criteria. Most investment funds concentrate on an industry, geographic area, or stage of business development.
c. Go through due diligence review
The investors will look at your company’s management team, market, products and services, corporate governance documents, and financial statements.
d. Work out the terms
If they want to invest, the next step is to agree on a term sheet that describes the terms and conditions for the fund to make an investment.
e. Investment
Once you agree on a term sheet, you can get the investment! Once a venture fund has invested, it becomes actively involved in the company. Venture funds normally come in “rounds.” As the company meets milestones, further rounds of financing are made available, with adjustments in price as the company executes its plan.
3. Angels
Angel investors provide money to help startups that might not otherwise get funding due to fear of failure or appearance of need. Angel investors are people who invest in startups based on the idea and desire to help others succeed. If you want to work in an industry that involves some creativity and questioning what’s possible, it’s important to look for angel investors. They’ll be your connection to the creative world and will help you see what other ideas are possible.
Of all the funding options, angel investors are one of the best bets. Angel investors offer 100% of the money raised, which means there’s no risk to either party (and maybe more to the Angel than just the money). Angel investors also have exclusive rights to pursue certain business goals with your company, which gives them great influence over the direction your business goes in terms of both growth and development.
Pros
Apart from the cash, angel investors will have experience and should be able to offer valuable business advice and guidance.
Cons
You’re likely to give up control of your business to some extent.
4. Business incubators
Business incubators are specially designed programs that provide startups with the tools they need to grow and innovate. They usually offer workspaces, mentorship, education, and access to investors for young companies or ideas. Incubators may be funded by the government, supported by membership fees, or provide support in exchange for equity in companies. These resources allow businesses to develop while operating at a lower cost during the early stages of development.
If you’re a first-time CEO looking for affordable office space and guidance, thinking of getting a business incubator for your startup is a good choice—as incubators provide mentorship and affordable office space for startups. But, you’ll have to consider if committing to an incubator is practical for your business. With so much variation in how incubator programs operate, it’s even more crucial to consider which one is right for you. When deciding which incubator program to join, think about what kind of support you need in order to get your business off the ground.
Pros
In addition to funding, these programs offer structured training and valuable expertise to help develop your business.
Cons
The application and selection process can be grueling.
5. Government Grants and Subsidies
A government grant is a financial award given by a federal, state, or local government authority for a beneficial project. It is effectively a transfer payment to encourage research, development, and projects that the government considers important.
A grant is financial assistance that does not include technical assistance or other types of help, such as a loan. The grantee (who receives the funds) is not expected to pay back the money but instead use it for its stated purpose, which typically serves some larger good. Government grants may also support critical recovery initiatives, agricultural projects, and innovative research in all sorts of fields. Receiving a government grant is highly prestigious and often brings an individual or entity to the attention of other donors or sources of revenue.
6. Bank Loans
Business loans are lending agreements between business owners and banks or private lenders. Businesses need capital to fund operations or simply to start themselves up, but they are unable to pay for it with the money they currently have on hand. Banks and lenders are willing to give them the money in advance, so long as they pay it back on an agreed-upon schedule with interest.
Pros
Some banks offer low-interest rates, depending on your credit score. You won’t have to give up any control over your business.
Cons
The process of getting bank finance can be long, tiring, and time-consuming.
How can NuBinary help?
With the help of NuBinary’s Fractional CTO services, they can assist you with many different aspects of the tech side of your business, from building your product prototype to finding the right grant funding option for you.
NuBinary will help you by providing technical documentation for various types of funding applications available to businesses in Canada for their software R&D projects. Scientific Research and Experimental Development (SR&ED) and Industrial Research Assistance Program (IRAP) funds can cover up to 100% of software development costs done by internal developers and outsourcing companies.
Visit www.NuBinary.com to learn more about our fCTO services, and our process of funding for your startup.
