Financing your startup

Barcelona’s startup ecosystem is brimming with possibilities and motivated entrepreneurs ready to make things happen. But how easy is it to attract the funding needed to transform your initial business idea into a functioning and profitable startup? You might have a well-practised elevator pitch and a business plan you believe in, but how do you take the next step and find the funding to back it? From Venture Capitalists (VCs) and your own funds to crowdfunding platforms and support from friends and family, the best funding model for your idea depends on the type and scale of the business you want to create. 

FRIENDS, FAMILY AND FOOLS (FFFS)

“The cost of launching a new online business has decreased significantly, as technologies make it not only easier and cheaper to launch an idea, but also enable access to markets at a reduced cost,” said Ignasi Fonts, managing partner at Inveready, one of the leading early-stage venture capital funds in Spain. Early e-commerce businesses had to build absolutely everything from scratch; today, costs of setting up are much lower, as anyone can pay a monthly fee to simply use someone else’s platform. 

If you’re looking to launch an online business, reaching out to family and friends could help you attract the necessary funding to create a prototype and gather information that demonstrates whether there is a market for your product. Carlos Guerrero, business angel, mentor and founder of Sitka Capital—an investment vehicle specialised in funding the initial phases of startups—recommends that you turn to so-called ‘FFFs’ and really get to know the target sector, before reaching out to professional investors and business angels. This approach is mostly suitable for tech startups with low operational costs, and enables businesses to get up and running before looking for funding elsewhere. 

PERSONAL FUNDS

A large number of startup founders use their own capital to kick-start their business. If you’re not willing to invest in your idea, why should an outsider invest? Globally, about 95 percent of entrepreneurs tap into their own funds when starting a business. Last year, the Global Entrepreneurship Monitor, one of the largest worldwide studies of entrepreneurship, reported that Spain, together with Israel, has the lowest level of such financing, with 79 percent of entrepreneurs using their own assets. The same report also showed that the average amount needed to launch a business in Spain is about €14,850. Many startup experts recommend bootstrapping your business during the first year, as low operational costs will give you higher profit margins and make it easier to scale your business.

Robert Muños, the co-founder and joint-CEO of Typeform—a software company specialised in data collection and conversational online forms—just raised $35 million in Series B funding. But when Muños and Typeform co-founder David Okuniev first had the idea, they spent over a year and a half working in their own digital agencies, while building Typeform on the side. “At some point you can feel that you’re risking too much, but in our case it worked because it allowed us to present something tangible that was completely different from anything else on the market.” It’s much more difficult to ask for investment when you have nothing more than an idea to show, nor previous experience in creating other successful startups. “What worked for us was to invest heavily in the product and the team, putting amazing people around our idea.”

LOANS AND STARTUP COMPETITIONS

If you’re looking to create a business with more fixed expenses and profit margins, such as a restaurant or a cafe, a bank loan can be a good option. In contrast to investors, banks are less likely to look for short-term, quick growth, although guarantors are required. In addition to loans, some banks offer different investment programmes and competitions aimed at supporting startups in their initial phase. Every year, Banco Sabadell invests in 10 young technology and digital startups through its initiative ‘BStartUp10’, which offers up to €100,000 to businesses based in Spain. La Caixa also hosts its own competition, ‘Emprendedor XXI’, awarding companies between €5,000 and €25,000 within different categories, including life science, information technology and digital businesses. It also invests in the early stages of innovative technology startups through its venture capital arm, Caixa Capital Risc.

VENTURE CAPITALISTS

One way to attract seed funding is to look for investment from a VC firm. In the past five years, Barcelona has seen a steady growth in the number of VC firms based in the city, including Conector, SeedRocket, Ship2B, Itnig, Wayra, IMPACT, Nuclio, NUMA and Inveready, amongst others. Many VCs specialise in certain types of startups and businesses, meaning that careful research is crucial if you want to find the right VC and increase your chances of landing investment. In Barcelona, for example, you’ll find several VCs supporting biotech, life science and digital startups. 

To anyone launching a startup, Muños recommends that you “select the investors as if you were going to work next to them, all day, every day”. You need the confidence to talk to them about both the good and bad things that come with creating a business. “It’s important to select good investors. And it’s not just about money, but about finding someone who can help you grow and introduce you to the right people and ideas,” he advised. 

CROWDFUNDING

Creating a crowdfunding campaign through sites such as Kickstarter or Indiegogo can be an alternative funding source, which can simultaneously serve to demonstrate your traction to future investors. This model also allows founders to keep control of their companies, in contrast to bringing investors on board too early. Creating a successful crowdfunding campaign can be a large project in itself, and requires a lot of time and energy. There are increasingly niched platforms available, such as iFundWomen, which specifically focuses on helping female founders raise money. Smaller platforms often generate a strong sense of community by connecting individuals who are genuinely interested in a certain sector and helping founders within it succeed.

For more on crowdfunding, check our article Power of the Crowd.