Startups warned over funding

Internet entrepreneur Ryan Carson has laid into into Oxygen Accelerator, a site where you can get a £20,000 loan in return for six per cent equity.

His blog post, entitled Let's Mug A Startup Founder, pulls no punches, and he makes no apologies about that. "It made me angry," Carson tells .net. "It's pitched as a wonderful thing, but all it's doing is taking advantage of new startup founders who don't know better," he claims.

Carson reckons you should never be in a position where you're giving up equity for a straight loan, rather than proper investment: "Raise the capital by freelancing or consulting. If you have a full-time job, save money and start building your product during evenings and weekends. If you need more funding, ask friends and family or your bank, and if you want to go the accelerator route, check out Seedcamp, YC or TechStars."

On the Oxygen Accelerator blog, Mark Hales argues that its service is "interest free, has no fixed term, is secured only against the business, does not have any personal guarantees and is only repayable if and when the business can afford it without jeopardy to the business," and that it offers additional assistance via its programme of facilities. However, Rachel Andrew, founder of edgeofmyseat.com, also argues that too many people are rushing to get funding for ideas, when they could get to market without it. "Do you really need funding? It is possible to launch a web startup with very little money: you'll need to work hard and probably do it alongside other work, but you then retain ownership of your product or company."

She says if you have an idea but not the means to implement it, you should consider finding a co-founder who has skills rather than just cash; or if you've got in-house skills, bootstrapping is an option, which is how edgeofmyseat.com initially funded CMS Perch.

In some circumstances, however, there are cases where giving up equity is inevitable. "This is true if your idea costs more than you can raise yourself or when investors are key to success," suggests Carson, "But then neither of those are usually true for web startups."

Should you nonetheless find yourself in that position, Andrew recommends seeking someone aligned with your longer term plan, particularly in terms of exit and how they'll make a return on their investment. "I'd also be interested in what else was on offer: what the investor could bring to the business in addition to money. It's impossible to say how much equity someone should give away, as that is going to depend a lot on how much risk the investor is taking, and also what else is offered," she says.

"But I'd still say that while some startups need investment, due to making a large outlay before profits will arrive, people should really examine whether they're in that group or if they could bootstrap from their own funds."

Carson also worries that people aren't thinking about the ideas themselves for long enough, and that we could be heading towards an investment-frenzy-fuelled dot-bomb incident, like the one that hit a decade ago: "For me-too startups ('We're the Facebook of dog lovers!') you bet the flood of money will slow or stop in the next couple of years." However, he says for internet startups that serve a niche that are willing to pay, the future remains bright: "There's always room for more businesses like that."