What Is Startup Funding?
In simple words it’s the money needed to
launch a new business — and it can come from a variety of sources.
Startup funding — or startup capital — is
the money needed to launch a new business. It can come from a variety of
sources and can be used for any purpose that helps the startup go from idea to
actual business.
While we often hear about venture capital
when it comes to startup funding, it turns out that’s just one of the six top
sources of startup capital. Of the $531 billion raised in startup capital each
year, $185.5 billion is from personal savings and credit; $60 billion is from
friends and family; $22 billion is venture capital; $20 billion is angel
investors; $14 billion is from banks; and $5.1 billion is from crowdfunding.
What are some types of startup funding?
As you can see, there’s a broad range of
options when it comes to startup capital. So let’s take a closer look at some
of the types of startup funding.
Personal Savings and Credit
Personal savings and credit account for the
largest portion of startup capital. Founders know that if they’re going to
convince anyone else to invest in their company, they have to be willing to go
all-in themselves.
It’s also the most accessible form of
funding, as you don’t have to rely on anyone but yourself in order to use it.
Friends and Family
Many startup founders turn to their friends
and family to help them with initial funding. After all, those are the people
that already believe in what you’re doing — you don’t have to convince them the
way you would a VC, angel investor, or bank.
Friends and family can be a great source
for getting started, but it’s important to make sure that the business part of
the relationship is clearly outlined. Get legal documentation for everything
and make it clear to your loved ones that they may not get any return on their
investment at all. Some entrepreneurs choose to avoid this type of startup
funding because of the potential personal complications.
Venture Capital
Venture capital is financing that’s
invested in startups and small businesses that are usually high risk, but also
have the potential for exponential growth. The goal of a venture capital
investment is a very high return for the venture capital firm, usually in the
form of an acquisition of the startup or an IPO.
Venture capital is a great option for
startups that are looking to scale big — and quickly. Because the investments
are fairly large, your startup has to be prepared to take that money and grow.
Angel Investors
Angel investors are typically high net
worth individuals who look to put relatively small amounts of money into
startups, typically ranging from a few thousand dollars to as much as a million
dollars.
Banks
Small business loans are a more traditional
way of getting startup capital, which means they may be easier for some
startups to get than venture capital, which can be a long and arduous process.
They’re a great option for startups that already have some momentum and — even
better — some income coming in. That’s because while venture capitalists are
all about taking big risks for the potential of big rewards, traditional
banking institutions are more careful with their funds. And unlike taking angel
investment or VC money, taking out a small business loan means retaining full
ownership of your startup.
Crowdfunding
Crowdfunding is a method of raising capital
through the collective effort of friends, family, customers, and individual
investors. This approach taps into the collective efforts of a large pool of
individuals — primarily online via social media and crowdfunding platforms —
and leverages their networks for greater reach and exposure.
Accelerators
Startup accelerators offer not only startup
capital — usually seed funding level, as in $50,000 to a couple hundred
thousand dollars — but also offer support for startups that are getting
themselves off the ground. Each accelerator is different but they usually offer
a combination of funding, mentorship, and other forms of guidance.
Grants
Government grants for small businesses come
in three forms: federal, state, and local. Federal grants usually offer the
most money — and have the most competition. They’re also pretty specific and
usually tied to a government agency that has clear requirements for qualifying
for the money — and for what they expect you to do with it.
1. Keeping scope for scalability in the
business model
Small business administration’s often face
difficulties attracting investors as they cannot communicate how they will
scale their business. Investors will want to know how you take your startup to
the next level using their money. And how they will get the return on their
investment.
For that, you need a business model that
increases profits without raising costs at a similar or higher rate. If your
business results in an extension of time, money, & resources, stakeholders
are less likely to open their gates. Here’s how you can make your business
model scalable and attractive for investors.
2. Figuring how much to raise
Seeking funds from angel investors or a
bank loan, first, you must know how much finance you need for the business.
More is not always good. More funding means more liability for your startup.
• Write a business plan — Write a business
plan including a realistic financial projection. Pan down expenses the loan or
investment will cover and how much return it will generate. Ensure to justify
each financial need in the business plan.
• Set milestones — Planning fancy furniture
or unwanted automation won’t please your investors. Instead, you need to
showcase how you will spend their money to grow your startup. Be specific and
create measurable milestones, like achieve a particular market share.
• Positive cash flow — Creating a financial
model is critical for startups striving for expansion. The model demonstrates
the cash flow how you spend on training, production, marketing, etc. It’s
crucial to align the funding request with your cash flow.
3. Understanding fundamentals of funding
A business from scratch lives through
different phases of development. Funding options vary depending on each stage
of the business lifecycle. For example, funding in the seed phase is used in
market research and product development to attract additional investors.
Whereas, during exponential business growth, you need additional finance to
keep up with the demands. And venture capital financing comes into the picture
when the business reaches maturity and strives for competitor acquisitions,
mergers, or initial public offerings- IPO.
4. Choosing the right source
Finding the right source for startup
funding is complicated. As mentioned earlier, during the initial stage, young
entrepreneurs prefer personal investment. However, when business grows,
financial requirements also increase. Consequently, you might need more than
one option to fund your business venture. However, investment terms matter the
most. For example, sourcing money from Angel investors compromises a part of
the ownership in exchange for funds.
Every source has its own limitations,
processes, and challenges. Thus, only if you know what potential financing
options are can you choose the most suitable.
5. Funding wisely
When you take investment, you become
accountable to your funders to spend their fund as you said you would. You need
to be transparent if you plan to change course. Investors don’t fund your
startup to have luxurious furniture or infrastructure. They want your business
to grow and gain a high-profit margin so that they can receive more profits.
• Stand by the business growth plan
• Spend mindfully on what is essential for
the business
• Keep it transparent with your investors
Conclusion and solutions
If you want to grow really fast, you
probably need outside sources of capital. If you bootstrap and remain without
external funding for too long, you may be unable to take advantage of market
opportunities.
While the plethora of lending options may
make it easier than ever to get started, responsible business owners should ask
themselves how much financial assistance they really need.
Now the big question is – How do you
prepare your business for fund raising? It’s better to start from the beginning
with good corporate governance as it might get hard to go back later and try to
exert fiscal discipline. To address these concerns, invest in a good accounting
software and keep your finances in order.
