How Do Startups Raise Capital?

Let’s say you’re launching a new company. You’re determined, passionate, and equipped with a brilliant action plan. Have you ever considered the cost of putting your plans into action? Investment cash is necessary for the launch of every firm, no matter how little. Access to capital gives your company projects a solid foundation, facilitating their growth and expansion. It may take time and effort to seek funding for a new firm.

However, before beginning your fundraising efforts, you must establish the framework by researching, using your network, and estimating your true financial needs. This guide will walk you through calculating your startup capital, the importance of startup funding, and the challenges for startups to raise capital.

Startup capital or Startup Funding 

Over 47% of startups fail before their very initial year of operation, according to 2021 research. It turns out that a lack of money is a rather prevalent explanation. In the corporate world, cash flow is like oxygen. It takes a fuel termed money to make the long, arduous, and exhilarating trip from concept to revenue-generating firm. So, how do startups raise capital? Let’s find out in the following section.

What is Startup Funding? 

Startup Capital, or startup funding, is money to launch and maintain a company. Numerous sources of financial support exist. The company uses this money for initial costs such as advertising, expansion, and operations. 

A young business may feel overwhelmed by the variety and quantity of available financing sources. Learning about the various sources of startup capital and how they relate to your business’s needs is an important first step. It’s common to rely on self-financing, personal loans, or family and close friends for initial capital when starting. This is called pre-seed funding. Angel investors and venture capitalists are the most probable sources of financing for high-growth, speculative businesses.

How does Startup Funding work? 

Startup funding typically involves raising capital from various sources. For Instance, You’ve just launched a new company and it is expanding. You need to find additional people to help you make the prototype for your new product. However, this can only occur with enough finance. You’ve decided to seek startup funding.

Investors put their money into companies they have faith in. It’s in their best interest to see a profit, too. That’s why stock is always part of the agreement, whether working with VCs, PE companies, or angel investors.

Investors will receive their money back plus a part of the company’s stock if it starts making a profit. A seed round is the first stage for most companies seeking external capital. Then, some will go on to the Series A, B, and C stages. A business valuation is necessary before the start of any rounds. This may affect the amount of fresh funding a business can raise from investors.

Why do Startups need Funding? 

Getting a business off the ground takes a lot of time and money. Access to sufficient funding is a major factor in determining a startup’s success. Having access to seed money for a company has several benefits. 

• The capacity to provide the capital necessary to start a firm is likely its greatest benefit. Lack of capital prevents many would-be businesses from ever getting off the ground. 
• The growth of new businesses is another important goal of the fund. It may help a startup get the capital it needs to expand its operations, increase its workforce, and introduce innovative new products or services to the market. 
• One further benefit is that these funds can protect the owners’ assets. In the event of a new business’s failure, the owners’ private assets may be at risk. However, if the business succeeds, it will protect the proprietors’ wealth.
• It also has the benefit of allowing you to grasp opportunities you hadn’t planned for. Financial stability will enable you to seize opportunities otherwise passed by. 
• One of the main benefits of startup capital is that it provides peace of mind if financial difficulties arise. This may relieve stress and allow you to focus on running and growing your company rather than worrying about making ends meet in the case of a drop in sales.

How do Startups Raise Capital? 

Finding startup capital from investors, banks, foundations, and other sources is a major step in expanding a firm. It may provide the startup funding your firm needs to continue developing goods and releasing updates for existing consumers. The availability of venture capital throughout the globe is very unpredictable. In 2022, startups globally raised $415.1 billion from investors, a 35% decrease from the previous record-breaking year of 2021.

How do you go about acquiring the necessary capital? This section will go through the fundamentals of startup funding. 

Bootstrapping

Self-funding, or bootstrapping, is a method of startup funding, in the early stages of a company’s existence. It might be easier for first-time entrepreneurs to get investments if they demonstrate early success or a clear path to profitability. 

If you choose to self-fund your company, you will be responsible solely to yourself. If you’re bootstrapping a business, you get to make all the decisions. On the other hand, if a company is funded using the founder’s own money or other personal assets, the founder takes on substantial personal financial risk. GitHub is a web-based hosting provider for software development initiatives that employ the Git revision control system. When the founders of GitHub decided to turn their weekend hobby into a full-time business, they financed the initial expenses of setting up the site. 

Friends and Family

Friends and family are often the first investors in a new company’s founders. After all, they are the ones who have faith in your idea and won’t need convincing as you would have to do with a venture capitalist, angel investor, or bank. When starting, it’s helpful to have support from friends and family, but it’s crucial to establish boundaries between personal and professional interactions. You should document everything legally and let your loved ones know they may not profit from their investment. For fear of unpleasant legal ramifications, several would-be business owners opt out of this source of beginning capital.

It’s surprising to learn that friends and family invest over 60 billion dollars a year into new businesses. Close friends and family have provided 38% of business founders with startup funding. Typically, people invest about $23,000.

Crowdfunding

Crowdfunding refers to the practice of raising monetary backing through various online mediums. It’s a low-risk strategy for garnering early attention for your firm and receiving assistance. Entrepreneurs used to spend months reaching out to their networks, researching prospective investors, and footing the bill to meet with them in person. 

Crowdfunding simplifies entrepreneurs’ ability to reach a wider audience with their ventures. It offers investors a variety of investment opportunities, including thousands of dollars in exchange for stock or compensation for first-run goods or additional benefits. Crowdfunding has several benefits, including being a terrific marketing tool and a low-risk approach for entrepreneurs to generate funds. Time and effort are required, and there is no assurance that you can raise the money you need to complete your project.

In 2012, at 20, Palmer Luckey, the creator of Oculus Rift, launched a crowdfunding effort. With over 9,500 supporters and a final tally of $2.4 million, his campaign was one of the largest crowdfunding successes ever. Oculus VR was later purchased by Facebook for $2 billion in 2014. Everyone knows that Oculus Rift is part of the Facebook family of applications and services. 

Angel Investors

High-net-worth people who invest in businesses with relatively modest sums of money, usually between a few thousand to a million dollars, are known as angel investors. They are an essential component in the equity fundraising system since they are frequently one of the entrepreneur’s first options for securing startup funding. 

Angel investors are advantageous since they are often free to make investment decisions independently. Angel investors are free to make wagers based on their values and priorities rather than those of a partnership or corporation. This is exactly what the entrepreneur needs in the early stages of a startup’s life. 

Having angel investors on board means giving up some of your company’s power, which is the biggest drawback. In addition to having a voice in how the company operates, an angel investor also receives a share of the proceeds when the company sells., 

In 2004, Peter Thiel, co-founder of the online payment platform PayPal and a unique voice of conservatism in Silicon Valley, invested $500,000 at $5 million for a 10% investment in Facebook and a seat on the board of directors. This is the best example of a successful company that benefited from angel investing.

Venture Capital

Venture capital aims to capitalize on the rapid growth of promising startups. Typically, they will put their money into a company in exchange for stock and cash out when the company is acquired or goes public. Venture capitalists (VCs) provide advice, guidance, and an objective assessment of a company’s future viability by considering issues including longevity and expansion potential. Businesses that have graduated from the startup phase and are producing money may be good candidates for a venture capital investment. 

There are, however, certain drawbacks to using venture capitalists. Venture capitalists often expect a return on their investment within three to five years, and they have a limited patience span when it comes to companies they back. Venture capitalists may only be interested in your company if your product launch is expected to take a little while longer than that. They prefer to put their money into organizations with a solid team of employees, promising growth potential, and bigger prospects that provide less risk. Also, you’ll need to be adaptable in your commercial dealings and willing to cede some power in exchange for guidance and input from others.

Over the last three decades, venture capital has become more important to fund fast-growing new businesses. The early success of cutting-edge companies can be traced back to the startup capital and guidance given by venture capital firms. These firms include Amazon, Facebook, Google, Microsoft, and Apple.

Challenges for Startups to Raise Capital

The most difficult task for a new business owner is securing startup funding. This is especially difficult in the current economic climate since banks are less inclined to lend money to new enterprises and startups than they formerly were. Here are a few typical challenges every startup owner may face during their launch.

• Limited Access to Networks- Getting pre-seed or prospective investors for your startup from sources other than family and friends is very challenging. To attract investors, you need to show that your company has succeeded in the past. You will need more than a fantastic concept to get you far in securing financial backing.
• Lack of Track Record- In particular, startups and other small businesses might need help to keep up with the demands of managing a sudden infusion of capital. Startups must take a careful and safe approach to this issue by maintaining meticulous records. Today’s startups often face severe financial challenges that may be mitigated with the assistance of a reputable financial consulting agency.     
• Competition-  Competition in the business world is high. The giants are always competing with one another. Startups face a significant threat from the market competition. Even more so if you’re trying to launch a new company online; since there is little room for mistakes in such a cutthroat market, businesses must always be on their toes. 
• Uncertainty- Most backers favor business owners who describe their vision and explain why it matters. Early-stage investors will see that you’re serious about turning your company concept into a reality if you make the vision the focal point of every capital-raising pitch meeting.
• High Expectations- When a startup succeeds, the founders may get overconfident and make mistakes. To thrive in the business world, entrepreneurs need to set ambitious but realistic goals while also keeping an eye on the resources at their disposal, the size of their potential for development, and other relevant market aspects.

Get valuation done by Eqvista to Raise Capital for your Startup!

A professional appraisal is a must to raise your business’s startup capital. Attracting investors and figuring out how much your firm is worth are both significantly aided by a valuation. Hiring experts will help ease the process and serve as a rock-solid basis for your future fundraising activities. Eqvista is a well-known platform that provides in-depth valuation services supported by cutting-edge technology and professional experience. Please use our tools to see how your firm stacks up financially, wins over investors, and increases your chances of getting the funding you need to develop. Ready to secure startup funding? Call us now!