Founder’s Guide to Raising Funds for your Early-Stage Startup
Startup funding is the money needed to get a new business up and running.
In order to attract investors, you must have a clear picture of your financial situation. You must determine the type of investment that will aid in your company’s growth. You must choose your funding source according to the nature of your business, the risks involved for investors, the pressure of repayment, the returns to investors, and their involvement in the decision-making process. We’ve outlined a few financing options that can assist you in finding the best fit for your situation.
Guide to Fundraising for Startups
How to raise funds for a startup? In order to begin the process of raising money for your cause, you must first do your homework, use your network, and think realistically about the amount of money you will need. Assess your startup costs and different types of funding sources to consider. The below comprehensive list of startup funding options can assist you in raising capital for your company.
What is Startup Funding?
Funding for new businesses is defined as any type of capital that helps a new company get off the ground. Startup funding is the money needed to get a new business up and running. For product development, manufacturing, expansion, sales, and marketing, office space, and inventory; it is a financial investment in the company. A startup’s funding can take many forms, but there are three main types: self-funding, investors, and loans.
Understanding Funds and How They Work
A startup’s initial round of funding occurs so early in the process that it is not typically counted as part of subsequent funding rounds. Often referred to as “pre-seed” funding, this stage typically refers to the time when a company’s founders are just getting started. Pre-seed funding typically comes from the founders and their closest friends, supporters, and family members.
Uses of Funding
How does raising funds help startups? Initial funding is used to develop further a product or business idea that has already been conceived. To enter new markets or locations, fund R&D, or stay one step ahead of the competition, companies frequently turn to the outside world for financial assistance. Listed below are the uses of funding:
- Research – Whether in technology or the social sciences, research is used. Commercial and non-commercial research funding can be separated. Commercial research funding is typically provided by a company’s research and development departments. Non-profit research is funded by charitable organizations, research councils, or government agencies, while corporations fund commercial research. In order to secure this kind of funding, organizations typically have to compete against each other. Candidates with the most potential will be selected. To ensure the long-term viability of some projects, they need money.
- Launch a Business – People who have an idea for a business want to gather as much money as possible before venturing out into the market. When starting a new business, securing the necessary financial resources is necessary. Without these funds, entrepreneurs would be unable to put their business ideas into action in today’s business environment.
- Use of Investment – A fund management company gathers money from a large number of investors and invests it in the stock market. Professional investment managers oversee these funds, which may result in higher returns and lower risks due to the diversification of the assets. These funds may be worth a few million dollars or many billions. These funding activities are primarily aimed at maximizing profits for individuals or organizations.
Types of Startup Funding
When it comes to raising seed money, the possibilities are nearly endless. Here are some of the funding options for startups that we should examine in more detail.
- Venture Capital – Venture capitalists often target entrepreneurs and small enterprises with the potential for rapid expansion. It’s the venture capital firm’s goal to get a large return on their investment, either through a purchase of the business or an initial public offering (IPO).
- Angel Investors – Angel investors are often wealthy individuals that invest small amounts of money in enterprises, typically between a few thousand dollars and a million dollars. Early-stage funding might be hard to come by, but angel investors are an important element of the equity fundraising ecosystem. The most important advantage of working with angel investors is that they can usually make their own investment decisions. The angel investor is able to make wagers that they are comfortable with because they don’t have to manage a partnership or corporate hierarchy of decision-making. In the early stages of a company’s development, an entrepreneur often needs this kind of support.
- Banks – In contrast to venture financing, which may be a lengthy and hard process for small businesses, small company loans may be easier for some firms to get. If you’ve already got some momentum and a steady stream of revenue, they’re an excellent choice. This is due to the fact that traditional banks are more cautious with their funds than venture capitalists, who are more willing to take enormous risks for the possibility of big gains. Taking out a small company loan, on the other hand, ensures that you retain complete control of your startup.
- Crowdfunding – Raising money through the efforts of a large number of people, such as friends, family, clients, and other investors is known as “crowdfunding”. With the use of social media and crowdfunding sites, this strategy taps into the pooled efforts of a huge number of people to gain more exposure and reach.
- Accelerators – There are startup accelerators that provide not only an initial investment (often $50,000 to a few hundred thousand dollars) but also help for firms as they begin to grow. Accelerators offer a wide range of assistance, from money to coaching to other sorts of support.
- Grants – Grants from the federal, state, and municipal levels are all available to small businesses in need of financial assistance. The largest money is available from federal grants, but they also attract the most applicants. Additionally, they’re frequently attached to a government body with very stringent criteria for who qualifies and what you’re expected to do with the funds. When compared to federal grants, state grants tend to be smaller in terms of money but also less competitive. It’s possible that the federal and state governments may collaborate to handle funds designated exclusively for small company grants.
- Series Funding – Entrepreneurs who want to keep their startups afloat by raising money in successively higher amounts of this type of investment. Starting with seed capital, founders typically progress to Series A, B, C, D, and even E funding rounds. As a general rule, venture capital funding is the most common type of funding at later rounds of Series A fundraising. As a seed round investment is typically between $2 million and $15 million, investors are going to demand more proof of concept than they did in the seed phase. When a startup is ready to raise a Series B funding, they’ve already found product/market fit and need assistance expanding their business. Between $7 million and $10 million is typical for a Series B investment. Series C firms are typically valued between $100 million and $120 million. Venture capitalists are the most common source of funding for Series D rounds. Since only a few firms make it to this stage, the amount of money raised and their valuations might vary greatly. Series D is a good place to start, but only a small number of companies get to Series E. Many of the factors outlined in the Series D round may apply to companies at this stage.
Pros and Cons of Startup Funding
Before you go ahead and get into securing funding, there are a few things you should consider. There are some pros and cons to getting funding to your startup. Go through them first before making the decision of seeking help from investors or VCs.
- Access to Business Funding is Simple and Convenient – Businesses can rely on financial institutions that focus primarily on funding. Investors and bank loans are included in this. The amount of money you need to start a business can be determined by the size of the enterprise. The institutions set loan payback terms. You can repay the loan if the business produces a profit within the allotted time.
- Experts are Brought on Board – One of the perks of startup funding is the opportunity to meet and learn from other entrepreneurs. They can aid your company with their technical expertise. For both pre-and post-funding checks, they are constantly present on the ground. They want to ensure that your firm is protected from any potential threats. You can get help with your company ideas and other issues at any moment.
- Arrangements of Connections and Ties – There are a lot of people interested in startup funding. Investors expose you to the world outside of your own business. It is possible to gain new customers through referrals. You can meet people who have excellent ideas and are prepared to share their expertise with your firm through the network.
- External Supervision – You can rest assured that your investors will have complete control over every penny you receive from them. Because no investor wants to lose money, they must keep an eye on things. If you have investors, they will always have a say in the direction of your company. Their influence on your business is based on how much money you get from them.
- Consequences of Commitments – You must return every penny that an investor gives you. There are a lot of forms you must fill out before you get any money from them. As proof of compliance with the terms and conditions of the funding, signatures should be attached to your application. You could face unfriendly consequences if you don’t follow these rules.
How do Founders Raise Funds Successfully for Startups?
A company’s ability to raise money is heavily dependent on the nature and type of its business. Here are some of the options you have.
- Invest your Own Fund – In the early stages of a business, bootstrapping or self-funding is an effective method of startup financing. If you’re just starting out, it’s hard to get funding without showing some progress and a clear vision for the future. You can either invest from your own savings, or you can ask your family and friends to help. Due to the lack of formalities and compliances, and the lower raising costs, this will be a simple task. Family and friends are usually willing to negotiate on the interest rate.
- Right Time for Fundraising – Spend some time thinking about why you need the money. What do you hope to achieve with the funds you’ve raised? What are the milestones it will help you achieve (e.g., speed to market, market share capture, opportunity utilization)? In addition, remember investors don’t fund capital shortages but rather opportunities. For a successful campaign to raise funds, it’s critical to have well-defined, time-bound objectives that can be easily achieved. The timing of your fund-raising efforts is also critical. In the game of life, every second counts.
- Research Investors – Investors frequently carry out background checks on you before deciding to invest in your company. The same should be true for you. As much as investors are choosing you, you’re also choosing them. Prior to launching a crowdfunding campaign, it is essential to conduct thorough investor research. Two concepts should guide it: identifying the proper investors and doing objective research. Choose investors who will not only offer the money but who will also believe in you and stand with you through good times and bad. Do some research into who your investors are, what they’re good at, and what they’re not so good at. You need to make sure your investors are a good fit for your stage, location, and ticket size.
- Make a Good Plan – Approaching and managing fundraising as a process is essential. Using your fundraising plan as a roadmap will help you stay on track with your fundraising efforts. If you’re going to raise money, you need a clear plan for how you’re going to get in touch with each investor.
- Use Incubators and Accelerators – Incubator and Accelerator programs are viable funding options for early-stage businesses. Programs like these are available in nearly every major city and help hundreds of new businesses each year. The two terms are often used interchangeably, but there are some fundamental differences. For businesses, incubators are like parents, nurturing them and providing them with the resources they need to grow. It’s basically the same thing, but an incubator helps a business walk, while an accelerator helps a business run/take a huge leap forward.
- Approach Angel Investors – A common definition of an angel investor is a wealthy individual who has a burning desire to put their money into promising new businesses. They also work in networks of networks to screen proposals collectively before investing. In addition to financial assistance, they can also provide guidance or mentorship.
- Make Networks for Strong Partnerships – Network connections and partnerships are a great way for startups to minimize the risk of failure in their first round of funding. If you want your startup to succeed, you need to build a strong community of support among your peers and the business community in which you live and work.
- Prepare a Good Pitch – It’s impossible to generalize about investors because each one is unique. In contrast to those who place a high value on specifics, some investors place little emphasis on them. When it comes to developing a successful fund-raising strategy, tailoring your pitch to your investors is absolutely essential. Prepare 3-5 key points to convey in a meeting with an investor before learning as much as possible about them. A few essentials will be the same for all investors, but the rest should be tailored to the specifics of each case.
Get a Business Valuation to Increase Your Chances of Securing Funds!
With all of these options, it’s clear that there’s a ton of money to be had in the startup world. For each entrepreneur, it’s essential to determine which type of funding is best suited to their company’s goals and needs. A big help to securing funding for your startup is getting a business valuation. With a business valuation, you can attract more investors and better funding for your startup. Eqvista can help you secure a fully-customized business valuation done by certified professionals. Get in touch with us to learn more about our valuation services!