Startup capital, often known as startup funding, is the sum of money required to establish a new company.
It can come from a variety of sources and be used for any task that aids the startup in turning an idea into a functioning business.
What kinds of funding are available for startups?
There are several possibilities available for startup funding. So let’s examine some of the startup funding options in more detail.
- Personal credit and savings
- Family and friends
- Venture Capital
- Angel Investors
- Banks
- Crowdfunding
- Accelerators
- Grants
- Series Funding.
1. Personal credit and savings
The majority of startup financing comes from credit and personal savings. Founders are aware that they must be willing to put everything on the line personally if they hope to persuade anyone else to invest in their business.
As you don’t need to rely on anyone but yourself to use it, it’s also the most accessible type of funding.
2. Family and friends
Many company founders ask their friends and family for financial assistance. Since they already support your endeavours, you don’t need to persuade them in the same manner that you would a venture capitalist, angel investor, or bank.
Starting with friends and family can be a terrific idea, but it’s crucial to make sure that the commercial aspect of the relationship is specified.
Make sure everything is documented legally, and let your loved ones know they might not get a return on their investment at all. This sort of startup finance is rejected by some business owners due to possible personal repercussions.
3. Venture Capital
Venture capital is money invested in new companies and small enterprises that have the potential for rapid growth but are typically high risk.
An extremely high return for the venture capital firm is the aim of any investment in venture capital, which is often achieved by the acquisition of the fledgling company or an IPO.
Venture funding is a fantastic choice for entrepreneurs aiming to scale up rapidly and significantly. Your startup needs to be ready to accept and employ the huge investments to expand.
How to get venture capital funding
Although there is no surefire technique to obtain venture capital, the procedure typically follows a set sequence of fundamental phases.
A. Find an investor
Look for private investors, also known as “angel investors,” or venture capital companies. Make sure to conduct an adequate background investigation to determine the investor’s reputation and experience working with start-up businesses.
B. Talk about your business plan
Your business plan will be examined by the investor to see if it satisfies their criteria for investing. The majority of investment funds focus on a particular sector, region, or stage of business development.
C. Review your due diligence
The management team, industry, goods and services, corporate governance records, and financial statements of your company will all be examined by the investors.
D. Negotiate the terms
The next stage is to agree on a term sheet that details the terms and conditions for the fund to invest if they decide to do so.
E. Investment
You can obtain the investment once a term sheet has been agreed upon. A venture fund becomes actively involved in the company onceinvests.
Investment capital typically comes in “rounds.” Additional financing rounds are made available as the company achieves milestones, with price changes made as the strategy is carried out.
4. Angel Investors
High net-worth people who invest in businesses with relatively small sums of money—often between a few thousand and a million dollars—are known as angel investors.
Angel investors are a crucial component of the ecosystem for raising equity because they are frequently one of the more easily available sources of early-stage finance for an entrepreneur. The fact that an angel investor can frequently make an investment decision on their own is the main advantage of partnering with one.
The angel investor can place bets that they feel comfortable with personally because they don’t have to manage a partnership or corporate hierarchy of decision-making. This is frequently what a startup founder needs in the early stages of growth.
5. Banks
Since small business loans are a more conventional method of obtaining startup funding, they could be simpler for some firms to get than venture capital, which can be a difficult and time-consuming procedure.
For startups that already have some traction and, much better, some revenue flowing in, they’re a fantastic alternative.
That’s because traditional banking institutions are more cautious with their funds, in contrast to venture capitalists who are all about taking huge risks in exchange for the possibility of big gains.
Additionally, taking out a small company loan means maintaining complete ownership of your startup, unlike accepting angel or venture capital funding.
6. Crowdfunding
Through the combined efforts of close friends, family, clients, and individual investors, crowdfunding is a way to raise money. This strategy uses a huge number of people working together, mostly online through social media and crowdfunding platforms, and makes use of their networks to expand reach and visibility.
Entrepreneurs typically devote months to sorting through their personal networks, screening possible investors, and investing their own resources to get in front of them.
With crowdfunding, business owners may provide more methods for people to support the growth of their company, from investing thousands of dollars in exchange for equity to donating $20 in exchange for a first-run product or other prizes.
7. Accelerators
Startup accelerators provide help for businesses that are just getting off the ground in addition to startup financing, which is often at the seed funding level, or $50,000 to several hundred thousand dollars.
Although each accelerator is unique, they typically provide a mix of finance, mentoring, and other forms of support.
8. Grants
There are three types of government grants available to small businesses: federal, state, and local. The largest money is typically offered via federal grants, but there is also the most competitive.
They are typically connected to a government agency with particular qualifications for receiving the funds as well as expectations for what you should do with it, and they are also rather detailed.
State funds, on the other hand, are often less generous than federal grants, but they may also be less competitive depending on your state. The federal government may collaborate with state governments to handle funds designated expressly for small business grants.
Grants for small businesses tend to be even smaller at the local level, however, they could be simpler to obtain because interpersonal relationships still matter.
Take a look for local grants if your startup or small business is focused on enhancing your town because these incentives are typically about boosting your local community. You can also check out Ford Foundation Grant and World bank grant.
9. Series Funding
Series funding is when a founder secures successively greater amounts of funding to maintain their firm. Typically, founders receive seed money before moving on to Series A, B, C, D, and even E.
While each Series may include a mix of other forms of finance, venture capital is nearly always a component, especially in the later rounds.
Even if they haven’t yet demonstrated their business model, entrepreneurs are required to have a plan for doing so in a Series A round. Additionally, they must use the funds earned to boost sales.
Investors will want more evidence than they did for the seed round before they commit because the investment is bigger than the seed round—typically $2 million to $15 million.
When a firm is ready to raise Series B funding, they have already achieved product/market fit and need assistance growing. Typically, a Series B round costs $7 million to $10 million. A company’s valuation should be in the $30 million to $60 million range.
Venture capital firms typically provide Series B funding, frequently from the same investors who drove the previous round. Because the startup’s valuation changes with each round, past investors frequently decide to reinvest to ensure that their share of the pie is still sizable.
Companies that receive Series C capital are performing well and are prepared to grow into new areas, buy out rival companies, or create brand-new goods.
Startups typically raise an average of $26 million for their Series C round. Although it is conceivable for companies to be valued much more, especially with the recent proliferation of “unicorn” startups, the valuation of Series C companies typically ranges between $100 million and $120 million.
Compared to the other rounds, a series D round of funding is a little more challenging. As previously said, many businesses use their Series C to close out their funding round. There are a few reasons, nevertheless, why a business would decide to raise a Series D. One is that they want to grow in a novel way before pursuing an IPO.
The second is a “down round,” which occurs when a corporation falls short of the goals it set in its prior round. Down rounds can reduce the value of a startup’s equity and make progress challenging.
Venture capital firms generally provide funding for Series D rounds. Because so few firms make it to this point, the amount raised and values vary greatly.
Companies that reach this stage may be raised for many of the reasons listed in the Series D round: They’ve fallen short of expectations; they want to stay private longer, or they need a little more assistance before going public. If few companies make it to a Series D round, even fewer make it to a Series E round.
How to get startup funding
To raise money for your startup, use these five steps:
- Determine how much money you require
- Plan your business
- Gather important documents
- Choose the funding option that is best for you
- Make sure you can afford to repay the funds
1. Determine how much money you require.
A corporate credit card can be the best option if you want to fund a significant one-time transaction. An investor can be a better option if you need a significant amount of money.
Before you start submitting applications or contacting your network, figure out how much money you’ll need.
2. Plan your business.
A business plan is typically required by lenders and prospective investors. This document should include information on your business plan, financial requirements, and methods for making a profit, among other things.
3. Gather important documents.
These can include your personal and business tax returns, bank statements, financial statements for your business, and other relevant legal documents (such as articles of incorporation, a commercial lease, or a profit and loss statement).
4. Choose the funding option that is best for you.
Make sure you do your homework to determine which type is appropriate for your company, and then tailor your applications to that type.
5. Make sure you can afford to repay it.
Before you borrow any money, make a strategy for how you’re going to pay it back. You can estimate your payments using a business loan calculator or credit card payoff calculator to make sure they are within your spending limit.
What are the best sources of Startup Funding?
Even though venture capital is frequently mentioned when discussing startup funding, it turns out that it is only one of the top six sources.
On average, $531 billion is raised annually for startup funding, of which $185.5 billion comes from personal savings and credit, $60 billion from friends and family, $22 billion from venture capital, $20 billion from angel investors, $14 billion from banks, and $5.1 billion via crowdfunding.
Conclusion
Which choice is the best for you?
There are a tonne of possible sources for startup finance, and plenty of money is lying around. Each founder must decide which funding option best suits their business objectives.
Before you start the process of attempting to obtain startup financing, take a closer look at each source of funding.
