What does it take to start a business?
First of all, of course, a promising business idea. But even the most innovative idea needs financial backing. Even if your product generates revenue from day dot, you need money to develop your marketing, customer service, and day-to-day operations.
Securing startup funding is the biggest challenge for new startups. Especially now, because of the pandemic, the investment atmosphere disruptively changed. Many venture capital providers turn rather to promising ideas than risky deals. This makes strategy and preparation key here. In the search for financial injection, you’ll probably go through months with a constant tingle of uncertainty in the pit of your stomach. So to make that feeling a little more pleasant, we’ve put together a guide on what you need to do when securing your financing.
With the help of our complete guide to startup funding, you’ll learn about:
- What Is Startup Funding
- Different Funding Opportunities
- Stages of Startup Funding
- How to Choose the Right Investor
- How to Develop a Business Plan
- How to Create a Story Pitch
- How to Negotiate With Your Investors
Let’s kick things off with the different ways you can fund your startup.
What Is Startup Funding?
Startup funding provides the capital that helps a new company get off the ground. Depending on the type of business model you’ve got, each company requires a different type and size of the investment.
How To Raise Capital For A Startup: 5 Different Ways
There are various forms of raising funds, and as we’ve alluded to above, it’s really dependent on what your motivations are with the investment. Nevertheless, we’ve outlined the different methods of securing funding for a startup like yours.
Family and Friends
Many startups raise the seed capital for their business by leveraging their existing relationships. Often, this cash injection is enough to hire the first employees, secure office equipment, and equip a team with the necessary resources.
Using personal relationships to raise capital has its advantages and disadvantages.
Typically, it doesn’t prepare you for a round of funding in an investor environment. Acquiring funds via personal relationships also gives you little to no support in other areas, such as networking and incubator support. However, in the end, it also means that this type of funding is more flexible and bound by fewer rules.
It’s vital to get in touch with the right people and handle the funding round professionally, even though you may have a close relationship with them. Make sure you know whether potential family investors their investment in startup funding terms as a loan or a gift, and make them aware of the terms of their investment. It wouldn’t be the first time family investments shook family relationships, so hedge against funding that could cause future rifts.
When your startup receives funding from a Venture Capital (VC) agency, wealthy individuals or companies usually back this funding. VC agencies build investment portfolios, with which they invest in high-risk startups in exchange for equity. As part of the investment contract, individual investors will have additional requirements. For example, they may want to sit on the board of directors or be involved in certain recruitment practices.
Alternatively, you can look out for a family office. Family offices have emerged over the past few years, because of wealthy family’s interest in directly investing in a startup or fund, keeping the power over their investment decisions.
The venture capital process is exciting if you’re looking for knowledge and experience in developing a business. Likewise, VCs bring their extensive network of industry players and incubators for you to leverage. This means that you can rely on your VC network for advice and mentoring. They also tend to provide more significant investment, which is an advantage in the high-tech sectors and for development-intensive products.
The industry with the most power to rope in venture capital is technology, and even small businesses have a chance of achieving VC. However, throughout the years, VC has become difficult to acquire for specific groups. For example, solo woman founders and all-women teams raised just 2% of all VC dollars. The exclusivity of some VC clubs makes it difficult for starters to connect, so look for public VC programs and join incubator and accelerator programs to get the support you need.
Private investors, also known as seed or angel funders, usually finance small startups in exchange for ownership equity. Angel investors can be family and friends as well. Having an angel investor means you don’t have to repay the funds because you’re giving ownership shares in exchange for money.
Angel investments have a relatively short closing time compared to VC, which can take up several months of time. They’re also less invasive in day-to-day activities. However, angel investors are harder to obtain without a personal network, and the likelihood of receiving large funds is lower.
There’s a way to start a business without raising a large amount of money – bootstrapping means financing your business without raising capital. It can be a good alternative if your business idea makes money from day one, requires little initial investment, or if your savings and credit card limits are sufficient to keep your business afloat. Bootstrapping doesn’t get you anywhere closer to receiving business knowledge and networking, but it also carries fewer risks and external intervention.
Lately, a new form of funding rounds has become popular. By running a crowdfunding campaign via one of the top crowdfunding platforms, businesses can receive the necessary budget to start immediately. According to a recent report on Startups.com, around 50% of crowdfunded campaigns are successful. And, more than 75% of campaigns exceed their target goal. While it is a relatively seamless process with little to no risk involved, there’s a high chance of failing your campaign as well. When deciding on crowdfunding, make sure to communicate your idea well and in an enticing way, and use social media campaigns to inform more people about your purpose.
If we trust Fundable, only 0.91% of startups are funded by angel investors, while a measly 0.05% get funds with VCs. In contrast, 57% of startups rely on personal loans and credit, while 38% receive cash from family and friends. However, the type of investment that’s effective depends on your product, industry, and region. That’s why researching the context of your business is key before going for one of these options.
The Various Startup Funding Stages
It’s not unusual that businesses close deals such as $15Mn in Series B funding. However, how large your investment jumps depends on your idea and the stage your business is in.
Is the earliest stage, often funded by supporters, families, and friends, and involves only small cash flows.
Is the first official funding stage. As with planting a tree, seed funding is the initial starting point of a growing business. With seed funding, you can begin market research and product development and line out the business plan basics. Often, angel investors stem the seed funding phase, and it’s not uncommon to produce anything between $10,000 and $2 million for a startup.
Series A funding
A Series A funding is usually achieved after having the first proven track record of business success, using the Series A funding for increasing the user base or optimizing product offerings.
For receiving Series A, you need a business plan explaining how you will generate long-term profit. Series A rounds raise approximately $2 million to $15 million. The investors involved in the Series A round come from more traditional venture capital firms. Well-known venture capital firms that participate in Series A funding include Sequoia Capital, Benchmark Capital, Greylock, and Accel Partners.
Series B, C, and D funding
When you’re ready to bring your business to the next level, it’s time for Series B funding. The funding is useful to grow the existing business, hire new employees and expand existing product offerings. However, if you’re a company that already receives Series B, C, or D, you’re probably past the point of asking yourself how to put together a good pitch deck.
Study Your Investors
Before you blindly approach an investor or present your idea at an open competition, you need to study their interests. The goal is to find the perfect partner for your company, including their industry knowledge, funding amount, and network. Investors aren’t simply drawn by distributing their money and waiting for the result. Particularly angel and venture capital investors want to be involved and contribute to the development of a successful company. They often pursue values and special interests, such as promoting a particular cause or supporting minority groups. Check out this list of 25 VCs that aim to close the gender and ethnic gap and search for programs with which you identify your business values.
When contacting potential investors, you need to be clear on how you’ll allocate funds and why they should choose your idea. When researching, check what previous investment rounds they have led and what kind of payback they usually ask for.
With this knowledge, you’ll have productive conversations and convince the right people to jump on the bandwagon of your concept.
How to develop a Business Plan
Even though there is a difference between running a crowdfunding campaign and pitching to an angel investor, the key to any funding is to have a business plan. This includes an ‘investor pitch’ that convinces future financiers to stump up the large sum of cash for your enterprise.
A well-thought-out business plan will improve the likelihood of receiving funding and help you formalize ideas around your product. With a strategy that’s clear to both yourself and potential investors, your startup is ready to begin scaling its operations and, ultimately, its growth.
These are the most common things to include in your plan:
- Give an overview of the business idea. Explain your objectives.
- Financial forecasts. Include how much budget requires each function and part of the development process.
- A product strategy. Explain your unique selling proposition, the customer value of your product, and who your target consumers/buyers are.
- Plan your team and marketing resources. What are your team goals, and what talent will you hire? What marketing measures will you use and why?
- Your revenue strategy. What will your pricing look like? How do you make money? How will you invest revenue? The goal is to maximize your profits when facing the reality of production costs, losses with competition, and the customer price point.
Well-developed and profound research is key. All relevant statistics and data points need to be accurate. Even if you don’t have to present all the statistics when presenting your idea, you should have them ready when questions arise during funding rounds.
Create a Story Pitch
Take the ideas and stats of your business plan to write a convincing pitch to your investors. Often, you will compete against other companies at events and sometimes, present your plan personally to an investor one on one. Either way, there are some things to keep in mind:
- Keep it concise. People have a short attention span, especially when they listen to hundreds of other ideas. A 20-minute PowerPoint will convince more people than a 2-hour presentation.
- Start with the broad objectives and detail how to deliver the expected results later on. So, your story should start with analyzing the problem, your solution, your business model, and why investment is necessary but also lucrative.
- Use key statistics and graphics on financial outlooks, future growth, product mockups.
- Provide customer testimonials, business validation tests, and real-life use cases if you have them.
- Leave time for a thorough Q&A, where you can include additional facts and statistics.
Negotiate With Your Investors
After catching the first investor fish, it’s time to get the best deal for you and them. When negotiating, your potential investors will raise concerns and ask questions. Here, it’s key to be transparent. Give an honest answer to start the business relationship the right way and build the necessary trust.
The higher the investment sum, the greater is the possibility that you’ll give up control over your business to your investors. However, when agreeing to the contract terms, make sure you understand and feel ready to comply with them. It’s also great to make clear deadlines regarding your plans, from pitching to closing the deal. Creating a sense of urgency will make you get the investments faster.
The only rule in funding is – there’s no single rule.
For example, while fintech is one of the largest booming tech sectors, financial tech startups have difficulties when it comes to demonstrating expert knowledge and the authenticity of an idea. Every industry and product faces different challenges along the way, and investors know the hard facts. They will challenge you on each of them.
However, this does not mean that the chances of getting startup funding are slim. On the contrary, if you show your investors that you are aware of the risks, challenges and can demonstrate how to overcome them convincingly, you’ll be rewarded with a confident and enthused partner that’s ready to grow your startup with you.
We hope you’ve found our guide to startup funding useful, and if you need help creating a narrative pitch deck, let us help you tell the most compelling story of your business idea.