Startup Funding: How to Get Capital for a Business

Starting a new business is an exciting journey and, for many, is the path to better economic opportunities. However, having sufficient capital in the first place to start is a table stake to get to a successful business. So, it’s kind of a chicken and an egg problem - how do you start generating revenue and profits if you have to have money in the first place? In this article, we will go through your options and how to pick the right one for you.

What is Startup Funding?

Startup funding is the capital founders raise and use to start, grow, and sustain their businesses. Business owners can use the raised capital for:

• Product development
• Marketing
• Attracting talent
• Operational costs

Why Do You Need Funding Support for Startups?

The startup funding can serve two purposes:

• Unlocking opportunities that otherwise are not available to you
• Accelerating processes that otherwise will take longer to happen

Let’s go through a few examples.

If you build a product company, the value you deliver to your customers comes through the product. This means there is no value exchange between you and the client until there is a product—in other words, there is no money coming into the company.

However, some products may require significant time and resources to build. OpenAI took more than five years from its founding to the start of generating revenue.

Even not so highly technical products may need a couple of years to be ready for the market. The company still needs to pay salaries and incurs operational expenses during this time. Without some initial investment, building such products would not be possible.

On the other hand, capital can be used to accelerate processes that are already in motion and produce the results that are expected from them. If you can convert organic visitors to your website to customers, running a marketing campaign that leads more visitors to your website will increase the rate at which you get new customers. Similarly, you can increase your learning rate when running experiments.

Securing enough capital from the start is essential for the business owner to dedicate himself entirely to building a successful business. Whether the cash comes from his own assets or external sources, having peace of mind is important for focusing on his most important objectives.

Different Stages of Funding

1. Bootstrapping

These are the company's early days, in which the founder self-funds it. Capital may come from personal savings, profits from other investments, or additional income streams like salary from a full-time job or renting.

2. Preseed Funding

The preseed round is used to determine product-market fit or prove a sustainable business model and can be scaled further.

3. Seed Funding

Seed funding comes after a sustainable business model is validated. It accelerates the business's growth and demonstrates its potential for growth.

4. Series A, B, C

The following rounds of investments aim to increase growth. The capital can be used to tap into new markets, build new product facilities, expand the product offering, etc.

5. Late-Stage Funding

Later stages of funding are used to prepare a company for IPO or an acquisition. There is no strict limit on how many series of funding a company can get. Companies like Uber and Lyft got 14+ funding rounds before going public. However, there are some considerations like equity dilution, existing investors' goals and investing horizons, etc.

The article Demystifying the Startup Funding Rounds provides more in-depth information about the earlier stages of investments.

Source of Funding for Startups

The Founders

Many founders initially fund their company with their capital, and some of them strive to do that as long as they can, sometimes depleting all their personal capital. The upside of this approach is that the founders retain full ownership of their company, which gives them full control over their business decisions and maximizes their potential financial benefits. The downside is that this exposes the founders to a bigger risk of losing everything. Attracting capital from others has some benefits like:

• Partial indirect validation for the idea.
• Investors often help with know-how and connections.

If these benefits are not important to you and you have a very visionary idea that is hard for others to believe in - going fully bootstrapped can be a great option for you.

Otherwise, consider some of the other funding sources at some point.

Friends and Family

Family and friends are the closest people around you who can support you with capital. In most cases, they will be motivated by their relationship with you.

They won’t approach the situation as a typical investor who is assessing your business and wants to evaluate their ROIs. It’s important to negotiate terms that work for both parties to avoid bad feelings down the road. Their investment could be:

• A gift
• A loan that will be returned at no or some interest
• In exchange for ownership of your company

Having everything written and consulted with lawyers and financial advisors can help to set proper expectations for both parties and avoid unpleasant surprises.

Angel Investors

Angel investors are high-net-worth individuals who support early businesses with resources, connections, and advice. They usually focus on the qualities of the founder and the starting team and invest in their potential, knowing that the current idea will undergo a significant transformation to become a successful business. Angel investments are usually made in exchange for ownership in the company.

Venture Capitalists

VC funds are institutional investors supporting companies in different development stages. Some funds specialize in companies that are in a specific stage. Others focus on a given industry.

Smaller funds with local and regional impact usually support early-stage companies, while bigger funds seek more global impact and invest in businesses that have already proved some traction. VC investments are in exchange for equity, which documentary can be wrapped in different forms:

• The investors directly get equity
• Simple Agreement for Future Equity (SAFE)
• Convertible notes or loans

Each of these forms has different pros and cons, and it’s important to identify the right one for your situation, especially based on your business's location.

The terms of VC investments often include additional conditions like:

• Preferred shares rather than common shares give additional rights like liquidation preference, dividends, conversion rights
• Board representation and control giving the right to vote and veto
• Exit rights, which is the main path for VC to get ROI
• Tag-along and drag-along rights mandating how majority shareholders exercise their rights in relation to minority shareholders

Banks and Financial Institutions

Banks and other financial institutions can offer business loans, another alternative to funding your company. If you have a large upfront investment and expect to start generating revenue quickly after that, getting a loan can be a good way to retain your ownership in the company. Small business loans can be helpful when you temporarily need to raise money, and that’s a one-off exception.

In addition to the interest, the company might have to provide collaterals, which could be property, equipment, or other assets. Unsecured loans without collateral often incur higher interest rates due to the increased risk for the bank. Your credit score can impact the rates or even the availability of loans for you.

Crowdfunding Platforms

Crowdfunding platforms are an emerging method for funding your company that has unexpected advantages. The idea is that you pitch your idea, and users of the crowdfunding platforms decide whether they want to back the project and with how much.

The reward they get depends on their contribution and can vary from a thank you note, through some swag, to one or more units of the actual product. For bigger contributors, sometimes there are special offerings like personalized items or exclusive deals, allowing you to provide unique incentives for the backers to support them more.

The unexpected advantage of these platforms is that they are not just providing capital for your product. There are much bigger benefits:

• Provide validation that the product is in demand by people putting their money
• Create a traction channel of users willing to test out an early product
• Set proper expectations about what your early customers can expect

The downside is that these platforms get thousands of new projects daily, and you need to focus on your messaging, pitching, and video presentation to stand out. However, this will help your product, anyway, so it’s definitely not in vain.

Grants and Competitions

Public agencies and private organizations offer government grants and prizes for startups, usually based on certain industries they seek to incentivize. These types of funding are often non-repayable, but they might not be big enough to sustain your company for a long period. Also, you might face severe competition, which in some cases might be a distraction from your core objectives.

Startup Accelerators

Startup Accelerators are programs that help startups accelerate their growth. They are training programs for founders that empower them to become successful business leaders through education, connections, and funding.

Learn more about accelerators and how they can help your company in the dedicated article.

How to Get Funding for Startup

The most important aspect of the successful raising of capital is the preparation of the founder or the CEO for the round. There are some strategic decisions to be made at this stage:

• What stage is the company in, and what type of funding is needed
• What the capital will be used for
• Which funding options is appropriate given the circumstances
• Which organizations are good and appropriate candidates for investors

Once there is clarity on these questions, the next step is to prepare your pitch. A great investment pitch is based on real-world data and validation and instills confidence in the investors about the business idea, the decision-making, and the product development process.

If you are pre-PMF, it’s important to provide real-world evidence from your target audience about the importance of the problem you are solving, the gaps in the existing alternatives, and the size of the market. Ideally, you are sharing this information from the customer interviews that you conducted during the product research.

When you are ready with your pitch, it’s time to contact potential investors and start pitching. One of the most challenging parts of this phase is the high rejection rate. Expect that you will get hundreds of “No”s before getting to a “Yes,” and be prepared to adjust and adapt your pitch based on the feedback you are getting from investors.

The Icanpreneur Way to Secure Funding

Icanpreneur is a platform that helps entrepreneurs validate their ideas based on proven methodology and with real-world data coming from potential customers. The platform handles the entire process:

• Expressing and polishing your idea
• Preparing a business plan
• Building customer interview scripts adapted to your idea and target audience
• Mini-CRM to manage the communication with potential interviewees
• Complete analysis of your conversations with insights produced by the latest AI technologies about the customer problem, the effectiveness of your solution, and the buyer persona

All of these are the main components of a great pitch that will provide all the information needed to your potential investors about whether they should back your company.