Name ready? Check.
Logo ready? Check.
Business concept ready? Check.
Congrats. You have created a business.
But… wait. Does it work like this in the real world? No, it isn’t all fun. Especially when you are planning a real business, things will get serious pretty quickly.
To start your business, you need to get your concept to ideation, and for that, you need a Minimum Viable Product (MVP) that is ready for the market. Now that you are serious about the business, you need STARTUP FUNDING. Assuming that you are a fresh graduate, just out of the college, you will have around a couple of hundred bucks… not even close to something that can get your startup registered.
FYI: In the USA, the average price for registering a company is around $800 to $1000. Well, the next question in your mind will be where can you get funds?
Where Can You Get Startup Funding?
Getting funds for your startup is not easy, especially when it has no product or service to offer. People won’t believe your idea. And, the bad news is that you can’t get funding for your startup from anyone who is not even believing your idea.
So, what do you do?
You go to your relatives. Your mom, your dad, they will believe you even if your idea is picking trash – trash can sell too [LITERALLY!].
In fact, top business celebrities like Nick Woodman, Donald Trump, Kim Kardashian, Elon Musk, Jeff Bezos, and many others took funds from their parents when they were in the early stages of their business. Later, they were able to turn this initial funding for startup into millions of dollars for themselves, and their family, with sheer hard work and smart decisions.
Once you have funding from your relatives, you can survive for a year or two, But once you are out of that what do you do? Read below.
Types of Startup Funding for Business
If a startup has to survive, it will go through multiple rounds of funding. Let’s see how many rounds does an average startup goes through and why.
Seed Funding For Startups
Seed funding is the initial startup funding you get for your business. It can be around $50,000 or $500,000 depending on how convincing presentation you make and the amount you require to take your business off the ground. The problem is, this is one of the riskiest investments.
Because you can’t prove that your business will survive. If it survives, your investors will be able to double their money in just a few years, and if it fails, they will lose all their hard-earned money in months.
For this article, we will assume that the startup will survive. And, if it does for at least two years, you will be eligible to get series A funding.
You are now out of money. You have given a share of 10% to your father for the seed funding. Now, you need to get more cash to get things one level up. You will connect with venture capital (VC) firms and angel investors to get more investment. This type of investment is much bigger than what you were aiming initially. It can run from a couple of hundred thousand dollars to millions of dollars. But you will have to give a share of your company to the new investors.
Let’s say that you gave 10% to your father through the seed funding. But now that you have more investment coming in through the Series A funding, you will have to dilute the shares. Here is how it will work:
Initial company value = $300,000
Father’s share (seed funding) = $30,000 = 10%
For Series A funding you get one million dollars from a VC firm. Now the company share will belike this:
Company value = $1 million + $300,000 + = $1.3million + post-funding value = $ 3 million
Note: You don’t have $1.7 million but you assume that by getting the funding for startup from investors your company’s value will increase.
Now you will bargain with VC firm to get 30% value in your company for one million dollar funding. Therefore, now the startup will release shares, diluting the previous share value.
Let’s assume that there are 100,000 shares of your company, with each share worth $3. Now, to give 30% of the company to the new shareholders, the company will release more shares. The initial 100,000 shares will shrink down to 70% of the total company value. To complete it, you will release 42,857 more shares of 30% company value. The number of new shares will be 142,857. It also means that the company’s share value will increase to $21.
Therefore, your father doesn’t hold 10% company value. But guess what? His share value has increased from $3 to $21. Hence, your father’s current share value is $210,000 instead of $30,000 that he gave you two years ago.
Similarly, your company can opt for series B funding after four to five years of operations – when it deems suitable. In many cases, companies don’t opt for series B funding because they tend to become profitable after five years or so. This startup funding is usually in double-digit million figures starting around 10 million for basic funding round.
Here is a summary of how startup funding goes. Watch the complete video to learn more about what we have just explained.
10 Ways to Get Funding for Startup
Now that you know what is startup funding, and how it helps distribute equity of each investor, let’s delve into the “How to get funding for startups?”
1. Crowdfunding for Startups
One way to get startup funding is through crowdfunding. Crowdfunding is one of the fastest and safest ways to get funds. Why? Because the crowd isn’t going to ask you to give it back. They just want the product or the service that you promised to offer. So, how does it go?
Well, check Kickstarter, Indiegogo, Patreon, and you will see that these are some crowdfunding sources that allow the crowd to get products for funding the startup. Many reputable startups have become successful using the crowdfunding tactic.
So, how do you get crowdfunding?
Wil Schroter, the Founder and CEO of Startups.co, says:
“And grow it from there. If you are trying to raise $100K, start with a $10K target. The reason is because getting the first bit of commitment is exponentially harder than the rest of it. No one wants to be the first person to the party. If you surpass $10K (or whatever your number is) you can always expand from there. But think specifically about initial momentum, then expansion.”
Tips for Getting Crowdfunding
- Create a killer product or prototype that solves a problem
- Make video shots of the product’s use cases
2. Angel Investors
Angel investors are private investors who invest during the seed funding stage. That’s why they are called ‘angels’ because of the risk of investing in a new company is higher than usual. Seeking an angel investor for your company is fairly easy if you have the right connections. You can find them through your own network, searching on social media websites and then sending them your startup pitch, or by attending startup events.
Doreen Bloch of Poshly Inc, says:
“One of the benefits of investment, beyond the capital, is the expertise of the investors to help move your business forward. In particular, angel investors often have deep industry experience, as well as connections that you can leverage for the business. I highly recommend seeking out any executive-level professionals in the space who will bring more than just a check to the table in an angel deal, whether your startup targets market research, professional sports, Fortune 500s, the beauty industry, etc.”
Tips for Raising Angel Investment
- Build relationships early and don’t wait for the right time to pitch. You never know when you are getting the right deal.
- Build a solid product and develop as much traction as you get. Don’t go for investors, let them come to you.
3. VC Firms
A Venture Capital Firm is a limited partnership or limited liability company that invests in startup businesses with potential for a high return on investment for their pool of investors. Most VC firms are actively hunting for startups that want to get funds in return for equity. But you can also find them directly through their websites or via startup events. The best way to find VC firms is by attending startup pitching sessions. The best example of this is Shark Tank, where you tend to pitch for investment to sharks in the tank.
Wade Foster of Zapier says:
“The best way to get an investor excited about your business is not to need one in the first place. First, build a solid product, then gather as much traction as possible.”
Tips for Attracting VC Firms
- As mentioned above, make a killer product and VC firms won’t deny your application.
- The only thing VC firms see in your startup is if they can get a return on their investment. They are there to double-in their money. If your product can grant then that, they will be more than happy to invest.
4. Startup Incubators
Startup incubators don’t usually want equity unless they are also providing some kind of funding for startups. In most cases, they simply incubate and mature the startups so that they can apply to the accelerator programs. The duration of incubation can vary from three months to a year. Most startup incubators provide mentorship, office space, and even help startups meet angel investors. But, there are some incubators that like startups to get funds from them in return for a share in the startup. Make sure to check this while applying there.
Angela Ruth of eCash, says:
“You’ll succeed in an accelerator program when you’re open to the advice of the experts running the program. Even if this means pivoting your startup or making significant changes to your business model, it’s important to listen and consider what these experts are telling you. They have the knowledge and experiences that can help ensure your idea becomes a sustainable business.”
Tips for Getting into a Startup Incubator
- Have a workable product. Also, be open to feedback from mentors.
- Build your network with the right people. Get traction for your product.
5. Startup Accelerators
Consider an accelerator as the second level of your startup founder training. Before searching for one, ask yourself:
Do I even need an accelerator?
Maybe your startup is getting traction by itself, and you don’t need to be in an accelerator at all. Accelerators usually require a Minimum Viable Product (MVP). Therefore, build an MVP first. Also, make sure that your product is already in the market. Most accelerators will reject the product if it isn’t in the market. In fact, unlike incubators, the accelerators are only for a fixed term and highly mentorship-driven.
Education in accelerators is mostly seminar-based. You can attend the sessions remotely as well like we offer mentorship sessions at Cloudways Startup program.
Now comes the big question. How can a startup accelerators fund a startup business? There are many accelerators that will allow the startups to get funds from them in return for equity in the business.
Sarah Corrigan, CEO of Leblum, says:
“Investors are looking at thousands of companies. Boil everything down to the most powerful, impactful one or two sentences.”
Tips to Join an Accelerator
- Accelerators will only show an interest in your startup when you have gained traction.
- Most accelerators can help you connect with startup investors. Do ensure to offer a problem-solving product.
6. Pitching Competitions
One way to get funding for your startup is through pitching competitions. Pitching competitions are perfect for those who are looking to get feedback about their startups. Take shark tank, investors also known as sharks, offer funds for equity in the startup. To participate in pitching competitions, start looking for startup events in your city and participate in them. You may have to pay entry fees to enter in the pitching competition.
Meridith Unger, the founder of Nix, says:
“One way of evaluating whether a pitch competition is worth participating in is answering this question: Will the competition help you achieve any of your goals, even if you lose?”
Tips for Entering Pitching Competitions
- The best way to enter a pitching competition is to have an epic startup idea.
- Next, go for a simple yet persuasive pitching deck.
- Most pitching competitions tend to look for unique ideas. Try to add creativity to your startup idea before pitching it in the competitions.
7. Bank Loan
You can also go for bank loans for your startup. Banks usually charge somewhere between 12% to 15% markup on your money. Also, you will have to place a guarantee before you take the money from the banks. This can be your house’s documents or any other asset that belongs to you.
Benjamin Pimentel of Nerd Wallet says:
“Keep in mind that since you don’t have a business started up yet or you’re just starting out, you likely have to borrow money based on your personal finances. For this reason, you’re more likely to qualify for startup financing with a strong personal credit score.”
Tips for Getting Bank Loan for Your Startup:
- You will be eligible for a personal loan since the business is still in its initial stage.
- Banks are quite strict with deadlines of loans, so you need to ensure that you do proper homework before applying for the loan.
8. Family and Friends
Most businesses prefer to take funding from family and friends just as we highlighted in our example at the beginning. Funding from friends and family is called seed funding. You will have to give them a portion or percentage of your startup equity for taking the funds.
Let’s say you start your business with the help of family and friends. You have two options: Take investment from them and provide them equity in your business. Or, take a loan from them and repay them at some later date with an interest that you both mutually set. When you take the investment, your friends and family members will become the owner(s) of the business. However, once the loans are paid, the transaction concludes.
Martin Zwilling, a startup consultant, says:
“Just like professional investors wait for friends and family to go first, friends will wait for you to show “skin in the game.” A startup founder who is not the “lead investor” in time and money, should not expect anyone else to jump in front and lead the way.”
Tips for Getting Startup Funding from Friends and Family
- Make it professional: Document the commitments and outline financial options.
- Demonstrate your startup plan and keep them briefed on a monthly basis.
9. Govt Grants / Programs
There are many government grants in the US for startups. But grants aren’t free. According to USA.gov funding options, you can only get grants for non-profit startups. For-profit startups, you can only get loans in the USA. But if you live outside the USA, you can get government grants.
Tips for Govt Grants
- The best way to apply for govt grants is to have a plan for your business. You need to develop a loan package with the participating lender. So, that if you default, the government can pay to that person.
- Some governments have strict policies about the number of employees you should have. Do remember to read them.
This is one option that we personally love. Bootstrapping is perfect for anyone who is willing to start his or her own business. Bootstrapping means starting your business by your own funds and resources, without relying on any type of external funds. It is a great way to keep complete ownership of your startup and become self-dependent. But bootstrapping has its own cons. You can’t scale business with bootstrapping and if for some reason the business goes bankrupt, your own hard-earned money will vanish as well.
Tips for Bootstrapping
- Start a side-gig to support your business.
- Ask all your co-founders to pool in some money.
- Only start the business when you are completely sure you have funds to keep it alive for the next three years.
Do you like any of these options?
Now that you know about startup funding types and ways, it is time to start developing a business idea that you can turn into reality. While we don’t emphasize that you should start as a bootstrapped business, it is always a good practice to keep the liability to a minimum in the initial years of your business.
Was this article informative? How can we add more value to our articles? Let us know in the comments below.
Arsalan, a Digital Marketer by profession, works as a Startups and Digital Agencies Community Manager at Cloudways. He loves all things entrepreneurial and wakes up every day with the desire to enable the dreams of aspiring entrepreneurs through his work!