Not one or two startups had to close their doors because of a lack of funding. Finding the right investors is not easy because the competition is so big. Thousands of entrepreneurs have great ideas, but not all can get the funds they need to continue their work and take their business to the next level. Startups have proven their value, and there are cases where they turn into unicorns with lightning speed. Funding, however, can be one of the most exciting stages for a new company. It makes you think about where you are heading and how you can get there in the fastest and most efficient way without the need to compromise with quality. Also, researching funding options and partners can make you reach further than you ever thought before. To be prepared to take this step, you must understand what funding is and how it works.
What is startup funding?
In a nutshell, startup funding is the act of getting the capital you need to continue growing your business. There are many ways to get the money you need, like loans, funding rounds, etc. Which one will be the best for you depends on your company and at what stage it is right now. The most common one is probably the equity funding method, where investors will give you the capital you need to own a part of your company and get dividends once there is some profit. Depending on the investor, they might want to be more or less involved in the company’s management. If your startup is up-and-coming, you might get the attention of many potential investors, and then it will be up to you to choose the right one that will be involved as much as you want and in the areas, you might need help.
Some startups prefer that the investors are uninvolved in their day-to-day work and don’t have management rights over the company. Some investors might be willing to fund you and be a silent partner, but it is a rare case. Your other option would be to get a business loan. However, this might be impossible for some startups because it might be almost impossible to be approved. Keep in mind that with loans, you need to start paying them immediately. If you cannot prove profitability, your loan application might be denied. It is a bit riskier if you are not sure you will have a stable cash flow guaranteeing your ability to pay the monthly installments.
The third option will be bootstrapping or self-funding if you and your family and friends have the capital to do it. Bootstrapping would mean that your close ones and acquaintances who believe in your initiative will back you up. They will give you the finances you need to start your business, give them the money back when you can, and maybe pay them something on top of gratitude. However, in most cases, those people won’t get parts of your company and won’t participate in the management. There is one big risk — if your business fails, your family and friends will lose their money.
Based on your business model and the stage you are in, you need to choose the best funding model that suits you. Now let’s talk about how funding works.
How does startup funding work?
Usually, a startup will go through a couple of funding rounds. You will need finance to back this up whenever you want to develop a new feature, grow your company, and become even more competitive. And this is the moment you start looking for funding from outside. Many investors are ready to back up startups they believe in. But of course, they would want something in return and this in most cases will be part of your company as we mentioned and with them part of the profits so they can make a return on their investment. So whether it is a private investor or equity fund, venture capitalists, angel investors, etc., they will want to become partial owners of your business.
A startup will, in most cases, start with a seeding round and then proceed with Series A, B, C, and so on of funding rounds. But one step should be taken before that, and this is the startup valuation. The valuation will consider everything about your startup and the market, so investors will know how high the risk of investing in your company is. Once you present the valuation to potential funding partners, you can start with the actual funding rounds. How long each of them will depend on your business and your offering. There are sectors with high interests, and they can get funding in a matter of weeks and even more money than they were expecting. In other areas, finding the right investors can take a couple of months, but you should not feel discouraged if it takes you a bit longer.
Tips for landing funding
Landing funding sometimes can be like a piece of cake, but in others, it might take some more effort from your side. This is why we have prepared a couple of tips for you:
- Calculate your funding needs — Knowing exactly how much money you need is better. You should explain it very well in your business plan and be able to justify why you need that money no matter if, to you, it seems quite logical. Whether the sum is small or huge, you should be prepared to answer all possible questions. And don’t go too high in your asks in the beginning because this also can put investors off.
- Have a business plan — We mentioned that you need a business plan that includes your funding needs. The business plan should consist of not only this but everything else that an investor would need to know about your business at its current level and how you plan to develop it.
- Check all suitable funding options — There are different funding options of various sizes, and you should be prepared for which ones are the best for you. If you prefer not to have anyone involved in the management of your company, then you can have a deeper look into loans. If you don’t mind someone helping you from within, you can research venture capitalists, angel investors, etc., and know which option can support you with how much investment and what they are most interested in.
- Make a repayment plan — This is something your investors will appreciate because it shows that you have a plan to give the money you received as soon as possible. Investors know that this is just business but showing some gratitude and planning is always a good idea. You can present rough estimations of when you can start paying them back and how long it will take to repay them completely.