We have decided to prepare a comprehensive guide to startup funding to help you find your way in the long journey that it is. First, we shall explore the conventional stages of startup funding and various sources of startup capital. We will move on and list the requirements of startup funding and point out some common mistakes for you to avoid. The piece concludes with a few tips on startup funding.
A) Startup Funding Stages
Conventionally, startup funding occurs in stages that are called series or rounds. These funds are necessary to start the company and to take it to the next level. Essentially, funding can be perceived as the bloodline that kindles the flames of innovation through the pass of growth.
The Seed Money
Startup funding begins with seed money provided by the founders, their family and friends, and early partners. These funds are spent on research, consulting, testing, prototyping, branding, and other fundamental tasks that lay the very first bricks for a startup. The idea needs to go through testing and mature to a more structured and methodical form. The resulting viable business plan needs resources to start its early-stage implementation, and the seed money makes this possible.
Series A Funding
Investopedia defines series A funding as follows:
“Series A financing refers to an investment in a privately-held, start-up company after it has shown progress in building its business model and demonstrates the potential to grow and generate revenue.”
Series A funding is the first major startup funding round where a relatively established business offers the ownership of a piece of the company to obtain new financing needed for its growth. The Series A funding is the riskiest among the startup funding rounds, and the investors have substantial control over negotiating the terms of the partnership.
Series B Funding
Investopedia defines series B funding as follows:
“Series B financing is the second round of funding for a business through investment including private equity investors and venture capitalists… The Series B round generally takes place when the company has accomplished certain milestones in developing its business and is past the initial startup stage.”
After a business has proven to be profitable in scale and holds a large user base, it attracts Series B startup funding to grow ib sizes or to develop new products and services. The future market prospect, the growth potential, and the involved risks are the key factors in negotiating the terms of startup funding.
Series C Funding
Scaling and increasing revenue requires new capital. Series C startup funding is the low-risk investment that a successful business attracts for such purposes. Investors are eager to participate in a proven and flourishing business that plans to expand its operations.
Series D Funding and Beyond
Series D startup funding and beyond that are no different than series C. The relative abundance of private equity promotes the attraction of successful companies for private venture capitalists and hedge funds.
In a more thorough piece, we have explored the startup investment rounds by proposing a hypothetical company that goes through the various funding stages. The article is fun and easy to follow and requires no prerequisite knowledge on the matter.
B) How to Get Startup Funding?
Funding is a significant concern for small businesses. In this section, we shall address the various means for startup funding.
You can choose to proceed without external help and bootstrap it. Investopedia defines bootstrapping as follows:
“Bootstrapping is building a company from the ground up with nothing but personal savings, and with luck, the cash coming in from the first sales.”
Bootstrapping is a metaphor for achieving success without external support. That is straight forward enough. Bootstrapping usually entails a certain frugality with spendings, but that is not always the case. The conservative funding stems from the notion that starting as small as you can with the minimum financial commitments will minimize the involved risks.
Dipping into personal savings and selling assets to gather the required startup funding are bootstrapping at work. Working a second job to bootstrap your startup is not uncommon in this scheme. When there are simply no savings and assets to use, the term becomes pretty much literal, and the founder chooses to work for the needed funds.
Friends & Family
There is no shame in asking for help, especially if there is a validated idea involved and a probable success on the horizon. The support from family and friends does not necessarily need to be of the altruistic kind. It can be established in the format of a loan or company stocks. Nonetheless, it is nice to have people around who would give you the benefit of the doubt when the startup is in its early stage, and there is not much evidence to validate the idea.
Angel investors are seasoned professionals with extensive backgrounds in business, management, finance, and more. They say yes to startup funding when no one else believes in them. The drive for their tendency to take prominent risks goes beyond making more money. They seek to impart their wisdom and engage in what they love to do best: to enable the new generation of innovators, and to mentor them to success.
“I invest because I love helping entrepreneurs and watching them learn and succeed. In my opinion, your motives are driven by self-serving factors around ego satisfaction and ‘making a buck’. My motives and values are very different.” – Ron Conway
Make sure you check out our detailed article on the characteristics of angel investors to understand them better. The article tries to answer the question of what drives angel investors to engage in their line of work.
Governments support entrepreneurship to create new jobs and supercharge national growth. An instance of this support is evident in the diverse range of governmental grants dedicated to startup funding.
Various types of startup funding are awarded based on administrative goals. The grants for technology import, export development, small businesses support, and environmental and sustainability grants are among the available options for startups.
Entering your startup into a competition can secure the startup funding you need. These competitions hold several benefits. Firstly, you put the idea to test and gain precious feedback. Moreover, you make new acquaintances and further develop your network. The icing on the cake is the fact that the publicity of winning the competition can be as beneficial as the startup funding you secure for your business.
Pre-tailing is short for pre-retailing and refers to introducing new products way before the official release-date to collect pre-orders in limited quantity. Hitting the market earlier than conventional methods provides the company with extra startup funds that can be put into good use. The added benefit of pre-tailing is the evaluation of demand and getting to know the public mindset.
Venture capitals are privately held funds ready to be invested in reasonably low-risk opportunities. To be considered eligible by a venture capitalist for startup funding, your company must have passed the few first stages of financing. Validate ideas, existing user base, promising markets, and evidence of growth are among the main elements that make a startup appealing for venture capitalists.
“What investors are looking for when they invest in a startup is the possibility that it could become a giant. It may be a small possibility, but it has to be non-zero. They’re not interested in funding companies that will top out at a certain point.” – Paul Graham
People passionate about your product are willing to help you make it a reality. To make the process more rewarding, there usually are some perks involved for pre-orders. These perks can be in the forms of early access, limited editions, or some other exclusive benefit. With crowdfunding, you can collect the startup funding you require to make dreams come true, including your own.
“I think that crowdfunding has become such a powerful tool to tell stories that might not find financing otherwise – like a dark comedy about infidelity, for example!” – Kit Williamson
There are different kinds of loans. Some banks are ready to grant huge sums of loans for promising startups. Being eligible for these types of loans is very similar to the venture capital evaluation process. Despite the venture capitalists, banks usually prefer interest rates instead of stocks.
Microloans and non-for-profit loans are also among startup funding options. Applying for these loans looks a lot more like applying for governmental grants with the obvious difference that the loan is not an award. The startups qualified for receiving these loans are small businesses active in certain sectors or pursuing certain subjects that require support. The main problem with microloans is that they are micro in amounts and could only be suitable for startups looking for modest funding.
Make sure you check our piece on business startup loans.
Accelerators could be considered a combination of venture capitalists and angel investors. They are privately held institutions that provide mentorship and education for startups. With a wast network of contacts, accelerators can provide startup funding by connecting them with investors. Some accelerators have their own funding accounts for investing or granting startups loans.
Hitting the stock market is another option for startup funding. In an initial public offering (IPO) or stock market launch, shares of a company are sold to investors through the stock market. The process of IPO is also known as going public, due to the fact that through it a privately held company is transformed into a public company. After the IPO, the company shares can freely be traded in the market. Going public can bestow substantial startup funding for evolved businesses.
ICO, or initial coin offering, used to be about the launch of a new cryptocurrency, but this is not the only case anymore. A startup funding strategy can involve an ICO in which tokens or coins are sold to raise money. The novel nature of crypto coins attract people who might not consider an IPO interesting enough.
You might want to check our article on 11 methods to get funding for startups. This piece covers some of the most common ways to raise capital and get funding for startups.
C) The Must-Haves for Startup Funding
The success of any of the discussed startup funding strategies relies to an extent on the evidence of validation. Investors require documentation proving the proper validation of the idea they are considering. Depending on the funding stage and strategy, the necessary validating methods vary. You might need a proof of concept to examine the technical plausibility of the idea. Prototyping and MVPs are also accepted validation methods.
If you have not doted the Ts in the validation yet, our piece on business idea validation methods could assist you in the process. We have listed straightforward business idea validation methods that you can quickly implement into your business and design strategy. The list includes proof of concept, prototyping, and MVPs.
Investors would search the web and social media to judge your startup before you have had the chance to utter a single word in your defense. By keeping an updated online presence through the relevant social media you are increasing your chances of receiving proper startup funding. It is suggested to prioritize LinkedIn profile and website over other mediums, nonetheless, the industry and nature of the idea might require different tactics.
Though investors do their own research, they expect you to provide them with the information necessary for them to make a decision. The bundle must include the following information:
- Business Model
- Key financial figures
- Details on the customer base
- Competitors analysis
- Future projections
- Growth opportunities
- Market potentials
- Scalability of operations
- Exit strategy
- Your team
“The recipe for impressing investors:
– Make something worth investing in.
– Understand why it’s worth investing in.
– Explain that clearly.” – Paul Graham
Effective negotiation skills can increase your odds of getting a proper startup funding deal. You will be negotiating administrative rights, share types, and stock options with investors to maximize the gains on your side. Also, some tactics could be used against you in negotiations to minimize your profits.
Furthermore, investors usually regard your personality as an important factor as the idea you are pitching. Having the right skills would convince them that you are a winner.
By deepening your knowledge in the art of negotiation you can increase the likelihood of reiving prosperous funding.
“In Business, you don’t get what you deserve, you get what you negotiate.” – anonymous
D) Startup Funding Mistakes
Having No Written Agreements
In pitching and during the pre-contractual negotiations you provide investors with key information about your business, team members, and operations. It is only natural that during serious negotiations, you eventually get out of your comfort zone and divulge confidential information to prospective investors.
Having no written confidentiality agreements and trusting people to hold up their ends based on good faith is a mistake that could render catastrophic results for your startup funding process. You need protection against the parties who set out to cheat you. Contracts are effective tools for shielding you from these hostile intentions. Without a contract, we would not be able to transparently communicate, bilateral expectations about startup funding. Having no written agreements in place is welcoming the emergence of future misunderstandings and loss of precious resources.
Check out our article on contracts for startups that explores the motivations behind the disregard towards contracts and debunks them by showing how helpful they can be. The piece requires no prior legal knowledge.
Not Ready to Pitch
Pitching to investors is a very delicate process and you should be prepared for difficult questions. Be it choosing the person who is pitching, or preparing the presentation itself, the process entails a certain deliberation and finesse. The presentation should cover the essential facts needed for making a preliminary decision about your project. Choose a passionate presenter with excellent people skills who is familiar with both the managerial and financial aspects of the business. Not being ready to pitch is the one mistake you cannot afford to make.
“During first meetings, most investors are looking for reasons to say „no“.” – Leo Polovets
It might be beneficial to check our piece on 9 deadly mistakes in pitching investors presentation. The piece highlights the most critical mistakes startup founders are prone to and suggest practical solutions for each.
E) Startup Funding Tips
Know Your Business
If you have managed to keep a distance from the business, do not expect investors to trust you with their hard-earned money. You must possess an in-depth knowledge of the industry and the inner workings of your business if you are seriously looking for startup funding. A certain extent of knowledgeability on the technical aspects of the operations is also expected. Investors would ask you difficult questions to evaluate your vigilance and expertise. Knowing your business and the surrounding industry would only communicate trustability and professionalism.
“If you’re a founder, you need to be able to go up to a whiteboard and diagram out how your investors will make money in your startup.” – Steve Blank
Know Your Audience
It is only common sense to study the investors before pitching. Knowing your audience could be interpreted more literally and indicates the need for understanding the personality and preferences. It is also a good idea to take a look at the investor’s portfolios and figure out the values they seek in their investments. Try to tailor your pitch to show them you possess, share, and cherish those values. Furthermore, a familiarity with their prior investments could come to your aid and impress them to your benefit.
Finding the one abundant source of startup funding is not a straightforward process. You would be searching for prospective means of funding and be engaged in lengthy procedures before finding a favored option. Learning of the new opportunities and getting people to trust you depends to a great extent on who you know. Maintaining a large network of connections requires precious time and energy, but it would certainly prove its worth in startup funding. A network can notify you of the existing opportunities, facilitate the process, and put in a much needed good word for you.
“Networking is an investment in your business. It takes time and when done correctly can yield great results for years to come.” – Diane Helbig
Consider Your Exit Strategy
If the startup funding is part of your long-term plan that concludes with an exit, it is not permissible to postpone devising the exit strategy to the final moment. The favourability of certain means of acquiring startup funds shifts when your end goal is to get out as soon as possible with a maximized profit. We strongly advise you to consider your options based on the exit strategy you have in mind and let the processes consolidate.
That said, investors also look for the exit strategy because they are usually planning to liquidate sooner or later. your pitch deck should include the exit strategy and options they might have in various situations.
“As much as you might love running your business, you must have an end-goal in the plan. At the very least, an exit strategy keeps you from turning your business into a glorified job – working from home, but with longer hours.” – Kevin J. Donaldson
Our guide on choosing the best exit strategy for startups helps you decide on the next chapter of the saga that is your startup.
Startup funding is a matter of expertise, research, and deliberation. To make the right choice you need to take into account various factors that affect the outcome. a Deep understanding of the legal, financial, and business aspects of startups is necessary to devise the right strategy. No one person is supposed to tackle this feat alone. Here in ARDOXSO, we are eager to help you with your startup funding process. Let’s talk today.