Funding Start-Ups - From Idea to Fund to Start

Starting a business can be one of the most exciting times in your life, as the ideas and possibilities seem ceaseless. But, at some point, whether it’s during the business plan stage or when you start crunching the numbers as you think about leaving your current job, you realized you’re going to need to find funding.

Finding startup funding is a challenging and complicated road. However, if you know what to expect and know the different types of startup funding available, that road can be a little easier to navigate.

Check out the different stages of a startup and the different types of funding available so you can grow your business.

What Is Startup Funding?

Startup funding is the process of finding people to invest in your new business idea to get it from the idea stage, through growth, and all the way through acquisition. There are usually five stages of this funding, that include using your personal savings, getting money from friends and family, and finding seed investors.

At each of the different stages, your business will need to show more proof of success, the return on investment opportunity for investors, and provide them with equity or some other way to reduce their risk.

Startup Funding Stages

There are many different definitions of a startup and the different stages that a company goes through, as every business has different goals. Some want to be the next tech giant, while others are content with one storefront.

Besides, the specific names of the stages don’t matter, especially because everyone will offer different opinions. But, the most common are:

  1. Idea Stage
  2. Implementation
  3. Seed Round
  4. Series A
  5. Maturity and Acquisition

Seed Round vs. Series A

Seed Round usually consists of 15 or less investors who seed a new company with anywhere between $500,000 and $2 million in exchange for equity or preferred stock options. Series A funding refers to a smaller number of angel investors in exchange for equity and that they’ll be the first group of investors to receive preferred shares.

9 Types of Startup Funding

There are nine types of startup funding, each with different pros and cons. And, at each stage, you trade something in return for someone or some company taking on the risk of trying to fund your idea, such as equity in your company or interest on a loan.

However, as your business goes through the different stages of a startup, you’ll face different challenges and require more infusions of cash to continue growing and meeting demand.

#1: Bootstrapping (or Self-Funding)

Contribution: $15,000 (Median)

Who Takes the Risk

This may seem like the most obvious, but it’s also the closest to home. Only you and your co-founders, if you have any, are taking on any risk. As a result, this could be stressful, depending on the amount of savings and the size of your family.

During this time you should be writing your business plan, defining your business and the value of your idea, performing market research, and finding your target audience.

What You Trade

At this point, you’re not trading anything tangible, but you are trading your time, which is your most valuable asset. This could be time spent at your current job, on a side hustle, or with your family.

As you complete your business plan, you should get a sense of how much money you need to start your business. The point of all this research and analysis is keep you as levelheaded as possible and to think about your idea as a business.

#2: Friends and Family

Contribution: $23,000 (Average)

Who Takes the Risk

As you grow and need more capital than just your own savings, you expand the risk to your friends and family if they become investors. This may feel strange at first, but this is a common approach.

For instance, Jeff Bezos received the initial startup capital, which amounted to a few hundred thousand dollars, from his parents. He even warned them in advance that there was a 70% that they would lose their whole investment.

Plus, it’ a good point to test your business, because if your friends and family won’t invest, why should anyone else?

What You Trade

The benefit for the investor is that they normally get a higher percentage at a lower price of the company because they’re investing earlier on.

#3: Small Business Loans

Contribution: $337,730 (2012)

Who Takes the Risk

Small business loans are a challenge because both you and the bank take on risk. The bank is risking that you’ll pay back the loan plan interest. You’re risking that you’ll grow enough to make payments every month.

What You Trade

Small business loans offer a chance to get money in a short amount of time, and for some, the monthly payments can actually be pretty low.

However, there are a couple problems with relying on loans or even putting a lot of money on business credit cards. First and foremost, the money has to be repaid and missing even one payment can seriously damage your loan or increase the interest rate. Which means you need to increase revenue from the first month.

In addition, you need a good credit rating in order to get a loan and to prove to the bank why your idea is sound and why you’re the person to run the business.

#4: Incubators

Contribution: $0 (Benefits are intangible)

Who Takes the Risk

Incubators are mentoring programs that offer a collaborative environment that focus on helping your company become successful at the right pace, and some can last longer than a year and a half.

Some of the benefits of incubators, and how they assume risk, include:

  • Consulting
  • Business school atmosphere
  • Office space
  • Legal counseling
  • Money

Your risk comes from preparing a pitch to incubator boards, who may only accept pitches from entrepreneurs with whom they have a relationship. Preparing these pitches and developing the network could take time you could spend on growing your business. However, many businesses have achieved success through incubators.

What You Trade

Incubators usually do not offer any capital and are funded by universities or economic development organizations. But they do invest time and resources at an early stage of the company and may prepare you for accelerator programs.

In exchange for the resources and environment, some incubators look for about 20% equity in your company, though the exact number depends on a number of factors.

#5: Accelerator Programs

Contribution: $20,000

Who Takes the Risk

Startup accelerators, like incubators, offer a collaborative environment, but they are for a specific amount of time, usually between 30 to 90 days. This is a way to reduce the risk for the accelerator programs in return for the initial investment and mentoring.

The goal of these programs is to get you to a point where you’re ready to raise larger amounts of capital. This includes growing the size and value of the company as fast as possible to prepare for an initial round of funding.

What You Trade

Usually, accelerator programs are the first outside investors in your company and look for between 3 and 8% of equity.

#6: Grants

Contribution: $500 - $1,000,000

Who Takes the Risk

Small business grants are the closest you can find to free money, as you don’t give up any equity in your company and you don’t have to repay the money.

Of course, you’ll have to spend time researching various opportunities and submitting proposals, but the payoff could be an infusion of cash without having to trade equity or take out a loan.

Check with your local Chamber of Commerce and the Small Business Administration to find grants that you qualify for.

What You Trade

When starting a business, time is your most valuable commodity and you could be trading plenty of it researching and applying for grants. Plus, many businesses have grant writers who are experts in your field and they can cost money, besides the time you spend finding and interviewing them.

#7: Crowdfunding

Contribution: $10,000 (Average crowdfunding campaign)

Who Takes the Risk

Crowdfunding is the process of raising money from the public, usually through small amounts of capital from a large number of people, typically through social media and crowdfunding sites. Businesses, startups, artists, and nonprofits all can use crowdfunding as a way to fund their goals.

Plus, none of the investors that contribute through crowdfunding campaigns gain any equity in the company, so you don’t lose any control, which means you and your investors are the only ones taking the risk, depending at what stage you crowdfund.

What You Trade

As you’re not giving up any equity, you’re only taking time to build the campaign, which usually includes creating videos, sharing updates on social media, and creating a prototype.

Besides a great way to collect some startup funding, this is also a chance to test your product or idea. Plus, generating buzz through crowdfunding sites is way to prove to future investors that there is a market for your idea.

#8: Angel Investors

Contribution: $25,000 - $100,000

Who Takes the Risk

At this stage, you’re spreading the risk to move people, as you usually look for between five and 15 angel investors. They are taking on the risk that your business will continue to grow and that they’ll earn their money back, plus that they’re equity will become more valuable.

Normally, this is beyond the scope of your friends and family, though if it’s not, they could qualify as an angel investor.

As a rule, accredited investors have a net asset value of more than $1 million or their annual income for the previous two years was $200,000 or the combined family income is $300,000.

What You Trade

At this point, you’re also trading equity in your company. It’s not unusual for a third of your company to be given to all of the angel investors combined, with individual amounts varying based on the amount they contribute.

The good thing about angel investors is that they’re actively seeking businesses to invest in and understand the associated risks and usually have a wide network and invaluable business experience. However, you should understand that angels normally get a sizeable share of the company, which means they become part of the team and you’re no longer completely in control.

#9: Venture Capitalist

Contribution: $6,000,000 (Depending on the stage and investment round)

Who Takes the Risk

These investors usually contribute more money, and, as a result, are looking for a greater slice of the pie. Not only that, they also usually charge a 2% management fee, which lowers the risk that venture capitalists take on when investing in a new company. However, the exact fee varies.

Because most companies that venture capitalists invest in end up failing, they are always trying to reduce their risk, which is why they normally like to invest in companies with another venture capitalist. In addition to reducing risk, it also shows that other investors believe in the company as well.

What You Trade

At this point, you’re trading sizeable percentages of equity in your company for larger investments to propel your company for further sustained growth.

For instance, many venture capitalists typically insist on owning at least 20% of any company that they invest in. And, usually they feel more comfortable with a co-investor, who also wants at least 20%.

What Is an MVP?

A minimum viable product (MVP) is the development for a startup in which a new product or website is developed with sufficient features to satisfy early adopters. The final, complete set of features is only designed and developed after considering feedback from the initial users.

How to Get Funding for Your Startup

As you can see from the list above, there are plenty of ways for you to get startup capital for your business. The trick is to understand:

  • The pros and cons of each
  • What you’re giving up to receive funding
  • How much money you need
  • What you’ll do with the money to return the investment

Key Things You Need for Startup Funding

More importantly, at every stage of funding, you’ll need to prove past success of your company and a specific plan to show continued and sustained growth. Some of the key aspects you’ll need are:

  • Business Plan
  • MVP
  • Team
  • Prototype
  • Proven success (or detailed plan of success for new companies)

After all, investors aren’t just investing in your business, they’re investing in you and your team. You’ll need proof of success and how you achieved it at each of the different stages of funding your startup to prove your business idea, and to prove to investors why they should invest their money to help you grow.

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