Building a business is thankless, difficult work. Sometimes, you just wish you had a little breathing room.
Usually, business owners have an idea of how they’d like to scale and grow their business. The only problem? Capital. There’s just not enough money to drive the growth they’d like to see.
It’s around this time that some businesses start to consider startup funding. Access to more capital means implementing better growth tools, expanding the team, and generally making the journey to profitability much smoother.
All of this sounds great, but it brings up important questions: How on earth are you supposed to get startup funding? What kind of funding should you consider? Does your business need startup funding?
I’m going to demystify the topic of startup funding and help you understand your options when it comes to raising money for your business.
How Do I Get Startup Funding for My Business?
Right off the bat, we need to establish a few ground rules.
It’s important that you understand what “raising money” actually does to your business. You’re essentially doing one of two things.
When it comes to startup funding, you’re either trading money for equity or trading it for debt.
When the average business owner pictures startup funding, they’re usually thinking about equity. To put it simply, equity is when you trade a percentage of your business in exchange for capital.
That equity is based on the perceived value of your company, which means it’s vital that you have some established value before you walk into an investor meeting. Ideas are great, but trust me when I say that these venture capitalists and angel investors have heard it all before. You’re going to need solid numbers and data if you want a chance at their money.
Of course, if you don’t have the data to secure startup funding from an investor, you could always rely on debt.
I’m just going to come out and say it: Going into debt as a startup is almost always the wrong approach. Whether it’s bank loans or credit cards, those terrible interest rates will eat your business alive. As “Shark Tank” investor Mark Cuban himself says,
If you’re starting a business and you take out a loan, you’re a moron. There are so many uncertainties involved with starting a business yet the one certainty that you’ll have to have is paying back your loan.
All of this is vital to understand because it highlights the reality of startup funding. What you’re really doing is giving pieces of your business away in exchange for some cash. Think of it like you’re borrowing from your future self.
I bring this up because I’ve seen plenty of startups ask if they can raise money. Do you know what I don’t see? Startups asking if they even need to raise money.
Don’t get me wrong, if your startup ends up being as big as Facebook or Slack, you can probably afford to trade some equity to increase cash. But trading away pieces of your profits just to keep your business afloat won’t be the right path for everyone.
Before you continue down this path, you and your team need to sit down and establish your needs, as well as the potential risks and rewards associated with each form of startup funding.
Remember, every single startup is going to have different needs, different risk tolerances, and different definitions of success. Consider each of these startup funding options carefully and make informed decisions for your business. Your future self will thank you.
How Much Startup Funding Do I Need?
Before you start asking for investor money, it’s essential that you establish your startup costs and how much you’ll need to continue building your business.
Assuming your business already exists, you should have a clear idea of your current expenses. As your startup continues to grow, it’s vital that you consider how much money your expansion is going to cost.
How much will you need for your new offices? How many employees will you be hiring, and what will their salaries be? What’s your projected ad spend? These are just some of the questions that you’ll need to have answers before you receive a dime from investors.
If you’re struggling, the SBA has a great startup costs calculator you can use to simplify this process.
When we think of startup funding, we tend to think of massive sums of money with startups raising millions of dollars. A study by Babson College found that the average business was able to start up with just $15,000 of funding.
When it comes to startup funding, it’s not about raising as much money as humanly possible. The goal is to raise the money you need without giving away too much of your startup in the process. Here are some options to do that, starting with the most common when we think of “startup funding.”
Check Out Startup Series Funding
The concept of Series funding can get rather complex, so for now, we’re going to address the basics.
This type of funding is typically thought of in terms of rounds. Series A round, Series B round, and so on.
But before any of that, there are a few other rounds that take place. Startups don’t usually just go straight into Series A, although it is possible.
First, there’s the pre-seed funding. This is friends, family, and other people in your support network. Seed stage funding is next, and this is typically where equity funding official starts. Venture capitalists and angel investors are usually found here, and these rounds will raise anywhere from $10,000 to $2 million.
Next, we have Series A funding. As the potential for greater funding increases, so does the level of scrutiny your business gets put under. Monetization is key here. These rounds typically run from $2 million to $15 million.
The rounds can continue from here, with each letter representing both an expectation of growth, as well as a potential increase in access to capital for your business.
Find Investors for Your Startup
Let’s assume that you didn’t make it to “Shark Tank.” How are you supposed to find investors?
There are typically five ways to find investors. The first, which I’ve already covered, is friends and family.
From there, you can look at loans and grants, but those aren’t realistic for every business. The more common option explored by startups is private investors. If you’re looking for angel investors, the Angel Capital Association is worth checking out.
While angel investors are typically individuals with a high net worth looking to invest, venture capitalists are using investor money to fund your business. It seems like a slight difference, but the approach to funding is actually very different.
Angel investors are interested in working with you to maximize the potential of the business. Venture capitalists are usually looking to fund a business that’s already well-established. Choosing the right investor can and will have a massive impact on the future development of your business.
Bootstrap Your Own Startup
Funding your startup through personal savings is far from glamorous, but it’s still your smartest move.
Why? The less of your company you have to give away, the better. But there’s something else at work when you’re bootstrapping your startup.
You’re creating tangible data that’s going to make raising money significantly easier.
Think about it. Most startups walk into investor meetings with a poorly designed MVP, a flimsy proof of concept, and a massive ask. More importantly, none of them address the elephant in the room.
Investors don’t care about good ideas. Investors want something tangible. They’re not looking to gamble away their money. They want the best possible chance of maximizing their returns.
Now, imagine you walk in with a fully formed business. Suddenly, the conversations are different. You don’t have an underwhelming MVP, you have a product that converts.
You don’t have a weak proof of concept, you’ve already established real product/market fit. As far as funding goes, you’re able to bring more to the table because your business is already off the ground.
When you bootstrap successfully, you’re able to present a much more compelling investment opportunity, while putting yourself in a strong negotiating position. This means better deals for you and peace of mind for investors, who know that your business is likely to be a winner.
Take the time to bootstrap your business, for as long as you can. It might not be as exciting as getting millions of dollars, but a bootstrapped business is 100% yours, and that’s pretty exciting to me.
Look for Business Startup Loans
While I don’t think that business startup loans are the right option for most founders, there is a right way to handle them.
Let’s start with what you need to know. A startup loan can be as low as $500 or as high as $750,000. The higher your loan, the more heavily your business plan will be scrutinized.
As a bare minimum, you should expect to explain both how and when you plan to make money. From there, you’ll likely be asked to explain why you’re better than your competition, how much potential your market has, etc. With some lenders, you’ll be required to present collateral, in the event that you can no longer pay back the loan.
Repayment of these loans can range anywhere from one to five years. You can expect to pay between 8% and 17%, even if your credit is solid. It’s worth mentioning that while you’re repaying this loan, it will be significantly harder for your business to secure another type of funding. After all, investors don’t want to be involved with a business that’s still paying their way out of debt.
Really, there’s only one reason you’d ever take out a startup loan. In a perfect world, you’re doing this because your business is already successful, you don’t want to give up equity, and you have a clear repayment plan that doesn’t create an excessive burden on your business.
Get Startup Funding From Family and Friends
This one is a bit tricky. On the surface, it sounds fantastic. It has the perks of a startup loan, without any of the drawbacks. Your friends and family can offer you capital for a low, or sometimes nonexistent interest rate. They’re also significantly more flexible when it comes to equity distribution, so what’s the problem?
Well, it’s family. Your support network might be rooting for you, but taking their money means they’re suddenly involved in the process. Suddenly, your decisions aren’t your own. Even when you own the majority of the company, family members might have their own ideas about how things should be done.
While there are plenty of entrepreneurs that raise money from friends and family, it’s a delicate decision to make. There are plenty of personal relationships that never recover after going into business together.
Still, it’s definitely an option to consider. Your wealthy aunt may not invite you to Thanksgiving this year if you lost all her money, but at least she won’t kick you out of your house.
Listen, if you have a rich uncle that was going to spend $25,000 on an addition to his house this year anyway, go ahead and see if he’s open to funding your business. Just understand that you’re not just dealing with your uncle anymore. You’re dealing with his money, too.
Raise Startup Money Through Crowdfunding
The average startup tends to ignore the possibility of crowdfunding for a few reasons.
Over the years, crowdfunding has developed a reputation as something of an incomplete funding strategy based more on wishful thinking than sound business sense.
Horror stories of products like the OUYA still haunt startup teams who are considering raising capital this way.
The second and more common reason is that they simply don’t know how to get started. It feels a bit more like putting on a performance than it does a round of investing.
The reality is that getting started is actually pretty straightforward. Start with a financial goal in mind. A common concept implemented within crowdfunding platforms is the concept of a stretch goal. The more money you raise, the more you’re able to deliver at launch.
Of course, you aren’t just getting money for free. Your new army of investors expects something valuable in exchange for their money. But with a bit of creativity and a strong understanding of what you can afford to offer financially, you should be able to make this work.
Crowdfunding is a highly competitive space, so don’t expect this to be easy. But if you’re willing to work for it, crowdfunding might just be the right approach for your business.
Apply for Small Business Grants
For whatever reason, small business grants aren’t looked into by most startup founders I talk to. I just figured they’d never heard of the concept, but now I’m starting to think it’s because they don’t think they’d qualify.
For example, the U.S. government is offering low-interest loans and even grants to small business leaders. Economically, the government supporting entrepreneurs makes financial sense. After all, competing internationally is much easier when your economy is boosted by five or six massively successful companies.
What does that mean for you? If you’re building a new tech or science business, you actually have a strong chance of securing some of that free government money. Plus, you typically qualify for state and federal grants.
Money being tight as an entrepreneur is nothing new. It’s natural to consider the option of startup funding. What’s important for you to keep in mind is that finding the right funding can make or break your business.
Take the time to consider your options carefully. If you can afford to bootstrap, do it for as long as you can. No matter what, protect yourself and your business so that it can develop properly over time.
Which kind of funding seems most interesting to you? Let me know in the comments below!