How to Get Funding for Your Startup
Even the most brilliant business ideas require a crucial element to start and grow into a successful business: sufficient funding. While some entrepreneurs finance their venture through personal funds and the support of friends and family, as 77% of small businesses do, historically, few companies grow with little to no outside assistance. Scaling a business does not come easy. It requires significant dedication, discipline, and resources even to have a fighting chance. Because of this reality, approximately 70% of startups raise capital by enlisting support from external funding or an investor. Before you start your journey to get funding for your startup, we recommend first consulting the following statistics:
1. Only 40% of startups are profitable. The others will either break even (30%) or continue losing money (30%). (source)
2. The time of the year you pitch, the thoroughness of your data, and the value of your pitch deck are a few of the strongest factors affecting the amount of funding your business could receive. (source)
3. The average small business requires about $10,000 of startup capital. (source)
4. 10% of startups fail within the first year. (source)
5. The second largest reason startups fail (29% of cases) is running out of funding and personal money. (source)
6. The most popular financing method for startup costs in 2018 was personal funds at 77%. (source)
7. Recent research has shown that the most expensive small businesses and startups to launch are restaurants, medical offices, and manufacturing companies, needing more than $100,000 to get off the ground. (source)
8. As of 2019, the ratio of male entrepreneurs to females was 10:7. (source)
9. The average time between funding rounds, from Seed to Series A, is 22 months. Series A to B is 24 months, and Series B to C is 27 months. (source)
It is crucial to note these startup statistics to set realistic expectations of the costs of entrepreneurship. And if you know what hurdles you may encounter, you can create a reasonable timeline for obtaining that necessary funding for your startup.
When Should You Start Searching for Funding?
When trying to get funding for your startup, you must keep in mind that each startup’s path is different, as is their timeline for funding. Industry experts suggest that you don’t necessarily need to pursue funding until you are imminently ready to use the money. You may think it better to begin with a large chunk of capital and build from there, but 1 in 3 founders begin their small business with less than $5,000.
Experts further suggest that you should only accept just enough investment capital to help your business shift to the next funding stage. This means taking the time to consider where your business is in its development and how much money you immediately need, then strategically mapping out your next steps.
Timing can also impact the success of your fund-seeking efforts. If you search for funding too soon, you may get rejected by some potential investors. In other cases, you may even garner the undesirable reputation of being too impetuous as a business owner. On the opposite end, if you wait too long to search for external funding, your desired investors may have already invested elsewhere, or your business may tip into a decline that will make it hard to sell investors on your idea.
Getting external funding for your startup can be beneficial because it enables you to preserve your internal resources and finance your current or future growth projects. And most helpful of all, if your investors have previously invested in other small businesses, they can potentially offer advice and expertise to help you avoid common pitfalls.
What Do Investors Look For?
It can pay to understand what investors look for in their investment opportunities. Your story and passion alone may inspire some investors to take a chance and invest in your startup. But others require much more than passion before pledging their support. Understanding the criteria necessary at each funding stage will help inform your pitch and better engage with investors.
Here are a few criteria most investors look at to determine whether investing in your startup is a wise business decision:
A sound business plan: It is a savvy decision to create a business plan. This document details how much money you need, where you plan to allocate it, and an estimation of how long it will take for you to earn it back. Investors first ask for a summary and pitch, and if your startup shows promise, they will request your business plan. So, it is wise to have one crafted already.
A prototype and traction: Investors want tangible or measurable proof that your product or service is as marketed. They also need evidence of market interest. Having one or two early adopters to your product or service isn’t enough to grab the attention (or capital) of most investors, so providing a physical prototype or extensive market data can help your case.
A significant market size: Most investors search for startups with a considerable reach, so your product must reach a regional market, at least. A widespread net increases your overall margins and profits, which, in turn, attract investors.
An exit strategy: Investors have two main questions: “How much am I investing and when?” and “How much will I get back, and when will I get it back?” Ultimately, they want to ensure a solid return on their investment, and having an exit strategy in place can help. Not only does having an exact timeframe for your partnership encourage investors to trust you, but it also sets reasonable expectations and increases their likelihood of patience through the process. Prepare for any questions investors may throw at you with this checklist by Funderbeam before trying to get funding for your startup.
An X factor: Your product must compel investors to finance your fledgling business. It must have that “it” factor, i.e., something that differentiates your product from your competitors. Suppose it is something that is already established, like a social media platform. What differentiator would allow you to flourish despite competitors like Facebook and Instagram? In such a case, you must highlight why your product is different or an improvement and how it can serve the market in a distinctly different manner.
What Are Startup Funding Rounds?
Before you can begin to navigate through the funding rounds, you first must have an analyst conduct a valuation of your burgeoning business. They will examine essential metrics like market size, your business’ maturity level, risk, and other factors to determine readiness and where you should start in the five funding stages.
Funding rounds for your startup are available depending on the industry and the level of interest among potential investors. Each funding round allows investors to invest in your growing company in exchange for equity, or partial ownership of your company. The rounds break down as such:
Also known as bootstrapping, this stage is the earliest round in funding for a fledgling business. Because it occurs so early in a business development, some investors don’t even include it in the funding stages. At this point, most founders use existing resources such as friends, family, and supporters to obtain the funding they need to get their business off the ground and operational.
The pre-seeding stage is where you begin converting your million-dollar idea into a physical product or service. It is also the time to develop your marketing and sales plan for launch. Your business will not yet be ready for an investor. In fact, you, the founder, might be the only investor until you reach the next stage: seeding.
If your growing business is a tree, then gaining early financial support is the nourishment needed to help your business grow. At this stage, your startup is financing its first steps, trying to gain its footing — in other words, putting down roots. Thankfully, this is also when your business becomes eligible for assistance from many investors, including founders, friends and family, incubators, crowdfunding, and micro venture capitalist companies.
Among the most common investors on this list is an angel investor. These individuals are willing to take on riskier ventures, such as startups that have yet to show a proven track record. These are excellent investors to target if you believe in the strength of your idea and your ability to sell it without much-supporting data.
The seed funding stage is becoming increasingly crucial, as according to TechCrunch, companies often raise nearly three rounds before they even reach Series A funding. On average, having an investor onboard can help generate anywhere between $10,000 and $2 million for your company.
Of course, adequate funding isn’t the only thing you need to succeed. You also require sufficient revenue and a successful business strategy. As the first official equity funding stage, the seed funding stage is where you will receive help to determine your final product(s), your targeted demographic, and your launch strategy.
Series A Funding
After your business has developed a track record — such as an established user base, consistent revenue figures, issued shares (typically to company founders and employees), and other crucial KPIs — you have officially moved into series A funding. Unfortunately, your startup is still considered high risk at this stage, and you’ll have much to prove before investors are entirely comfortable sowing money into your operation.
Angel investors are still an ideal source of interest at this stage, as are some venture capitalists. But the latter will only be willing to invest if you have now established a track record that shows enough promise to certify a reduced risk of investment.
Series B Funding
When you reach series B funding, you will have a higher valuation than the previous stage. This valuation is based on your startup’s performance compared to others in your industry, your assets, and predicted revenue.
At this stage, you should be able to present signs of growth, including increased revenue, an expanding customer base, and successful products or services. As your business grows, you gain authority and present less of a financial risk. In turn, the cost for private equity investors and VCs rises.
Series C Funding
This final funding stage is required when your company is ready to experience rapid growth. At this point, you have evolved to be a proven success in your respective market and are now interested in other exploring ventures that require additional funding. This may include acquiring competitors, scaling up your operation, or developing new products and services. This funding amount typically reaches $10 million-plus.
What Are Your Funding Options?
Although investors want businesses to succeed, they also want to protect their investment and ensure they see a return. When trying to get funding for your startup, the first thing you should do is consider your company’s needs and what your company has to offer investors. Not only does it influence where you look for funding, but it also impacts how.
Doing this also helps you determine which funding options are best for you and which ones you should explore first. Even apart from investors, there are many ways to get funding for your startup, including small business credit cards, government grants, P2P loans, and microloans.
That said, some forms of funding tend to be more popular than others. Here are a few of the most common options.
These high-net-worth individuals go by many names, including private investors and seed investors. Their goal is to provide financial backing for small startups and entrepreneurs. Unlike other investors, angel investors are often willing to support companies during the challenging early stages. They take this as a calculated risk, knowing that most startups have a 20% chance of failing within their first two years. Angel investors vie for such risky opportunities because they tend to have a higher ROI than more traditional investment opportunities. In essence, greater risk leads to greater reward.
Startups who enlist the resources of an angel investor usually do so because they have limited funding options in the early stages of their business, and angel investors often offer more favorable terms than other lenders. In most cases, the financial support from an angel investor is a one-time investment, but in some cases, it can be an ongoing stream.
Throughout the past five to ten years, crowdfunding has risen in popularity as the trendiest new way for entrepreneurs to gain investors and spread brand awareness. Hosted through sites like Kickstarter, IndieGoGo, and GoFundMe, crowdfunding uses small amounts of capital from many sources to help startups finance their up-and-coming business.
Through crowdfunding, private individuals can choose from hundreds of projects and invest as little as $10 in support. It also touts similar restrictions to hedge fund investing, designed to protect less-wealthy investors from investing too much and putting themselves at risk.
The most obvious advantage of utilizing crowdfunding is that you can source from a more extensive and diverse group of investors. Think bootstrapping, but on steroids and with strangers. There is also a word-of-mouth benefit to crowdfunding. Depending on their donation tier, investors can receive product samples or gain first access to the service, helping build buzz before your business even goes live.
However, the cons of using such a funding method can include a damaged reputation for “resorting” to crowdfunding and not using more traditional methods. (Though this depends heavily on your industry and how much “authority” your business needs to show.) With crowdfunding, you are also taking the risk that if you don’t meet your fundraising goal, those funds go back to the investors, and you’re back at square one.
Small Business Administration
Also known as SBA loans, this funding option virtually guarantees loans to small businesses and startups. Though SBAs don’t invest directly, they have the power to guarantee loans for commercial lenders. So potential lenders — who otherwise wouldn’t take the risky investment — can make loans safely, providing you with the funding you need. However, before certified lenders (i.e., local banks) can administer these funds, founders must front at minimum one-third of the capital to proceed.
Like angel investors, venture capitalists (VCs) are private equity investors, meaning they will invest in your startup in exchange for an equity stake. However, unlike angel investors, VCs do not fund businesses from the fledgling stages. Instead, they target companies with high growth potential who are likely to achieve significant business value in a short amount of time.
Venture capitalists typically gather funds and add them to a pool, ready for investment. Once they find a worthy and promising business to support, they release the funds for stock in your company. These funds are an excellent tool for growing businesses, and depending on your agreement, can be used in a variety of ways — whether your goal is to build out the foundations of your business, pursue rapid growth, or expand into new service territories.
At first blush, it can be confusing to know when to get funding for your startup and what options you have available at each stage. But with this foundational knowledge now in your pocket, you can dig into the options that best suit your business and feel empowered to leap when the time is right.
Of course, funding isn’t the only tool you’ll need to build a successful business. To foster the growth of your startup, you also need to build brand awareness with strategic marketing. Not sure where to begin? Joseph Studios is eager to help. As an intelligence-based digital marketing agency, we can help you find your ideal audience, increase visibility, establish you as an authority in your industry, and much more.
To learn more about our services, contact our team today. We’re ready to provide tailored marketing efforts and industry-best recommendations to guide your branding across digital channels and beyond.