Having a startup business is a very exciting venture, but what you may be less excited about is startup funding. It may seem like a long and tricky process, but there are tons of funding options out there. It all depends on your business type, management approach, and, most importantly, your business goals.
Although we’ve seen quite a decline in funding over the past couple of years, especially with the recent mass tech layoffs, budding entrepreneurs shouldn’t lose hope just yet. In fact, in the first month of 2023, over $10.1 billion has been invested in the Fintech sector. Pretty impressive, right?
So, what type of funding options are available? Which is the best one for you? And how much can you expect to receive? We’ll answer all this and more, including:
- What is startup funding?
- What are the different types of startup funding?
- Process of startup funding
- How to get funding for your startup
Let’s dive in, shall we?
What is Startup Funding?
Startup funding is simply the money you receive in order to kickstart and support a new business. There are many different types of funding that happen at different stages of the business journey. You can use these funds to cover expenses in order to provide stability, encourage growth, and ultimately increase revenue.
What are the Different Types of Startup Funding?
There are loads of different funding options available for startups, and you don’t have to stick to just one! Here are some of the most common startup funding types you can look into for your business:
1. Self-funding (Bootstrapping)
Self-funding essentially means that you, the business owner, provide the funding you need for your startup. Usually, this is using personal savings to get the ball rolling. Self-funding is also commonly known as ‘bootstrapping’ – where owners use their personal loans to get the business started, then solely rely on startup revenue to keep it going. Although this means owners can keep 100% control of their business, it also means that they will lose everything if the startup fails.
2. Loans
Loans are sums of money provided by an individual or body who will expect the money back in a certain amount of time and, most likely, with interest. There are tons of loans available to help startups build from the ground up. Here are some of the most common ones:
- Business loans: Usually, banks will have a variety of different loaning options specifically designed for startup businesses, such as low-interest rates and longer repayment terms. However, the approval process is quite strict, so your options may be limited.
- Microlenders: Microlending is a great option for those looking for a small investment (between $5,000-$40,000) from organizations in order to get the business started. They usually help entrepreneurs who may need to get their credit score a little higher before going to the banks for a larger business loan.
- Government loans: Depending on where you’re from, your government should have some business loan initiatives to help encourage the number of new businesses.
- Personal loans: Did you know that around 10% of founders use money loaned by their friends or family to start their businesses? Yes, personal loans are a great way to get the money you need, offering much more flexibility with payback times.
3. Crowdfunding
Crowdfunding is a very popular form of startup funding. It uses online platforms designed to help market your new business and ask for money to help fund it. Those who contribute (usually a smaller amount) will usually own a part of your business, meaning they get to have a say in how the business is operated. Although you lose control over your business, you can spread the risk across multiple people and work as a collective to ensure success.
4. Angel Investors
Angel investors provide a sum of money (tens or hundreds of thousands) into a business in return for equity or part ownership. Think Shark Tank or Dragons Den. Angel investors are usually successful entrepreneurs themselves looking to “seed” businesses and aren’t just focused on business revenue growth.
5. Venture Capital
Venture capitalists will provide startups with a large amount of capital (we’re talking millions), knowing that the startup may not be able to pay it all back. They do, however, expect to see serious growth in the business. After all, they’re very experienced investors who are very selective in who they invest. What’s more, they will play a huge part in how your business operates – any changes you want to make must be run by them.
So, now you know some of the types of funding available to startups, let’s explore the actual process of startup funding.
Process of Startup Funding
Usually, there are 5 key stages of funding for startups: pre-seed, seed, series A, series B, and series C. Businesses may have a series D or more funding stages before they reach Initial Public Offering (IPO). It’s also important to remember that before each funding stage, the business will carry out a business valuation to determine the amount of funding it is likely to receive.
What are the Funding Rounds for Startups?
Typically, businesses need three rounds of funding (Series A, B, and C) before they’re ready for IPO – the summit of the success mountain. But that’s not always the case. Let’s have a quick look at each stage of funding and what it can do.
Pre-seed
This is the earliest funding stage that happens at the very beginning of a business idea. For the most part, this funding will be made up of personal savings and loans from friends and family before the startup has a proper strategy in place.
Seed
Considered the first “official” stage of funding and represents the seed from which a business can grow. It helps to fund the initial steps of a business, such as branding, product and market research, and marketing. Often, these funds are given in return for equity, so think angel investors or crowdfunding. Many companies begin and end with the seed funding stage.
Series A
Series A funding is the stage where a solid business model is essential to get a large amount of funding in order to monetize the product or service and generate a long-term plan for growth. This stage usually is about focussing on development – developing a solid product and developing the customer base. You’ll find that venture capitalists are the main source of funding from here on out.
Series B & C (and more)
Series B & C funding (and more for some companies) is all about leveling up the business after its development stage and focusing on expansion. This could be expanding the workforce, expanding markets (marketing), expanding the product itself (new features), or improving key areas of the business like customer support.
At this stage, startups might keep the venture capitalists from series A, but new venture capitalists may join in at later stages of investing once they’ve seen that the business is steadily growing.
Initial Public Offering (IPO)
This is the final stage in which a company starts transitioning from a private company into a public company by selling shares to the public. Here, the founder and all the investors have the opportunity to earn profit from their initial investments as they gain capital from the market. Essentially, it provides the business the opportunity to get really big… billions big.
How to Get Funding for Your Startup
There are so many opportunities to fund your startup business and turn your initial ideas into a reality. The key? Do your research: establish your business goals, how much money you need, and which types of funding will suit both your financial and management goals. The more preparation you do for the funding stages, the better.
And don’t forget to take inspiration from other companies! At FROGED, we raised €500k in our seed round investment – read more about it here! If you believe in your product and work hard, the funding will follow. Best of luck!