Startup Funding 101: How to Get Funding for a Business

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Startup Funding

Startup funding is a necessary step in the development of a new business. There are a number of ways to fund a business; how to get funding for a startup depends on how fast its founders want it to grow, how much control they want to maintain in their business's growth, and how much risk they want or are able to shoulder.

How to Get Funding for a Business:

1. Bootstrapping / Self-Funding.

Bootstrapping or self-funding for a small business startup is the way most businesses start. You have an idea you believe in, you want to bring that idea to fruition, but it's too early to get money from outside sources. This type of startup funding carries a fair amount of risk - if the business fails, you're left with nothing. If it succeeds, however, the profits are yours to reinvest.

Many business founders accrue credit card debt to cover their business start up capital. This can be a dangerous method, as you're potentially facing steep interest rates if you're not able to raise the money to quickly pay off your cards. That said, credit cards remain a viable and popular method of startup funding - they're often the quickest way to obtain capital, and many businesses are able to grow and pay off the debt prior to racking up interest fees.

Another popular way to bootstrap is to fund your new business with another one. This is common among consultants and agencies. For example, 37 Signals, the creators of Basecamp and BigCommerce, started out by building software for others before launching their own products.

2. Friends / Family.

Many startups, especially in the early stages, rely on seed money provided by friends and family members who believe in your idea and your ability to make it a successful venture. When you're deciding how to get funding for a business idea, friends and family can be a good start. The benefits are that, often, they don't expect an immediate return on their investment, and likely don't charge interest.

The dangers, though, are evident; if you're unable to pay them back you can face strained or severed relationships with important people in your life. That's why it's widely advised that, even though you're dealing with people you trust, you have a written agreement in place that protects your friends and family members' investments and stipulates how they'll be paid back.

3. Startup Grants.

Startup grants can be provided by the government or private sources, and are typically small lump sums that do not need to be paid back. Often this sort of startup funding comes with the stipulation that your business contribute in some way to the public good, so grants are often tied to industries such as health or education. For example, grants are often a good source of funding for nonprofit startups.

In addition, this type of seed funding for startups commonly comes with conditions as to how the money is spent, so you could be giving up a degree of freedom in exchange for the grant. With that in mind, if your business fulfills a public good you should absolutely search for grants, as it's rare to find a source of startup funding you don't have to repay.

4. Crowdfunding.

Crowdfunding has been a popular means for finding investors for small business, and can be wildly successful if you have a product that excites people into investing. Crowdfunding works best for startups that are developing a product, as the different levels of investment typically reward investors with the product or products whose development they're funding.

Crowdfunding is best understood as an initial sale of your product prior to its development. There are legal issues with this sort of startup funding, so be sure you've researched your level of obligation to investors if your business fails.

Top Crowdfunding Websites
Top Crowdfunding Websites:
  • Kickstarter.
  • GoFundMe.
  • RocketHub.
  • Fundly.
  • AngelList.
  • CircleUp.

5. Startup Accelerators.

Startup accelerators represent an excellent opportunity for a fledgling business to get initial startup funding while building your company in an environment designed to take your startup to the next level. Accelerators provide an initial amount of seed money and require that you move your operations under their roof for a time to undergo a period of intensive growth.

Startup accelerators provide intensive mentorship and oversight as you grow your business, generally to a point at which you can deliver a solid demo to potential investors for your next round of startup funding.

6. Angel Investors.

Angel investors are another source of startup funding for which research prior to entering an agreement is key. Angels investors are often individuals, and their investment in your business would likely be a package deal - you get their funding (typically ranging from $25,000.00 to $150,000.00) but that's often accompanied by the investor assuming a leadership or mentor role in your startup.

Angel investors often have a list of conditions that need to be agreed to by all parties prior to providing capital. These conditions, listed on a term sheet, protect the investor in case of failure. As with other forms of startup funding, it pays to do diligent research prior to entering an agreement.

7. Venture Capital.

Appealing to venture capitalists is another common way to obtain startup funding for small business, but generally is not the first step. Venture capitalists, or VCs, typically will want to see that the business has achieved some level of success and has strong future prospects. When you're looking to VCs for your next level of startup funding, it's important to make sure you and they are in agreement as to the future of your company.

VCs often are interested in getting a quick return on their investment, so they'll be looking for rapid growth rather than a slower, possibly more organic and sustainable process. They also assume some degree of control over the startups in which they've invested, so if you're not ideologically aligned before VCs become involved you could find yourself relinquishing control of your business.

8. Private Investors.

Private investors provide another means of obtaining startup funding. One example of potential private investment stems from family offices, which are created when either single or multiple families create an office to manage their money. Family offices may set aside some of their wealth to invest in new ventures as a way to increase their financial holdings.

Other private investors are individuals who are making or have made a great deal of money in their respective fields but want to branch out, grow their wealth while supporting new entrepreneurs. Private investors could include those who've made their money in (for example) real estate, traditional retail, or energy development and who want to diversify their investments by funding exciting new startups.

Top Venture Capital Firms
Top Venture Capital Firms:
  • Sequoia Capital.
  • Andreessen Horowitz.
  • Greylock Partners.
  • Accel.
  • Kleiner Perkins.
  • Spark Capital.

Startup Funding FAQs:

How do I get startup business funding with bad credit?

Bad credit definitely complicates the process of looking for funding to start a business, and can actually be spurred by initially funding your startup with credit cards. If you don't grow as quickly as you'd intended and can't make your credit card payments, your credit rating will suffer. That said, there are still ways to get startup funding for a small business with poor credit.

You can get startup funding from friends and family, and exploring available grants could be a good idea. You could also attempt to crowdsource your startup funding.

What is a seed round of startup funding?

Startups often go through many rounds of funding as they grow and prove themselves sound, and the seed round is one of the earliest stages of funding. Seed funding often occurs before the business has a fixed proof of concept, so sources of investment are limited. Friends and family can provide seed funding, and some angel investors specialize in funding startups in very early stages.

You can also explore crowdfunding as a source of seed funding.

What are the typical startup funding rounds?

  1. Seed funding - The earliest stage of funding, when the business strategy is sound on paper but has yet to be proven in practice. Startup funding at this level is generally either bootstrapped, supplied by friends and family, or provided by an early-stage angel investor.

  2. Series A - This round of startup funding happens when the business has achieved some level of success and is looking to scale. Series A funding typically comes from venture capital firms, family offices, or private investors and can exceed 10 million dollars.

  3. Series B - Series B takes the business past development, so this round of startup funding is intended to expand an already established business, helping it grow to the next level. Series B startup funding ranges in tens of millions of dollars and is typically provided by later stage venture capital firms.

  4. Series C - Not all businesses need this level of startup funding, which is intended to grow an already thriving company. Series C funding may, for example, help the business expand its product offering by buying another company or might help a business expand overseas. Since this is the most financially sound and least risky series of startup funding, there are more investors, including hedge funds and banks.