What is Startup Funding?
Startup funding is the money (capital) needed to either launch a new business (idea to MVP) or to scale an existing business for growth.
Why do Startups Raise Funding?
Broadly, funding is required by startups as it allows them to:
Develop/Bring a Product/Service to Market: Startups require funding to research, develop and launch their product or service. This can include costs such as product development, prototyping, testing, and manufacturing.
Hire/Build a Team: Startups require funding to hire employees, such as engineers, marketers, and salespeople, to help run the business and build the product or service.
Market/Promote the Business: Startups require funding to market and promote their product or service, including costs associated with advertising, public relations, and creating a website.
Scale the Business: Startups require funding to scale the business, including costs associated with increasing production, expanding sales and marketing efforts, or building new infrastructure.
Meet Regulatory/Compliance Requirements: Startups may need funding to meet regulatory and compliance requirements such as obtaining permits, certifications, and licenses.
Fund Ongoing Operations: Startups may also need funding to cover ongoing expenses such as rent, utilities, and other operational costs while they work to generate revenue.
Overcome Cash Flow Gaps: Startups may need funding to overcome cash flow gaps that may arise while they are waiting to be paid by customers or while they are scaling the business.
Support Growth and Expansion: Startups may need funding to support growth and expansion efforts such as opening new locations, hiring more staff, or making strategic acquisitions.
Manage Risks: Startups may need funding to manage the risks that come with starting a new venture.
So to summarize, startup funding allows the founders/entrepreneurs to develop their product/service, build a team, market and promote their business, scale their business, meet regulatory/compliance requirements, fund the ongoing operations, overcome cash flow gaps, support growth, and expansion (through acquisition), and manage risks.
How do Startups get Funding?
Funds can come from a variety of sources, and although the media is often buzzing with Venture Capitalists and Angel Investors, these are just 2 sources of startup capital.
Here are the 8 most widely sources that founders or entrepreneurs use to raise funding:
1. Self-funding aka Bootstrapping
Using your own personal savings to launch a business is the most accessible form of funding, as you don't have to rely on others.
Earning money through a side hustle to fund the business.
~80% of small businesses rely on their founders personal savings for their initial capital needs i.e. launching their business (EU Startup Monitor report 2018).
2. Debt Loans
Taking out a loan on a credit card is another source widely used to launch a startup.
Bank loans are a great option for those startups that already have some momentum/traction.
These are the loans, where you pay interest and do not part with the equity.
3. Friends and Family
Raising money from friends and family members. These are the people who believe in you, and thus don't have to convince them hard.
However keep it thoroughly professional, and ensure they are aware of the inherent risks associated with it.
Some founders avoid this route, as they don't want to risk their personal relationships.
4. Grants
Applying for government grants to fund innovation or specific projects or aspects of the business.
5. Crowdfunding
Raising money from a large number of people, typically via the platform.
It's much easier for entrepreneurs to fund their product launches or get pre-orders via crowdfunding.
6. Incubators and Accelerators
Participating in programs that provide funding, mentorship, and resources to startups in exchange for equity.
Corporations also run strategic innovation programs to fund the startups that can help them for growth.
7. Angel Investors
Seek investments from high net-worth individuals, who put in their investment (usually pre-seed to seed) across several startups.
Typically, they earn high returns (10X-20X) through an exit in the later years.
8. Venture Capital
Obtaining funding from venture capital firms that are known to invest in startups that are usually high-risk, and have the potential for exponential growth.
Their goal is to leverage huge returns (100X+) usually in the form of an acquisition of the startup or during the IPO.
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