5 Types of Startup Funding for new entrepreneurs

Startup Funding: It is hard to run a startup without money. In this article, we talk about the types of funding opportunities available for startups. As we know, the number 1 reason why startups fail is lack of money. In the early stages, these funds define the birth or death of an idea. It is much easier to build on an idea if you have the benefit of funds. As an entrepreneur, the benefit however is that you can raise funds with the help of investors or accelerators to work on your idea. The good news is that you don’t always have to take loans to build your idea. In this discussion, we will focus on the types of startup funding available for an entrepreneur.

Types of Startup Funding

The most common types of startup funding are – family and friends, loans & grants and equity investment. We can find other subtypes too – but these mainly define the broad segments and types of startup funding. You can either have one or all of these types of investments to build your idea. They are not mutually exclusive. Thankfully it means that you have more options in the difficult world of fundraising. At an early stage of startup, the investors will be keen on judging your idea based on – its value, impact on the market, commitment and customer interest. Ultimately everyone wants to know that your idea has a greater potential for success. This is literally what they are looking for while assessing your idea and business plans.

Family and friends

This is the first and the easiest way to raise funds. At this stage, you’re at the mercy of your friends, family and network. They’re giving you money based on the trust they have in you and goodwill. They might expect some details on your business plan but aren’t usually as rigorous as a professional investor. Consider it as a loan without collateral or a gift of goodwill in your business.

Everything in this stage depends on your social capital, your network and personal funds. Some people might give you money on the goodwill and some others share the risk with you. But they trust you more than the business idea in this stage.

Equity Funding, Crowdfunding etc

During the early stages, seed investment is a fantastic way to raise capital. These are usually called angel investors who invest in your business for a % of your equity. Although they get a larger % than in later stages of funding, they still take a bigger risk since your idea is unproven. However, as your business grows, you can take funding from Series A, B or C for the expansion stages of a startup. This is explained in the following segment.

If your product is simple enough to understand and explain in a short video – crowdfunding is a great way to raise funds. It gives you an opportunity to talk to potential customers or investors and raise funds based on the popularity of your idea. Please note, it takes a lot of effort to make this video appealing to customers and ensure that it catches their attention.

Startup Loans and Grants

Some banks and financial institutions offer startup loans for you to raise funds for a business startup. However, these banks usually ask for certain collateral for your startup. Some can even take a % of equity for your collateral, but such occurrences are rare and financial institutions are generally risk-averse.

Startup Grants are a This is a great way to raise funds if you can. The government grants and funds provide you funds to develop or market your business idea depending on the impact of your business idea. If your business idea has a social impact or is in an area of focus from the govt agenda, it increases your chances at these funds.

Different Stages of Startup Funding

There are typically 3 stages of funding for a startup. These funding stages are classified under equity funding where you’ll give up a part of your company’s ownership/stake in exchange for money. This money will be used to develop the product or expand the scale and scope of your startup depending on its maturity.

Pre seed funding and Seed Funding

This occurs during early stages of the startup. Pre-seed funding is used to develop the proof of concept or initial operations of the business. The ideal outcome of a pre-seed fund is to be able to develop a minimum viable product that can be used as proof of success for next stage of business development. Incubators are great places to support opportunities for pre-seed funding. Some pre-seed funds come as a part of incubators or even some university funds that can be very handy. Other routes of pre-seed funding are family and friends or self-investment.

Seed Funding: During the pre-seed fund, we normally don’t give out any equity. The first time you focus on equity funding is during the seed funding stage. By this stage, you’ll already have a credible business plan, a minimum viable product and some early customer feedback to support your idea. At this stage, angel investors are more forgiving about the detail in your approach and the early stages of product development. A seed stage represents a high risk for an investor and naturally, they will get a higher % of the ownership of your company as compared to investing in the later stages of your startup.

While you’re asking for seed funding, make sure that your business plan is built for scale and covers situations of future fundraises. They will ask you questions about dilution and reduction in share value in further rounds as you raise further investment.

Series A, Series B and Series C Funding

After the seed funding round, your next equity fundraise is Series A funding. The seed fund is generally used for product development. In Series A funding, investors will expect a level of success from a startup. At this stage, they will also expect your startup to have some initial customers. In an ideal world, they’d like to see some impressive customer names to add credibility to your product.

Series A funding is to expand the business and increase the product adoption. Before this stage, you should have completed the product prototype and even the first delivery. Series A funds raise from $2M to $15M according to investopedia. The minimum expectation however is that your idea has progressed from an idea stage to actual product with a few adopters.

Series B Funding

Series B funding is all about market expansion. Remember, the purpose of a startup is to scale and provide a repeatable business model. In this stage, the investors will expect you to have an expansion plan. Sometimes, these expansion plans in Series B funding are about setting up genuine new companies to expand your market share. geographical units and expanding the size of the customer base. The business at this stage has already entered the inorganic growth phase where the mantra is to sell and sell more. You can use a part of this investment for continuous product development. But this should feed into your expansion plans and future innovations to increase customer appetite on your solutions. You should be well beyond product market fit while applying for series B funding.

Series C Funding

Series C funding is exciting. At this stage, you already have a successful business and are looking for further expansion. This expansion can come in the form of acquisitions, buying out other companies to expand your market share. At this stage, you’re well beyond startup phases and into business domination. Series C startups command large valuations and are ripe for a great buyout themselves. It is looking for rapid expansion in the market and this comes with significant investment to ramp up sales and marketing functions. If you’re lucky, you’ll be able to focus on next horizon investments that can be very exciting.

These are the types of investments you can focus on as a startup founder. Depending on the goals of your startup, define your investment plan to reach out to the right investors.