Starting a new business can be an exciting yet daunting task. While you may have a great idea and the passion to build something new, one of the biggest challenges is securing the necessary funding to get your startup off the ground. Fundraising is a critical hurdle that all new startups face in order to launch and scale their companies. This article will explore the common ways that new startups obtain investment capital and provide tips for pitching and getting your startup funded.
Bootstrapping
Many entrepreneurs kickstart their business by bootstrapping, or self-funding their venture. This typically means relying on personal savings, credit cards, loans from friends and family, and one’s own sweat equity to cover initial costs and operate during the early stages of building the company. Bootstrapping allows founders to retain full ownership and control of their business, but the funding limits may constrain growth. Some successful startups like Mailchimp, GitHub, and Craigslist launched through bootstrapping before they sought outside funding.
Bootstrapping works best for startups with minimal initial costs that have the potential to start generating revenue relatively quickly. The business can then use its operating income to fund future growth. Startups with hardware or intensive research and development costs often require more substantial upfront investment. Overall, bootstrapping is a great option to get a venture off the ground and to demonstrate initial traction before approaching outside investors.
Angel Investors
Angel investors are affluent individuals who provide financing to startup companies in exchange for an equity stake in the business. They are usually among the first external investors that entrepreneurs approach to raise funds once they have bootstrapped as far as they can manage. Angel investors provide more capital than founders can typically raise from their own resources or from friends and family.
Angels invest in the early stages of startup growth, taking more risks than venture capital firms in the hopes of significant returns if the company takes off. They tend to invest based on belief in the founders and interest in helping new companies get off the ground. Some look for opportunities in familiar industries or geographies, while others may just look for innovative products or business models.
Startups find angel investors through their own business networks, referrals from other entrepreneurs, angel investor groups and networks, as well as angel websites and events. Angels perform due diligence on the startup’s business plan, product, and team when deciding where to invest their money. But they invest more on gut feel and faith in the founders compared to venture capitalists.
Angel investors provide critical early stage funding typically in the range of $10,000 to $100,000. Their capital helps startups further build and refine their product, hire key team members, and attract their next round of funding.
Venture Capital
Venture capital firms are professional investment companies that raise pools of capital from institutions and wealthy individuals and then invest that capital into new startups with exceptional growth potential. They target startups that have already demonstrated some early traction and are ready to scale their business model.
Venture capitalists will do extensive due diligence to analyze a startup’s technology, financials, business model, market dynamics, and team over a period of several months before deciding to invest. They ensure the company has a compelling business plan and the ability to achieve an exit through an acquisition or initial public offering. If they invest, venture capital firms will typically take a seat on the startup’s board and provide guidance as well as access to their expertise and networks.
While angel investment ranges from thousands to hundreds of thousands, venture capitalists tend to invest millions into a startup once they commit. They specialize in providing growth funding to help startups take their business to the next level and gain advantages over their competition. Venture capital plays a huge role in spurring innovation by bankrolling billion-dollar companies like Amazon, Apple, Facebook, Google and Microsoft in their early days.
Startup Accelerators
Startup accelerators offer programs and funding for cohorts of early stage startups, acting as a bridge between angel investing and venture capital. To be accepted into an accelerator, startups must go through a competitive application process and demonstrate that they have a strong founding team and a product with market potential.
Once accepted, startups enter an accelerator program lasting several months. This bootcamp style program offers mentorship, connections, training and other resources to rapidly develop the startup’s product and business model. At the end of the program, startups get the opportunity to pitch their company to angel investors and venture capitalists.
Leading accelerators like Y Combinator and Techstars provide early stage funding, usually between $50,000-$150,000 in exchange for anywhere from 2-10% equity. Accelerator funding allows new companies to extend their runway for several more months so they can focus on gaining traction. The intensive program and mentor guidance better equip the startups to land larger, more serious VC rounds after graduating.
Alternative Financing Options
While bootstrapping, angels, VCs and accelerators account for the majority of early stage startup funding, entrepreneurs do have some other options to consider when seeking capital:
- Bank Loans: Startups with an established business history and assets may qualify for bank lending. However, they typically need revenue, steady cash flow, and hard assets to secure loans collateralized against.
- Business Plan Competitions: Student entrepreneurs can enter school and other competitions to pitch their startup idea and potentially win funding prizes.
- Crowdfunding: Platforms like Kickstarter and Indiegogo allow startups to raise smaller amounts of capital from a large pool of investors through online public offerings.
- Government Grants: Federal and state governments provide a variety of grants for women-owned and minority-owned businesses that meet certain criteria.
- Product Pre-Sales: Startups can pre-sell product packages before launch to generate capital and gauge market interest.
- Revenue-Based Financing: Investors provide capital in exchange for a percentage of monthly or annual sales until the startup pays back a predetermined amount.
- Strategic Partnerships: Aligning with large corporations in mutually beneficial partnerships provides startups with capital, distribution, credibility, and other support.
While each model has pros and cons, these less traditional funding methods give startups additional options to finance different stages of growth. Entrepreneurs should research all potential sources of capital when mapping out their financing strategy.
Pitching Investors
To win over investors, entrepreneurs must master their pitch. An effective pitch deck conveys the key details of your business in a compelling, easy-to-digest way – typically no more than 15 slides. While every pitch should be tailored to your specific offering and audience, there are some slides that investors expect to see:
- Problem Statement: What pain points or unmet needs are you addressing? Why does your target customer care?
- Solution: How does your product uniquely solve the problem? What value does it offer customers?
- Market Opportunity: What is the size and growth outlook of your target market? How much market share can you realistically capture?
- Business & Revenue Model: How do you make money? When will you reach profitability?
- Go-to-Market Plan: What is your distribution strategy? How will you acquire and retain customers?
- Competition: Who are the other players in the space and how do you differentiate?
- Team: What unique strengths and experiences does your team offer?
- Funding Needs & Use of Capital: How much funding do you need short and long term? Exactly how will the funds be used?
- Financial Projections: Provide key metrics like customer acquisition costs, churn rate, ARPU, gross margins, to demonstrate your model’s economics.
- Exit Strategy: How will your company provide a return on investment through a future sale, merger or IPO?
Along with a solid pitch deck, entrepreneurs need to craft and practice their narrative, clearly explain their impressive background, and demonstrate why they are the right team to back. Investors are betting on the founders as much as the business. With a compelling pitch and perseverance, entrepreneurs can overcome investors’ objections and skepticism to secure the funding they need to turn their startup into a success.
Finding the Right Investors
With so many potential sources of funding, how do entrepreneurs decide which route is best? The ideal investors offer the right amount of capital for your company’s current stage and needs, have knowledge of your specific industry and business model, can provide valuable mentorship, and will increase your startup’s credibility.
No two startups will follow the same fundraising path. Many leverage a combination of funding sources; for example, bootstrapping to build an MVP, then entering an accelerator, securing angel investment for product development, and ultimately going after VC once they’ve proven traction and potential for scalability.
Entrepreneurs should create a list of target investors tailored to their startup based on stage, industry expertise, geographic location, portfolio companies, past exits and investment amounts. Building relationships with the right investors often starts months or years before formally pitching them. Utilize your network for warm introductions, get involved in local startup and VC communities, and don’t be afraid to network at events and directly reach out to investors.
The startup fundraising process involves persistence and resilience. Embrace feedback from each pitch and meeting, refine your business strategy and messaging, and keep pursuing investors that seem like a good fit. With dedication to crafting a compelling vision and validating your business model, you can secure the necessary capital to turn your big idea into a thriving company.
