Startup Funding: Ultimate Guide to Getting your Startup Funded
Last Updated: 1/7/2022
Developing your idea into a solid product requires more startup funding and a bigger team. To actualize your business idea, you need to hire employees, pay expenses, and maintain the operation of your business.
Depending on your industry, be it a tech or a business field, your startup funding can be derived from multiple sources. It might be difficult for a new startup to secure adequate funds for its operations due to numerous challenges, such as inadequate assets.
In this guide, you will get a lot of insights into various types of startup funding, criteria used by investors to finance startups, the best ways of pitching, and negotiating your startup concept with investors, with an emphasis on venture capital.
Types of Startup Funding
There is a broad array of types of funding you can get to raise money your startup. In this article, you will familiarize yourself with multiple funding types, including Small Business Administration (SBA) loans and grants, a venture capital fund, crowdfunding, friends and family, and angel investors.
Small Business Administration (SBA)
Since its establishment in 1953, the SBA has guaranteed small companies and startups with reliable business loans to fund their operational expenses and scaling purposes. The business loans come to the rescue of the small ventures from the commercial lenders offering more a traditional business loan who imposed high-interest rates on their loans.
You can access SBA loans from various financial institutions, including banks, which act as lenders. All you need to do is spotlight local lenders under the SBA listing from their official website. It would help if you reached a potential and reliable SBA-loan lender to pitch your idea. The lender will get an opportunity to review and give you enough feedback about the business loans and your qualifications.
All startups or small business do not have a guarantee of receiving SBA loans. You need to meet some requirements for you to secure business loans backed by SBA. To enjoy the full benefits of the loan offered, you need to follow various steps. You can read our full article on Small Business Administration (SBA) loans for startups or small business here.
Go through the steps below:
- Make a proper review of your credit history. Small Business Administration (SBA) loan lenders would always like to know the character of the borrower. It is advisable to check your borrowing history once every year, to ensure positive outcomes. SBA loan lenders prefer borrowers with high rates on their credit scores.
- Come up with a proper business plan or pitch deck, which maps the details and purpose for your startup or small business and its financial requirements.
- Develop a financial history of the startup. It is typically advisable for existing startups seeking SBA loans to prepare financial statements, including balance sheets and income statements that outline the business’s cash flow behavior for the last three fiscal years. This step is not necessary for new startups.
SBA employs specific criteria when offering secure loans to their borrowers:
- The business size requirement. Small Business Administration (SBA) considers the size of the startup or small business, depending on its respective industry. Other sectors align with the basis of the number of employees available on the operations or the average receipts for an entire business period.
- The startup needs to have received various turn downs from other private loan lenders. Lenders can be found on B2B aggregators such as Wimgo.
- The startup also has to qualify the lender’s requirements after succeeding through the SBA requirements. SBA has its preferred lenders, who serve their roles in offering loans to startups.
A common question people have regarding loans is if they qualify for a business credit card. However, the answer is most commonly no. Startups themselves do not qualify for a business credit card and the credit is generally used by the owner themselves even if the business is a limited liability company.
Friends & Family
A significant way of sourcing for your startup business funding is to begin from your innermost network, families, and friends, before sourcing from public channels. Depending on how close you are with your friends and family members, it is certainly not the best pick for most individuals.
You can approach a friend and pitch your startup concept confidently, detailing all the vital financial and general information about the startup. It may also be difficult for your family to raise a fortune of money for your startup. However, your closest family or friend may get to test your startup concept or even become a target market for the services offered.
It is easier to request your family or friend for some funds back up for your startup, unlike startup investors, for whom you barely have any bonds.
Angel Investors
This type of investor often provides startup business funding of small amounts to young startups in exchange for a reasonable amount of equity or return on their investment. Angel investors come in handy in narrowing the gap between the support from families and friends, and even supreme investment types like venture investors. They are mostly ideal for startups in their early stages of operations. You can acquire several angel investors for your startup from competitions for businesses or even websites online.
Venture Capital Firms
Venture capital firms have a few similarities with angel investors. They have extensive experience in startup funding and usually make more significant returns by providing investment in startup ideas. Since venture capitalists accepts the risks involved in the startup, they tend to have a stringent selective nature when it comes to picking the right startup for providing investment.
It is up to you to fully prepare for the startup pitching by disclosing relevant and necessary details to win the venture capitalists’ hearts. You can do that by drafting appropriate value propositions and market segments for your startup.
Equity Crowdfunding
Crowdfunding is an excellent type of startup funding as an alternative to venture capitalists. It involves gathering multiple individuals who accept the risks involved to assist in raising funds for your startup. In some cases where products are being offered, the group of people lack ownership rights of the startup or small business.
It can be achieved by holding digitally or locally events, or through platforms, including Kickstarter. Unlike venture capitalists, which usually occupy only a few positions on the Cap Table, equity crowdfunding requires a pool of effort and perseverance for more remarkable outcomes. It is mostly ideal for individuals with consumer-oriented services. It would be best to map your financial goals for the startup to enhance transparency to the investors.
Grants
An alternative to venture capital for those who do not wish to give up equity is grants. Most of you are not aware that startups can receive funds from their respective governments. Since startups affect the country’s economic growth, governments are willing to offer grants to help their performance. Startups for young individuals or those belonging in the STEM (Science, Technology, Entrepreneurship, and Mathematics) field are more likely to secure grants or other startup funding from the government. Depending on your geographical location, you can look for available grants through Google.
Have questions about business planning or the capital raising process? Contact our experts at Pro Business Plans by scheduling a free consultation.
What Investors look for in Startup Funding
The probability that a funder is likely to invest in a potential startup highly corresponds with the intensity of energy that the founder and its company team entail, this is especially true for venture capital.
If the group seeking startup funding is passionate about how they handle operations, objectives, and actions, then the investor is with zero doubt likely to be associated with the respective company.
Venture capital tends to assess several significant factors before investing in a company, such as founders with clear goals and accurate objectives that are likely to be achievable and meaningful. Does the company serve as an excellent fit for investment? How determined is the company team? How big are the company goals? Investors need to be impressed by your company’s actions and ought to predict massive success from the potential company in question. Some of the factors that investors consider before investing in your company include:
A passionate and determined company management team is attractive to any type of investor willing to fund a potential startup.
Passionate and experienced entrepreneurs
A passionate and determined company management team is attractive to any type of investor willing to provide startup funding. A vibrant startup founder with big plans and great desires is highly capable of getting financial aid from an angel investor simply because they express big plans for the company and future investors in general.
The market
A market study is another significant factor used by venture capital as a measuring tool. The startup founder should be in an excellent position to define the market’s status in terms of its level of competition, maturity, price of entry, etc. Good market competency is a win-win strategy whereby the startup founder and the entire management team acquire a bigger picture of the market and get to present their investors’ general market understanding.
Momentum
Consistent progress is much attractive to an investor rather than stagnant and unsteady growth. Investors are likely to provide funding to a growing company with great potential of increasing its scope and enhance general growth. Continuous revenue growth, technical advancement, increased consumption rate, etc. typically measure the amount of progress in an absolute startup.
Business Plan
An absence or unstructured business plan is always a sign of unpreparedness for any investor. A business plan serves as an overview icon for the primary startup objectives, financial margins, company goals, the effective management team, etc. A well-drafted business plan initiates a one-step forward of acquiring reasonable amounts of venture capital funds.
How to Pitch Investors
Pitching to venture capital about your existing idea or product is another fundamental aspect of any startup needing financial aid from investors. Discarding a statement to investors entails explaining and presenting a basic overview of the startup vision and its significant components, including its problem-solving aspect. For an existing investor to provide funding to a startup, the founder has to impress and fascinate the investor about the startup idea in question, with much passion and great potential.
Some of the crucial tips in making it all a success involves:
Target Market
Researching and studying the kind of investors likely to show up during pitching is a big deal. Where is the geographic target of the investor? Is she familiar with my startup? Has she made any recent investments? They are the kind of information that sets a founder prepared and ready to tackle the audience. The accurate, diverse, and researched knowledge is likely to build intense confidence in the founder and enhance success during pitching.
Problem/Solution
An elevator pitch defines an overview summary of an individual or organization within a short time frame. To enhance effective communication and possible future funding, the founder should fascinate and initiate a simple, unique, and accurate short project presentation to investors with good energy and confidence.
Market Research
Statistics help in evaluating the value and transparency level of a particular startup. Investors may be willing to invest in the startup or small business once there is a detailed and precise report of any startup information set that dictates any previous operations’ quantity and quality.
Revenue model
A revenue model dictates the expected sources of revenue for a potential startup. The founder showcases to the investors the different methods and techniques that the small business or startup project expects to gain revenue and any relevant future financial projects. The revenue model should be simple with a structural declaration of income sources, the pricing tiers, and even potential economic challenges.
How to negotiate with Investors
Negotiating healthy terms with the available investors comes in after the potential entrepreneur pitches their fantastic project idea with all its relevant details. The negotiation process should be simple, ethical, and more straightforward, following a standard array of conducts and principles. The entrepreneur should correctly adhere to the following set of principles to enhance a healthy negotiation.
Establish conduct of trust
A code of trust is essential between the startup founder and the potential investor since no party would be willing to build a fishy bond with an unfaithful body. Disclose any relevant information that may most probably win a specific investor’s trust and create a healthy working connection suitable for future startup or small business growth.
Understand the leverage that you have
The company interests should remain definite, accurate, and highly measurable with or without relations made by kind of investors. The founder should highly leverage its strengths and pick amendments that highly favor the company’s growth and generally existing assets.
Stay open-minded
Staying open-minded allows the founder to seek and agree on the most healthy terms to serve an excellent fit. Listen to understand, weigh, and pick options that would create tremendous value for the company. Also, remember to establish good negotiation skills with the investors appropriately to encourage more similar future operations.
Conclusion
Your startup funding needs to be adequate to handle any operational expenses or make improvements. Your startup or small business has multiple financing types, which depend on the startup’s experience and industry.
It would be best to do some more in-depth research and have a proper business plan before your raise money or concept pitching since you need to assure your investors that the money, they are willing to offer for investment will have a positive outcome.
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