Funding a Startup: The Three Types of Equity Funding

A high-level guide for early stage founders who are considering getting funding for their startup in exchange for equity.

Jenny Chu
Jenny Chu
Sep 4, 2017 · 6 min read

What is Equity Funding?

Funding, in the context of startups, is when a person or an organisation provides you with finance in order to grow or develop your product. Equity investors require a longterm ownership stake in a venture in exchange for capital.

Bootstrapping — Funding Your Startup Yourself

This is the stage where the founder(s) invest their own money to the startup. Bootstrapping (self-funding your startup) is often underrated and sometimes, founders may decide to skip this step and go straight to funding with just an idea. But imagine how that might sound to a potential investor? If you are not willing to put your own money and time into your idea, how could someone else?

Angel Investors

When you first start out, it is often difficult to get funding from venture capitalists because of multiple reasons. Venture capitalists are looking for startup ventures that will grow quickly, giving them tenfold returns for their investment. When you first launch a startup, getting this funding can be difficult as there are a lot of risks associated with an underdeveloped product or idea. That’s why, it’s common for founders to turn to angel investors to get investment.

  • If your angel investors are ex-entrepreneurs, they will be able to offer assistance beyond capital, providing expertise and networks.
  • Angel investors usually invest without a structured timetable or control over the company’s decisions.
  • Less capital is usually offered, compared to venture capital.
  • Angel investors can be really powerful people to have on your side. However, if entrepreneurs do not perform due diligence with an angel investor, they may find themselves stuck with someone that lacks the expertise to help them or be difficult to manage.

Venture Capitalists

Venture capital firms invest in new ventures using funds raised from limited partners such as pension funds, endowments, and wealthy individuals. These firms are run by professional investors, often referred to as venture capitalists. Venture capitalists focus on investing in startups that are believed to have long-term growth potential, so that they can hopefully tenfold their returns on investment.

Thanks to Craig Blair of Airtree Ventures for this slide!
  • Connections: venture capitalists are very well connected! If you have them on your side, they will find the right people to help you, if they are unable to.
  • Business expertise: many venture capitalists are ex-founders, so they are able to contribute to startups beyond finance.

Strategic Investors

Strategic investors are extremely similar to venture capital firms, and are sometimes referred to as corporate venture capital. Like the name suggests, the investments made by strategic investors are often strategic in nature (such as getting access to technology important to the firm’s initiatives), as well as financial.

Which Type of Funding Do You Need?

Before I jump ahead to answer this question… it is important to note that I did not cover government grants, personal credit and bank loans in this article.

Entrepreneurs Finance Framework
  • Top left: If you are a using proven technologies to create something (i.e. less risky, almost guaranteed return), utilising commercial banks, project finance and strategic investors are usually your options. Example: creating a new smartphone.
  • Bottom right: If you are using new technologies i.e. a startup, it often means that the only ways to get investment is through angel investment and venture capital. Example: Airbnb.
  • Top right: If you are using new technologies and the product is extremely capital intensive, it is really difficult to get funding except through government support, due to the risky nature of it all. Example: new drug for curing a certain disease.

Are you a student-run startup and have questions about funding?

Feel free to e-mail me at jenny@textbook.ventures and let’s see if we can help you!

Textbook Ventures

startups news, entrepreneurship and startups aimed at students.

Thanks to Clint Amadeus Chan.

Jenny Chu

Written by

Jenny Chu

Product Manager @Atlassian

Textbook Ventures

startups news, entrepreneurship and startups aimed at students.