If you are a new startup founder or have an idea for a startup, funding might be a significant concern. We understand that raising funds matters a lot. Thus, understanding the intricacies of this process can help you plan better. In this blog, we have discussed startup funding for founders. It includes its meaning, types of investors, stages of investment, and, most importantly, how to find investors. Read this article to learn about startup funding.
What is a Startup Funding?
Funding is the most crucial and testing task for a startup. It is how you start your business by taking it out of your room into the real market. The funds help cash flow in your organization, allowing you to sell products or services. Your savings might keep you afloat for a few weeks or months, but it wouldn’t last if you need high cash flow. Thus, a startup needs funding from investors. The process of raising funds for startups is known as startup funding.
While the startup idea might be a billion-dollar one, convincing someone of this is not a walk in the park, especially if this is someone who is your investor. There are specific prerequisites you must meet to be eligible for startup funding.
Prerequisite for Startup Funding for founders
The prerequisite (yes! singular) for your startup to be eligible for funding is that it should be a private limited company. It means that it must be registered under the country’s governing body. It establishes your startup as a legal entity that the investors can trust and work with. This legal body handles the investor’s funds and any financial and legal transactions with your startup.
Before we discuss the funding types and sources, let’s first consider the types of investors.
What are the types of startup funding investors?
Investors are people who invest some amount of money in return for something. It could be an equity (share) or an inevitable percentage return on revenue. The following are the types of investors you must know about.
Bootstrap investors for startups
These are the people you know and those who know you: Family and Friends. You present your idea to your friends and family for investment. You can also reach out to familiar friends for the same. In return for this investment, they equity or % return.
Incubators for startups
Incubator investors help those starting their first startup with little to no experience running it. The Incubators provide you with space, funds, and knowledge to nurture your startup. Incubators are organizations or teams dedicated to helping startups grow. They provide resources and mentorship to help you learn to structure your startup company.
Accelerators for startups
Accelerator investors for startups primarily bring financial support to the startup. They also bring opportunities to get investment from other investors. They are well-versed in business and provide guidance. It is for the short term and primarily for early-stage startups.
Angel investors for startups
Angel investors for startups are individuals who want to invest in startups. They are primarily interested in the return on their investment. They might or may not have experience in your niche or business.
Venture capital for startups
Venture capital for startups comes from a formal organization that invests in your startup in hopes of better returns. These organizations get investment funds from other individuals and organizations with a promise of certain returns. Thus, they are more likely to scrutinize your offer before investment. They’ll also keep close track of your growth.
Stages Of Startup Funding you must know!
Following are the primary stages a startup goes through for fundraising.
Pre-seed funding for startups
It is the very early stage of startup, likely when it’s still in your room with your laptop, with the support of your friends. Your capital or startup fund primarily includes your savings and bootstrap investment. You can start developing your MVP (minimum value product) to start your business and for future investment. You are the prominent shareholder in your startup at this point.
Seed funding for startups
Seed funding for startups is the first instance when you go outside your circle for investment. You need to prepare a basic proposal for your startup for pitching. Incubators, accelerators, and even angel investors are primary options for this. So, it’s the first investment with which you start your journey with the startup.
You start selling your products and services and create a team to grow your startup. Gather insights and data to project how your business is growing. With seed investment, your shareholding may dilute, but the valuation of shares and the startup will increase.
It would help if you created an option pool. It means setting aside a few shares of your startup for your most crucial employees and making them your partners.
Series funding for startups
Series funding occurs when you have run your startup for a few years and now need some more investment to grow: a capital raise. This funding series can take place however many times you need it. The first fundraising is series A, followed by B, C, and more. Angel investors and venture capital firms are the primary investors you should target. Each series increases your startup valuation, and your equity shareholding decreases.
Now, you must develop a complete product and market it. Show your investors the gains and profits to keep their investments intact. The more series of investment rounds you do, the better your proposal will be.
Debt and equity loans for startups
You can raise funds by taking a loan from financial institutes. Based on your pitch and valuation, they’ll give you financial aid. They might give you a loan based on interest or equity.
IPO funding for startups
IPO stands for Initial Public Offering. It is used when you become a unicorn or high-earning startup and need more capital. Here, you provide a certain amount of shares at a fixed price to the public. Now, your private limited company becomes a public company with shareholders to answer to every significant decision you make.
How do you find investors for startups?
It is the most gruesome task for startups. While there are many ways, the following are the most trustable ways to find investors for startups:
Startup Summits
Startup meetings are formal events where many startups and investors gather. They are the place for startups to pitch their ideas to attract investors and for investors like venture capitalists, angel investors, and HNIs to invest their funds.
21BY72 is a team of angel investors conducting startup summits for investors and founders. We are soon conducting our third summit with investors and mentors from across the globe. At our summit, you get exposure to potential investors and learn from the mentors. Get your seats in the startup meeting, or book your stall now!
Cold Reach
You can reach potential investors through emails or other channels with a fantastic pitch. Investors will likely respond if your startup has potential and you structure the pitch right.
Startup Organizations
You can join a startup organization or cohort program if you need guidance and funds. Incubators and accelerators from government or private companies run such organizations. They offer your resources, capital, and mentorship to understand and run your startup.
Conclusion:
Funding your startup is the most crucial step for its success. It helps you run everyday tasks, marketing campaigns, and more. Thus, it is the backbone of business. You can raise funds from incubators, angel investors, and venture capital for startups. Startup funding starts with bootstrap investors for pre-seed financing. Following this is the seed funding. The first capital you raise with your savings, bootstrap investment, and other possible sources. Once you establish and run your startup for a few years, you can raise capital with various investments from various investors. You can also take loans and offer IPO to raise funds as needed. You can opt for cold reach to formal organizations or startup summits to find investors.
FAQs
Are incubators and angel investors the same?
No. Incubators are structured organizations intended to provide financial and managerial support to startups. Meanwhile, angel investors are individuals providing financial support to the organization. You might or might not be able to get any other organizational or business insights from them.
How do I prepare to raise startup funding?
You need to create a pitch for your startup. The pitch must highlight your business plan and strategy, the market your startup has captured, and the problem your startup is solving. You also need to show how you are running the startup with your team and your growth projections. Create a lucrative yet realistic pitch to attract investors and raise startup funding.
Can I raise an IPO after a few capital raises?
Yes. If you have created a successful product with market value and want more funds, you can get investment through IPOs.
