Startup Funding: 7 Ways To Finance Your Startup
By Trinity Hanson, Last updated: 2023-01-11 (originally published on 2022-05-17)
The hardest part of running a startup is getting your business off the ground. In order to launch your startup, you’ll need funding to bring your business plan to life. There are many ways that you can finance a startup. The right approach for you will depend on your business model and the type of funding that you need. Here are seven of the best ways to finance your startup and what to expect with each option.
1. Angel Investors
Finding the right angel investor can completely change your company’s growth trajectory. Angel investors are private investors that focus on startups and other early-stage ventures. In exchange for this early-stage capital, they get a stake in your company – usually anywhere between 10 and 50 percent. Because they have such a large stake in your company, most angel investors also want to have a say in major business decisions.
Angel investors are usually very high net worth individuals, which means these initial investments are substantial. They are also usually accredited investors. If you’re comfortable with having your investors involved in business decisions, then this funding strategy can be very effective. Before committing to any angel investment, it’s very important to make sure you are both on the same page about your business model.
Angel investors are very discerning, so you’ll need a very strong product, business plan, and marketing strategy to land a deal. If this is something you’re interested in, there are a variety of different angel investor networks and online platforms where you can connect with them. These include AngelList, Angel Capital Association, Angel Investment Network, Crunchbase, and Gust. However, you can also find angel investors by attending networking events and connecting with others in your industry. Many angel investors receive a high volume of pitches each day, so you’ll need to be very tactful with your communication and respectful of their time. Keep in mind that you’ll also need to develop a relationship with the angel investor before a deal happens. They will want to know your business inside and out before they can feel confident investing.
2. Venture Capital Firms
Venture capital firms are another option to consider if you are looking for a substantial investment upfront. This is probably the most talked about and reported option that is glamorized in the news. Notable venture capital firms you might have heard of include Sequoia Capital, a16z, Greylock, and TCV. Venture capital firms are groups of private investors that provide funding to growing startups in exchange for company equity. Venture capital investors are usually high net worth individuals, and many of them work on their own as angel investors in addition to working with venture capital firms.
Venture capital funding for startups is very competitive. You will need to put together a detailed pitch that includes information about your product and business model, as well as your current business valuation and financial status. Investors will also conduct lengthy due diligence interviews during this process, which means that you’ll need to be prepared to answer very in-depth questions about your company and your plans for the future.
3. Crowdfunding Campaigns
Crowdfunding campaigns have become an increasingly popular startup funding option in recent years. Instead of sourcing funding from one private investor or VC firm, you can use a crowdfunding platform to obtain small amounts of funding from a wider range of investors.
There are several popular crowdfunding platforms online that allow anyone to donate to your startup. These include Kickstarter, IndieGoGo, and GoFundMe. Investors on these platforms don’t receive any equity in your company, although some platforms allow you to offer unique perks to your investors. These platforms host thousands of crowdfunding campaigns, so you’ll need to write a compelling pitch to stand out. You’ll also need to market your campaign on social media platforms where your target investor might spend time.
Another option is to use equity crowdfunding platforms like WeFunder, StartEngine, Republic, and MicroVentures. With these platforms, your investors receive a stake in your company. For investors, the process is similar to investing in the stock of a public company. These sites tend to attract a mix of accredited and non-accredited investors.
Most equity crowdfunding platforms are curated, which means that you will have to apply to start a campaign. However, once you are approved, the equity crowdfunding platform will typically handle some aspects of your campaign for you. For example, they can help with SEC filings, campaign marketing, and investor relations.
4. Small Business Loans
Venture capital and crowdfunding campaigns can be very effective for startups that have already started and are trying to grow. However, these aren’t necessarily the best options for businesses that are starting completely from scratch. This is where small business loans can come in handy.
These are loans that are designed specifically for small businesses. Some of the most popular small business loans are provided through the Small Business Administration (SBA). Because these loans are government-backed, they typically offer very low-interest rates. The SBA also offers emergency loans for businesses that are struggling.
There are also many private lenders that offer small business loans, including loans that are designed specifically for startups. There are a variety of different factors to consider when choosing a small business loan, including interest rates, the length of the loan term, credit requirements, and the complexity of the application process. Keep in mind that traditional banks won’t always lend to brand-new businesses, so you may have to look for online lenders. You’ll likely need to compare multiple options to find the best choice for your needs.
5. Credit Lines
Opening a credit line can be another viable option for startups in their very early stages. A personal credit line is typically easier to get than a small business loan, but you might not be able to take out as much money at once. You’ll typically be able to use your personal credit history to apply for a credit line, rather than having to provide information about your business. The advantage of funding your startup with a credit line is that you can open one quickly. The application process for a personal credit line is typically very simple, especially if you are going through a bank that you already have an account with. If you do decide to open a credit line, you’ll need to be aware of the interest rate and make sure you have a plan in place to make your monthly payments on time. If you aren’t able to make your payments, it could end up hurting your business in the long run.
The advantage of funding your startup with a credit line is that you can open one quickly. The application process for a personal credit line is typically very simple, especially if you are going through a bank that you already have an account. If you do decide to open a credit line, you’ll need to be aware of the interest rate and make sure you have a plan in place to make your monthly payments on time. If you aren’t able to make your payments, it could end up hurting your business in the long run.
6. Startup Incubators
A startup incubator is a collaborative program designed to help new startups get off the ground. Startup founders attend programming in a designated workspace for a set period of time before launching their startup. This is a great option for startup founders who already have a solid business plan and some initial funding, but just need a little extra push to get to the next level.
Startup incubators don’t usually provide funding directly to their members. Instead, members get access to physical workspace, tools and equipment, mentorship, and professional services like accounting and marketing. However, startup incubators can also be amazing networking tools, especially if they are industry-specific. The connections that you make through a startup incubator can lead you to funding opportunities in the future.
There are many different types of startup incubators out there. Many incubators use a not-for-profit model and target specific startups based on location, industry, or founder demographics. There are also plenty of city- and state-funded incubators that are designed to stimulate the local economy. There are also some for-profit incubators that do take an equity stake in your company, but these are less common.
7. Peer-to-Peer Lending
If you’re having trouble obtaining a traditional small business loan, you can also fund your startup using a peer-to-peer lending platform. Peer-to-peer lending cuts out the middleman and allows individuals to provide loans directly to consumers or businesses with interest. Funding Circle is an example of a peer-to-peer lending platform that is popular among small businesses, but there are many others. Peer-to-peer lending is popular among investors because it provides a strong return, but it also has many benefits for borrowers.
The advantage of using a peer-to-peer lending platform is that these loans are usually much easier to get approved for than traditional bank loans. They also tend to have lower interest rates and be more flexible in general. However, peer-to-peer lending does tend to come with strict borrowing limits, so it may not be feasible if you need a very large amount of capital. You will also still need to pass a credit check in order to obtain a peer-to-peer loan.
A reliable source of funding is a must for any startup trying to grow their business. Even with an incredible business model, you will still need some capital to get off the ground. Consider the different tradeoffs to each different funding option against your goals. If you’re going big and seeing a lot of traction, equity traded options with more cash upfront could be what you’re looking for. If you’re hoping to keep most of your equity when you ultimately decide to sell your startup, the bootstrapping options may pan out better. These seven funding options are resources that new companies can use to bring their vision to life. Align them against your goals to decide the best option for you.
About the Author
Andrew Gazdecki is a 4x founder with 3x exits, former CRO, and founder of MicroAcquire. Gazdecki has been featured in The New York Times, Forbes, Wall Street Journal, and Entrepreneur Magazine, as well as prominent industry blogs such as Axios, TechCrunch, and VentureBeat.
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