Startup Funding: The Entire Process of Obtaining Funds for Your Startup

First and foremost, you need a profitable concept for a firm. However, even the most forward-thinking concept requires financial backing. Even if your product starts bringing in money from day one, you will still need funds to create your marketing strategy, customer support, and day-to-day business operations.

Obtaining finance for a startup is the most difficult task that new businesses face. Especially today, because of the pandemic, there has been a significant shift in the attitude surrounding investments. The most common focus of venture capitalists is on potentially profitable ventures rather than high-risk business transactions. Due to this fact, both planning and preparation are essential here. In the process of looking for a source of more funding, you will probably go through a number of months feeling a persistent prickling of unease in the base of your stomach. Therefore, in order to make that sensation a little bit more bearable for you, we have compiled a guide that will walk you through the steps that you need to take in order to get your finance.

You will get knowledge regarding the following topics with the assistance of our comprehensive guide to finance for startups:

What Exactly Is Meant by "Startup Funding"?

A new business can get off the ground with the assistance of money designated specifically for startups. Every company calls for a distinct kind of investment of a varying scale, and the specifics of that investment are contingent on the kind of business strategy it employs.

The Five Most Effective Methods for Fundraising for a New Business

There are many different approaches to raising capital, and as was mentioned up above, the most effective strategy for you will largely depend on the reasons you have for making the investment. Despite this, we have provided an overview of the various strategies that can be utilised to acquire investment for a business such as yours.

Friends and family

A large number of fledgling businesses are able to secure initial funding by capitalising on the connections they already have. In many cases, this infusion of capital is sufficient to hire the first employees, purchase office equipment, and provide a team with the essential resources.

There are benefits as well as drawbacks associated with using personal connections in order to get finance.

The majority of the time, it does not prepare you for an environment including investors during a round of funding. If you get capital through personal connections, you will also receive little to no support in other areas, like as networking and incubator support. On the other hand, this ultimately signifies that this sort of finance is more adaptable and constrained by a smaller number of restrictions.

Even if you may have a close relationship with the individuals you contact for the fundraising round, it is essential to handle the round in a professional manner and get in touch with the appropriate people. Ensure that you are informed of the terms of possible family investors' investments in your startup funding before approaching them, and ensure that they are aware of the conditions of their investments as well. It wouldn't be the first time that family investments broke up family connections, so it's important to protect yourself financially from funding that could cause future rifts.

Venture Capital

When a wealthy individual or company backs the money for your startup to acquire funding from a Venture Capital (VC) agency, this funding is considered to be successful. Venture capital firms construct investment portfolios, which are then used to make investments in high-risk startups in exchange for shares in those companies. Individual investors will be required to fulfil extra conditions as a part of the investment contract. For instance, they might be interested in serving on the board of directors or getting involved in the way certain hiring procedures are handled.

You also have the option of searching for a family office in the area. Family offices have become increasingly popular over the past few years as a result of the growing desire among wealthy families in actively investing in startups and funds in order to maintain control over their financial decisions.

If you are interested in gaining expertise and experience in the process of building a business, the process of raising venture capital can be very exciting. In a similar vein, venture capitalists provide you with access to their broad network of industry leaders as well as incubators. This indicates that you are able to rely on your network of venture capitalists for guidance and mentoring. They also have a tendency to provide more significant investments, which is an advantage in high-tech industries as well as for items that require extensive amounts of development.

Even tiny businesses have a shot at securing venture capital if they are operating in the technology sector, which has the greatest potential to attract VC dollars. However, the acquisition of venture capital has gotten increasingly challenging over the years for some types of organisations. For instance, only female founders and all-female founding teams only raised 2% of total venture capital dollars. When you're just starting out, it might be tough to interact with other people in the venture capital industry due to the exclusive nature of some VC clubs; therefore, you should look for public VC programmes and join incubator and accelerator programmes in order to acquire the assistance you require.

Angel Investors

Private investors, who are sometimes referred to as seed or angel funders, are the type of investors who typically provide funding for tiny firms in exchange for ownership equity. Angel investors can also be close family and personal friends of the business owner. You won't have to worry about coming up with the money to pay back an angel investor because you'll be trading ownership shares in exchange for their financial investment.

When compared to venture capital investments, which might take several months to close, the closing period for angel investments is typically much shorter. They are also less intrusive in the regular activities of one's life. Angel investors, on the other hand, are more difficult to acquire without a preexisting personal network, and the likelihood of receiving big sums of money is smaller.

Bootstrapping

The term "bootstrapping" refers to the practise of financing a company's operations without the aid of outside investors or financial institutions like banks or venture capital firms. If your idea for a business earns money from day one, takes little initial investment, or if the limits on your savings account and credit cards are adequate to keep your firm afloat, this may be a suitable solution for you to consider. The bootstrapping method does not bring you any closer to obtaining business expertise or networking opportunities, but it does carry fewer dangers and require less interference from outside parties.

Crowdfunding

Recently, a novel method of doing investment rounds has gained widespread acceptance. Businesses have the ability to collect the necessary budget to begin operations immediately if they conduct a crowdfunding campaign using one of the leading crowdfunding platforms. A recent survey published on Startups.com found that approximately half of all crowdfunded campaigns are ultimately successful. In addition, more than seventy-five percent of efforts end up surpassing their intended objectives. Even while the process is rather painless and there is minimal to no risk involved, there is still a significant possibility that your campaign may be unsuccessful. If you decide to go the route of crowdfunding, be sure to convey your concept clearly and in an appealing manner, and make use of social media campaigns to spread the word about your cause to as many people as possible.

If we believe Fundable's data, only 0.91% of firms receive funding from angel investors, while only 0.05% receive funding from venture capitalists. In contrast, 57% of start-up businesses rely on personal loans and credit, while 38% receive funding from family and friends. However, the type of investment that will yield the best results is going to be different depending on the product, the sector, and the region. Before deciding to go with any of these alternatives, it is essential to conduct study on the setting of your company.

The Various Funding Phases for Startups

It is not unheard of for companies to conclude transactions such as receiving $15 million in Series B capital. However, the size of your financial leap will vary depending on the kind of your business idea and the stage it is now in.

Pre-seed funding

This is the initial stage, and it is typically sponsored by supporters, families, and friends. There are very minor monetary flows involved at this point.

Seed funding

is the initial stage of the official funding process. In the same way as planting a tree is the beginning of the process, seed money is the beginning of a developing firm. You will be able to start conducting market research, developing new products, and outlining the fundamentals of your business strategy once you have initial financing. It is usual for angel investors to provide the initial seed investment for a firm, and the amount of money they provide might range anywhere from ten thousand to two million dollars.

Series A funding

A demonstrated track record of business success is typically required in order to qualify for Series A funding. This funding can then be put toward expanding the user base or improving product offerings.

You will need to present a business plan that details how you intend to earn long-term profits in order to qualify for Series A funding. Series A rounds often bring in between $2 million and $15 million in funding. Investors who participated in the Series A round of funding came from more established venture capital companies. Sequoia Capital, Benchmark Capital, Greylock, and Accel Partners are examples of well-known venture capital firms that take part in Series A fundraising.

Series B, C, and D funding

When you feel that your company is ready to advance to the next level, it is time to seek capital from Series B investors. The cash will be helpful in expanding the current product options, as well as hiring new personnel and growing the present firm. If, on the other hand, your business has already been awarded Series B, C, or D funding, you've definitely moved past the stage where you need to ask yourself how to put together an effective pitch deck.

Research Your Financiers

Before approaching an investor cold or entering an open competition, it's important to learn as much as possible about the audience's preferences. Finding a business partner who is a good fit in terms of industry expertise, financial resources, and connections is essential. Raising capital requires more than just handing out checks and hoping for the best. Angel and venture capitalists in particular are interested in making meaningful contributions to the growth of a firm. It's not uncommon for them to advocate for a certain cause or defend marginalised communities because of their personal principles and interests. Look through this list of 25 VCs whose programmes focus on reducing the gender and ethnicity gap to find an investment firm whose ethos aligns with your own.

When approaching potential investors, it's important to lay out exactly how the money will be used and why they should put their money in your venture. Investigate their track record of leading investment rounds and the typical return they want.

With this information in hand, you may have fruitful discussions and persuade the correct people to support your idea.

The Process of Creating a Business Plan

Even while there are some key distinctions between launching a crowdfunding campaign and making a presentation to angel investors, the most important thing you need for any type of fundraising is a business plan. This entails developing a "investor pitch" that persuades potential backers to fork over the substantial sum of money required for your business venture.

You will have a better chance of obtaining finance if you have a well-thought-out business plan, and it will also assist you in formalising concepts that revolve around your product. Your startup is now prepared to begin growing its operations and, ultimately, its growth now that it has a strategy that is apparent to both you and possible investors.

The following are some of the most typical components that should be incorporated into your plan:

Please provide an overview of the proposed business. Explain your aims.
Predictions of the economy Include the amount of money that is needed for each individual function and stage of the development process.
A product-oriented strategic plan. Give an explanation of your product's distinctive selling proposition, the customer value it offers, and the types of people you anticipate purchasing it.
Organize both your staff and the resources available for marketing. What are the objectives of your team, and what kinds of people will you seek to hire? Which marketing strategies will you employ, and why will you use them?
Your plan for bringing in money. What will the breakdown of your prices be like? Where do you get your money from? How do you plan to invest the revenue? In the face of the fact that you will incur losses due to competition and the price point of your customers, the objective is to increase your earnings as much as possible.

It is vital to do research that is both thoroughly developed and comprehensive. It is absolutely necessary that each and every relevant statistic and piece of data be accurate. Even though it is not necessary for you to present all of the facts when you are presenting your idea, you should nonetheless be prepared to do so in case issues arise when you are looking for funding.

Make a "Story Pitch" for it.

Utilize the concepts and data presented in your company plan to compose an investment proposal that will persuade potential backers. At events, you will frequently compete against other businesses, and at other times, you will have the opportunity to present your business plan individually to an investor in a one-on-one setting. In either case, there are a few things to keep in mind, including the following:

Try to keep it as brief as possible. People typically have a short attention span, which is exacerbated when they are exposed to hundreds of other concepts. People will be more persuaded by a PowerPoint presentation that is only twenty minutes long as opposed to one that is two hours long.
Begin with the overarching goals, and then work backwards to outline how you will achieve the desired results. Consequently, the first part of your narrative should be an analysis of the problem, your solution, your business model, and the reasons why investment is not only required but also profitable.
Utilize important statistics and graphic representations while developing product prototypes, future growth projections, and financial forecasts.
If you have them, please include testimonials from satisfied customers, business validation tests, and examples of real-world applications.
Make sure to schedule enough time for a comprehensive question and answer session, during which you can incorporate extra facts and data.

Discuss Terms of Investment with Your Investors.

Once you have secured your first investor, it is important to negotiate the terms of the best possible arrangement for both of you. During the negotiation process, your prospective investors will express their worries and ask you questions. Being open and honest is essential in this situation. It is important to start the business partnership off on the right foot and create the required trust, so be sure to give an honest answer.

The larger the amount of money that is invested in your company, the greater the likelihood that you will have to cede control of your company to the investors. However, before you sign the dotted line, double check that you fully grasp the conditions of the contract and that you are confident in your ability to abide by them. In addition, it's a good idea to establish concrete dates for all aspects of your project, from making the proposal to finalising the transaction. By cultivating a sense of urgency, you will increase the speed with which you receive the investments.

The sole rule in fundraising is that there is no single rule. There are many different rules.

When it comes to showing specialist knowledge and the genuineness of an idea, for instance, financial technology companies have a difficult time despite the fact that fintech is one of the most rapidly expanding areas of the technology industry. Investors are aware of the cold, hard facts that every sector and product will encounter its own unique set of hurdles along the way. They will test your knowledge of each and every one of them.

Despite this, there is not a significant decrease in the likelihood of obtaining finance for a business. On the other hand, if you demonstrate to your investors that you are aware of the dangers and obstacles, and that you are able to convincingly illustrate how to overcome them, then you will be rewarded with a self-assured and enthusiastic partner that is willing to build your startup with you.

We hope that you have found our guide to startup finance to be helpful. If you need assistance preparing a valuation term sheet or obtaining assistance with a certified valuation report, please let us know so that we may be of assistance to you.