A startup is a company in the early/first stages of operations; a newly formed business. But to launch a new business you need money, more specifically you need funding.
Startup funding is essentially the money required to launch this new business that you’re thinking of.
So what sources of funding exist out there?
A few actually. Let’s take a look at the list below.
1. Self funding
Self-funding means providing the necessary funds to help finance your newly established business through your savings.
Self-financing is the most common type of financing used by most startups. It enables you to keep control of your business. You don’t have to give any equity to anyone. However, if the startup is to fail, then you’re going to lose all of your funds invested in the startup.
Startup funding from banks comes in the form of small business loans. They’re usually pretty standard loans, meaning that you’ll take out the loan and start paying out the loan and interest.
This type of financing allows you to retain full ownership of your startup. The disadvantage of this type of financing is that banks may be hesitant to lend to startups without strong financials on their balance sheets. After all, banks need to be assured that you’re going to be able to pay that loan back.
Moreover, your business may have some cashflow struggles in the early stages of your venture, which may make it more difficult to cope with bank payments early on.
3. Angel investor/s
Angel investors are high-net-worth individuals who provide financial backing to early stage-startups in exchange for ownership equity. Angel investors do not only bring capital to the table, but also extensive knowledge, experience, and networking, as most angel investors are business professionals with a wide range of resources. A couple of disadvantages about angel investors are that by giving angel investors a part of your business, you’re also giving away a portion of your future net earnings. It will also mean that you won’t have full control of your company.
4. Venture Capital
Venture capital is a type of private equity investing that involves investments in earlier-stage startups in exchange for ownership equity. Similar to angel investors, when you give ownership equity to investors, you won’t have full control of the company and you will have to give a portion of your future earnings away. There are different stages of venture capital funding depending on your growth as a startup. These different stages are called series funding. Series funding refers to when a founder raises large sums of capital to keep their startup going. Stages of venture capital financing are:
- Seed Funding — Seed funding refers to the very first official capital/equity raising round. This capital is then used by the startup founders to finance the company’s first operations, such as market research and product development.
- Series A Funding — Once your startup has developed a track record, such as an established user base or other key performance indicators, they’re considered ready for Series A funding to help them grow even more as a business. The capital raised for Series A funding is used then to further optimize the company’s user base and products/services offerings. Essentially, in this funding round, startup founders are trying to figure out how to further monetize their business.
- Series B Funding — This funding round refers to when startups are past the development stage and are trying to expand. The startup has been successful in developing its user base. The capital raised in this funding round is then used to grow the company even more so it can meet the growing customer base.
- Series C Funding — If your startup made it to Series C, then congratulations are in order! This means that your startup has proven to be quite successful. The capital raised from Series C is used in order to help the company develop new products, acquire other businesses, and expand to new international markets. Investors and founders are focused on scaling the company and getting it ready for a possible IPO.
- Initial Public Offering (IPO) — Initial Public Offering or IPO refers to when a private company first sells its shares of stock to the wide public. Essentially it means that the company’s ownership is transitioning from private ownership to public ownership. Investors and the founders of the startup have a financial incentive to make their company public. By raising capital through the IPO, they can further grow their business, the founders and the initial investors can opt to cash out as a successful IPO is the perfect exit strategy for most startup investors.
A grant is a form of financial assistance. They may come from the government or other various local or international agencies that want to fund your ideas and projects to provide public services and stimulate the economy.
Crowdfunding is one way of raising capital to finance your startup, primarily through social media. These crowdfunding platforms are websites that enable interaction between fundraisers and the crowd. These platforms operate an all-or-nothing funding model. This means that if you reach your target you get the money and if you don’t, everybody gets their money back.
What are the largest sources of funding for startups?
In 2018, almost 78% of startups in Europe relied on the savings of founders. For comparison, 26% received funding by venture capitalists and 29% from angel investors. 20% of startups got financing from government subsidies. Also, around 18% of startups got funding from crowdfunding platforms.
Does your startup need funding?
After that, you should write a business plan! Many investors will require a business plan that outlines your business model, funding needs, revenue expectations, cash flow projections, etc.
At legit you can create your own business plan, in 5 minutes.
May the force be with you!