Startup funding stages
Traditionally, startup fundraising goes through several funding rounds:
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However, this model for startup funding rounds has changed in recent years, as investors' requirements and expectations increase. According to Natalie Dillon of Susa Ventures, the average age of startups raising seed capital has already exceeded three years.
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Even small ventures gain significant funding during seed round. Recent examples include:
- Mahmee raised $3 million
- The Org raised $2.7 million
- Umbrella raised $5 million
- Kaleidoscope Labs raised $4 million
These numbers illustrate the shift from small business investment priorities to significant investments that feed into companies that have already gained a market share and want to expand it. As a result, current seed rounds resemble Series A deals. You need to keep this in mind for successful startup business funding.
How to get funding for your startup?
According to a survey by Kabbage, around 30% of small businesses start with as little as $5,000. Almost two thirds (58%) rely on a $25,000 startup capital. According to Lendio, the most common sources of startup capital include the CEO's personal savings (77%), bank loans (34%), loans from friends and family (16%), online lenders (4%), and other funding channels. The same survey suggests that only 3% of small business owners raise money from angel investors and venture capital, and only 2% rely on crowdfunding sites. However, these types of startup funding offer the most promise, so let's take a closer look at each of them.
Crowdfunding
This strategy relies on getting small donations from numerous people to fund your startup and gain first adopters for your products. You can attract crowdfunding investors to your offer using any of the offline, online and AI marketing strategies. This fundraising strategy is perfect for startups in need of seed capital necessary to start development or manufacturing.
If you want to raise money for a charity cause or have nothing to offer in return to your investors, GoFundMe is the best crowdfunding startup funding website for you. Kickstarter and Indiegogo are reward-based, meaning you must provide a product or a service for every investor depending on the sum of their donation. You should read the terms of use carefully before setting up your crowdfunding campaign on any platform to avoid unpleasant surprises, such as mandatory commissions or fees.
Business Incubators
Incubators help with starting a business. They support startups as they grow and find their feet on the market by providing management training, office space, seed capital, and more. Unlike other business programs, incubators do not admit all applicants and are aimed at newly established and early-stage companies. This translates into high success rates and world-changing solutions, such as Airbnb, Dropbox, Reddit, and others.
Business incubators vary depending on their operational model and goals. Academic institutions and non-profit organizations usually do not require returns from startups. For-profit property development ventures and venture capital companies want to see their investments multiplied. You can find a business incubator that suits your needs in the organization directory of International Business Innovation Association. Some well-known incubators include Ycombinator, The ICEHOUSE, Techstars, and more.
Angel Investors
What is an angel investor? Angel investors are individual investors willing to take high-risk approaches with fewer return guarantees. However, their funding budgets are usually limited and sometimes cannot cover startup needs in full. This fundraising strategy is best suited for getting seed capital and early-stage funding (Series A).
To find your angel investor, start with online platforms, such as Angel Investment Network, Gust, or AngelList. You can also meet them at industry trade shows and conferences as a part of your networking effort. Web Summit, Rise Conference, Startup Grind Global Conference, TechCrunch Startup Battlefield, and others are all excellent places to start.
Venture Capital
Companies and funds can invest in your startup on behalf of their owners or members through a venture capitalist managing the daily operations. VCs steadily become more demanding, and they do not risk money unless they get profit guarantees. As a result, this fundraising strategy is more viable for established companies that have already gained a foothold in the market.
To find your venture capitalist, you can send out your pitch decks to VC funds and companies. We'll share insights on the best time to do this later in this post, so stay tuned. However, you will get the highest chance of securing the funds if you are introduced to an interested VC by another investor or if you are contacted directly after your startup gets noticed.
ICO
Initial coin offering is not just for cryptocurrency launches anymore. ICO can become a startup funding strategy if you sell tokens or coins to raise seed capital. This approach allows you to forego venture capitalists, bank loans, and stock exchanges. You can even avoid some regulations, although more countries are adopting laws to regulate the volatile cryptocurrency market. You will also need to invest in token development first, and for that, you require technical help from an experienced developer or a full team.
These are the five most common startup financing approaches for raising seed capital and going through further investment rounds. None of them are without downsides, and you should analyze both benefits and pitfall before committing to one strategy. Whichever option you settle on, you will need to present your idea to entice investors, and that's what we'll cover next.
3 fundraising must-have tools
Successful fundraising requires lots of research and preparation. While there are dozens of tools you will need, these are must-haves because without them no self-respecting investor will give you the time of day.
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Startup funding mistakes to avoid
Dozens of factors can affect the investors' decision to withhold funding. We will point out a few glaring and not so obvious mistakes that will doom your pitch and ruin your chances of getting the funds. Do not:
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Pro-business startup funding tips and tricks
According to a recent research report by TechCrunch, there are only two fundraising windows throughout the year. The one in March lets investors browse and decide on investment opportunities <medium>before the summer break<medium>. The second window in October/November provides a chance to secure deals <medium>before the Christmas holidays.<medium>
However, these windows do not mean you should start sending pitch decks as late as October. Instead, start early and give VCs the time to discover your project, consider the competition, and make a decision.
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Never running out of money is the startup founder's primary concern. To stay on top of this, consider your runway and give yourself <medium>at least six months to move to the next round<medium> of startup funding process. If you got enough money for 12 months during the last fundraising campaign, you would have to start over in just six months. Choose your fundraising window accordingly.
Most startups rely on <medium>founder's personal savings<medium> to get off the ground and move onto raising seed capital through angel investors, incubators, or crowdfunding after they have a working MVP or prototype. Now you know where and how to get investors for your startup and how to dazzle them with your pitch deck, prototype, and online image.
Just remember to avoid common startup funding mistakes, and your chances of successful seed round will soar. While you prepare for the next fundraising window and market your ideas, let the Freshcode team take care of the technical side of things for you!
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