How to Get Funding for a Startup Business

Securing funding for a startup isn't exactly the most exciting part of your entrepreneurial journey. However, it's essential if you aim for growth and don't want to end up in the junkyard. In fact, according to the startup failure rates, 9 out of 10 don't make it, often due to a lack of financial support.

That's why you should be well-equipped from the start and know some tips and hacks for how to secure startup funding. This involves researching your funding options, preparing a solid financial plan, crafting a great pitch, and a few other important things. 

So, let's get the ball rolling and explore the different funding types and when to opt for them, using tips that'll help you choose the best one for your startup.

Types of Startup Funding

If you're wondering how to get funding for a startup business, begin by having a look at these most common types of funding for startups.

Equity funding involves giving away shares of your company to investors in exchange for capital. This form of financing is ideal for those who are just starting out and want to avoid the risks associated with debt. On the flip side, it means that you'll have to split your profit with others. At times, it also limits your ability to make autonomous decisions, as ownership and control over the company are shared with your investors.

Debt financing typically means borrowing money from banks, loan firms, or individuals and must be repaid with interest over time. This allows you to retain full ownership of your startup but requires issuing regular repayments regardless of whether your business is on the rise or is struggling. High interest rates can be a significant drawback, and without consistent cash flow, there is a risk of bankruptcy.

Grants might seem like the most appealing type of funding because they don't require repayment. Yet obtaining a grant from the government or a non-profit or private organization can be challenging due to strict eligibility requirements. Not everyone qualifies for grants, so it's important to carefully consider other funding options.

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Where do startups get funding? This is among the most frequent questions that startup founders ask themselves. Let's overview the various options and find out how to get startup capital.

Bootstrapping or Self-Funding

It's one of the most suitable startup financing options for those who value independence and have enough savings or income to fund their business. Bootstrapping and using your own money allows you to launch your startup and show its potential without relying on external investors. 

However, this approach comes with significant risks if you're a newbie entrepreneur. Without the financial backup of seasoned investors or due business expertise, overcoming the challenges of the business world can be daunting. The entire responsibility, both financially and operationally, falls on your shoulders.

Family and Friends

Another way to get funds for startups is by borrowing from your friends or family members. They might lend you money at low interest rates or even without any, providing crucial financial support in the early startup stages. You could use a loan agreement to formalize the terms of the loan to ensure transparency and avoid misunderstandings.

While they may not have unlimited funds, this approach can be invaluable for getting your startup off the ground. Additionally, asking for their support offers a low-pressure opportunity to practice pitching your business idea. Presenting to people you know well can help refine your pitch and build confidence before approaching potential investors.

Crowdfunding and Peer-to-Peer Lending 

Crowdfunding is another popular startup term, which involves raising money from groups of individual investors through online platforms like Kickstarter or Indiegogo. This form of investment offers various business startup funding options, including borrowing money with interest, offering equity stakes in return for investment, charitable donations, and more. It's a modern and versatile alternative to traditional bank funding and one of the best fundraising ideas for business startup teams willing to demonstrate concept feasibility without losing equity. For instance, organizing the most successful Kickstarter campaign requires to craft a compelling story and idea, create an engaging campaign video, invest in proper marketing, provide strong social proof, and keep your backers informed about the campaign progress.

Similarly, peer-to-peer (P2P) lending provides another accessible option compared to conventional bank loans, especially if you have poor credit scores. P2P platforms often have more lenient eligibility requirements. Despite that, this convenience can come at a cost, as you may face higher interest rates compared to traditional loans. On the contrary, applicants with a good credit score may benefit from lower interest rates than those offered by banks.

Business Credit Cards and Loans

Taking out a loan from banks, credit unions, or online lenders is another solid option for those who are reluctant to give away equity and lose control of their startup. The main drawback is that you'll have to repay the borrowed amount with interest, which can sometimes be high. 

Securing a bank loan can test your startup's feasibility, as banks have strict documentation requirements and scrutinize every applicant. They might want to have a look at business registration documents, bank statements, your business plan, and sales forecast before finally giving approval. Your time in business and profitability influence your credit score which loan providers take into account as well. Having a dedicated business bank account can further streamline this process, making it easier to manage finances and provide the necessary documentation.

For smaller loan amounts, local banks or microloan lending institutions are recommended. Startups operating in the U.S. (or with U.S. partnerships) have access to SBA loans or traditional bank financing.

If your chances of getting a bank loan approved seem low, there's another appealing option: business credit cards. These cards can provide initial financing for startups, often with a 0% interest rate during the introductory period. Nevertheless, you must be prepared to repay the borrowed amount within that period to avoid high-interest charges.

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Startup Grants

The government, non-profit organizations, and private companies often support aspiring entrepreneurs through various startup grant programs. These programs aim to identify promising founders who can effectively utilize the capital to drive growth. If you're not aware of such programs in your country or industry, doing some research is worth it, as they are likely available.

Nonetheless, there are some challenges to consider. Such programs typically have stringent eligibility requirements and the application process can be time-consuming. Also, it's important to carefully choose the right private or federal grant funding program, as many grants are customized to specific industries or objectives. For instance, the Amber Grant offers great grant opportunities and awards 10k USD on a monthly basis only to select female entrepreneurs.

Accelerator Programs

Accelerator programs for entrepreneurs are designed to turbocharge early-stage businesses. These programs typically last 3 to 6 months and offer essential guidance and support to help you develop better products and scale. Yet the participation can cost you up to 10% of your startup's equity.

Big-name accelerator programs like Y Combinator, Techstars, or AngelPad often provide mentorship in specific business areas. As such, if you're lucky enough to get on AngelPad's bullet train, you'll also get 120k USD in return for 7% equity.

It's also worth noting that the acceptance rate is around 1%, so you must stand out to be selected. Having a launched MVP can significantly increase your chances of getting enrolled in one of the top accelerators. It's a great option to consider for obtaining fundraising for tech startups and unrivaled guidance from gurus with world-renowned "unicorn alumni" in their portfolio, too.

Partnerships

Thriving companies are constantly seeking fresh ideas to enhance their products and services, making collaborations with innovative startups a win-win. A shining example is the partnership between Microsoft and Taiwan blockchain startup International Trust Machines Corporation (ITM). During the COVID-19 lockdown, when the demand for fast and reliable transactions skyrocketed, the ITM team offered cutting-edge blockchain solutions to the problem. Microsoft saw their potential and offered collaboration. By teaming up, Microsoft addressed the issue of online trust while ITM received the support it needed.

Have something valuable to offer? Look for corporate programs or reach out to potential partners, as you never know what opportunities await.

Investors or VCs

Investors and venture capitalists (VCs) are always on the lookout for budding startups that can bring revenue in the long run. Renowned VC firms like Sequoia or Andreessen Horowitz not only contribute to financially but also offer valuable insights based on their experience in the field that can help scale your startup. Keep in mind that they ordinarily focus on specific startup stages, for example, renowned VC company Accel only works with seed or early-stage investments. 

Nevertheless, the downside of raising funds for startup usage this way is that you lose some autonomy and control over your company, as investors will expect clear outcomes from their investments. And high failure rates of startups often deter investors from engaging with idea-stage businesses.

Therefore, if you're wondering how to get venture capital funding for your startup, one of the first steps is having an actually working product with proven traction and an MVP pitch to present something tangible with a clear development strategy.

Another vital aspect of seeking VC funding is your startup’s marketing strategy. Don’t be discouraged: a strategy isn’t necessarily a costly investment in website and advertisement. Everything you do to promote your brand is marketing. Use sales presentation software to create a quality and value-driven presentation or one-pager to share with the potential investors and focus on sharing expert and attention-worthy content on your blog or social media.

Which Startup Fundraising Option to Choose

Now that you're familiar with the various paths for startup fundraising and some of their pros and cons, you might be wondering, "What should I do next? What is the best way to get funding for a startup?". While there's no one-size-fits-all solution to securing funding without risks, there are certain pitfalls to consider before deciding on a specific funding type.

If you don't know how to get startup funding for a small business, check out these steps that can help you pick the best option. We've also put together a comparison table with the key advantages and disadvantages of each option to help you brush aside the question of how to get funding for a tech startup most optimally.

1. Define Your Startup Stage

Identifying your business stage is crucial for understanding which type of funding suits you best. Startup funding stages have different financial goals. As we've mentioned before, the startup stage influences which kind of investor or VC to turn to. And while borrowing money from friends and family can work wonders for pre-seed startups, it most likely won't substantially benefit an established enterprise with a steady cash flow.

2. Calculate the Startup Budget 

The amount of money you crave determines the most suitable type of funding for your startup. If you need short-term funding, loans and business credit cards can be the ideal option. However, if a significant sum of money is entailed, equity funding from investors may be necessary. 

Investors work with precise numbers, so rough estimates are not enough to persuade them to invest in your startup. Calculating startup costs is vital to choosing the right type of funding and doubles your chances of getting the sought-after investment.

3. Set Long-Term Goals

Your startup's long-term goals should align with the funding option you choose as startup stages and goals often identify the funding path you need. The same applies to your investors' expectations. Creating a product roadmap can save you time and effort before exploring various funding options. If your vision aligns with potential investors, it might be worth pursuing their support. If not, bootstrapping could be a more suitable alternative, allowing you to maintain control and flexibility.

4. Evaluate Your Risk Tolerance 

You should decide whether you're ready to give up control of your business in exchange for the wisdom and support of experienced investors or accelerators or prefer being your boss and running your startup independently.

On the one hand, by sharing equity, you don't need to worry about repaying a loan to the bank or managing capital on your own, as investors provide financial support and possibly even valuable business expertise. On the other hand, this approach has a significant drawback that might deter many founders: loss of control. Once you share equity, you must align your decisions with the interests of your investors, which can limit your autonomy in running the startup.

If you feel that guidance and support are essential, equity funding might be the ideal solution. In fact, multiple owners offer equity as a perk when hiring developers for a startup. Debt financing, on the other hand, could be more suitable if you want always to be at the helm. 

5. Consider the Cost of Capital

Pre-evaluating the cost of each funding method might help you choose which funding type suits you best in the long run. If you're seeking loan amounts under 50k USD, turning to microloan lending institutions might be advantageous. To obtain larger sums, taking out a loan from banks or turning to VC firms or individual investors could be a better option. In the event that your startup takes off, equity funding will cost you a fortune while debt funding can be paid back within a relatively short time.

6. Know What You're Signing Up For

Every funding type, from self-funding to equity sharing, comes with its pros and cons. Whichever option you choose, you should be aware of its potential impacts on your startup's future. Let's go over the main advantages and disadvantages of each path to get startup funds to help you decide how to finance a startup business.

More Tips on How to Secure Funding for a Startup

Knowing some tricks and hacks for how to get funding for startup teams is essential if you want to avoid bumps on the road and obtain initial capital. Take a look at these additional tips that can help you secure startup business funding. 

Prepare a Detailed Financial Plan

Before approaching venture capitalists, individual investors, or loan lenders, it's essential to assess the current startup valuation and how much funding you need for further development. Whether you seek investment or plan on borrowing from friends and family, it's crucial to have a clear financial plan outlining how you're going to allocate the funds. This will ensure potential backers understand your funding needs and strategies.

Make Sure You Can Pay Back

Before taking on any financial responsibility, ascertain whether you will be able to repay the debt. No one wants to find themselves in dire straits, so, to avoid such common startup risks,  it's crucial to consider factors such as the:

• interest rate;
• possible penalties for late payments;
• repayment schedule;
• loan fees;
• among others.

Preparing a financial cushion would be recommended in case unexpected problems arise. Since early stages often involve spending more than earning, it's vital to plan your startup runway carefully. After all, no one wants to go into the red, right? A good rule of thumb is to have enough cash reserves to cover at least 6 months of operating expenses.

Stick to Your Business Case 

Just because some of your neighbors' friends took out a bank loan to kickstart a startup doesn't mean it's the right move for you. In fact, blindly copying someone else’s path is among the common startup mistakes. What you need to do is analyze your own situation and choose the funding option that aligns with your goals and circumstances. Remember, there's no one-size-fits-all solution. 

Collect Your Documentation

If you're planning to go to the bank, enroll in accelerator programs, or pitch to investors or VCs, having all the required documents in order is crucial. You'll use them when filing your loan application or show it upon request. This particularly applies to such documentation as:

• business registration and startup incorporation documents;
• business licenses and permits (if applicable);
• business plan;
• financial statements;
• income tax returns;
• and so on.

Plus, technical documentation might come in handy for tech startups. For instance, you may be requested to provide documentation during a technical due diligence audit of your product, so it helps to have everything in place.

Prepare a Convincing Pitch

Once your financial plan and documents are in order and you've chosen the type of funding, it's time to work on a pitch deck. A well-prepared detailed presentation is also a key to how to get VC funding for your startup and attract investors. It's a great tool to show the vision of the product, visualize the data, and formulate your funding ask. Measuring MVP success metrics can also help you prove that your product is worth the investment. 

Research Potential Investors

Finally, before jumping into a particular type of funding, you'd better do your homework. For instance, as you search for how to get startup funding for a business, look into the profiles of investors to ensure these people are experts in your field and can be your guides in the long run. Remember, not only investors have the right to choose who they want to invest in.

The same goes for banks, loan firms, and other lenders. Each offers different loan conditions, so you need to review them carefully before applying.

Major Takeaways on How to Fund a Startup

Summing up, securing funding isn't a walk in the park — it requires time, effort, and knowledge. Even so, you can make the journey smoother and increase your chances of success. You should just choose the right type (or even types) of investment and prove that your product is worth the game. It may not be easy, but with the right preparation and determination, you can find the financial support to take your startup to the next level.

If you need a hand with bringing your product to life, Upsilon provides MVP development services for startups. We even offer tech for equity to select startups, providing development services at discounted prices. Our seasoned experts can guide you through all the steps of building your product and scaling it. So if you have a project idea in mind, feel free to contact us to discuss your ideas, and check out our dedicated team pricing page for more details!

FAQ

1. What is startup capital?

Startup capital is the initial finance for startups which covers the expenses needed to get the business off the ground and support early-stage growth. These expenses include your team's salaries, rent, office supplies, research and development, advertising campaigns, and other essentials.

2. How do startups get funding?

There are multiple paths to how to get funding for your startup. These are the most frequent financing options for startups: self-funding, borrowing from family and friends, crowdfunding, debt funding, equity funding, startup business grants, investor and VC money, accelerator programs, and more.

3. How does startup funding work?

There are several common paths to how startup funding works for entrepreneurs, and they depend on the chosen funding form. As such, requests for borrowing from friends and family are rather straightforward, while crowdfunding implies searching for money via Kickstarter or its analogs. Loans mean you turn to banks or loan lenders to get funds for debt by providing documentation, whereas pitching your startup to investors or VCs is about making convincing presentations that prove that your business is promising. Applying for grants or accelerators are also options each with its own terms.

4. How long does it take to get funding for a startup?

The time for securing funding for a startup can vary depending on the type of investment you've chosen. If you self-fund or borrow money from friends and family, it doesn't take long and only depends on your resources. Whereas funding a startup with the help of VCs or angel investors might take from 1 to 6 months. Getting a grant is the most time-consuming process which can last up to a year.

5. How hard is it to get funding for startup teams?

Getting fundraising for startup business teams is a daunting process that can last from a month to a year. Many factors are taken into account when choosing a startup for investment, e.g., your project idea and its market potential, the team's expertise, a well-prepared financial plan, and more. In-depth knowledge of how to get funding for startups and a strategic approach can enhance your chances of obtaining the investment.