How to Fund a Startup
Securing funding for your startup is an essential part of launching and maintaining a successful company. Finding the right funding sources begins with calculating your startup costs, writing a business plan, and finally securing funding. Here’s how to get started:
Step 1: Calculate How Much Startup Funding You Need
Before you can look for startup funding, you need to know how much funding you’ll need. That requires breaking down all of the costs you will potentially have to start and operate your business.
Startup costs range from office supplies and inventory to formation fees and employment taxes. Every startup will have different costs depending on its type of business, location, and other factors. It’s a good idea to start with what you’ll need to get your business started, such as office space, business licensing, and insurance. Be sure to verify your state and federal requirements in terms of fees required to operate your business legally.
Generally, startup costs are divided into two categories: fixed costs that are continuous and variable costs that change in amount and frequency. Fixed costs are generally rent, utilities, insurance, and other unchanging costs; variable costs can be inventory, payroll, marketing, and any other expenses that will fluctuate depending on your startup’s sales.
Knowing exactly what your startup costs will be is a necessary step before you can secure funding. Not only does being aware of your startup costs confirm the amount of funding you’ll need to secure, it also impacts your ability to pick the right funding choice.
Recommended: Use our free Startup Costs Calculator to help you estimate the cost of launching your startup.
Step 2: Write a Business Plan for Your Startup
Your startup’s business plan is essentially the roadmap to the first three to five years of your startup’s life. Not only does creating a business plan help you strategize and manage your company, it is essential to securing funding.
There are two types of business plans that are common for startups: traditional business plans and lean canvas business plans. Each serves a different purpose while providing similar information about your startup’s goals and intentions.
A traditional business plan is a thorough, in-depth look at what your startup is, who you are, what milestones you hope to achieve, and how you’re planning to achieve them. In addition, a traditional business plan will include financial projections, market research, and more to give you an idea of how your business will operate, as well as communicate to a funding source why they should choose to invest in your startup.
Comparatively, a lean startup canvas is a general overview of the startup’s DNA, goals, and intentions. A lean startup canvas can be just one page with concise information to give investors the basic information they need to know about your startup and why they should invest.
Step 3: Explore Your Startup Funding Options
Believe it or not, most startup entrepreneurs fund their own company using personal savings. Bootstrapping is definitely one of the harder ways to fund a business; however, it is entirely possible. Essentially, bootstrapping is squirreling away money into savings, getting a side hustle, anything that will put some money in your pocket to put towards your new business venture. Once you’ve established yourself and gained some momentum, additional funding may be easier to come by.
Friends and Family
If you’ve got friends and family interested in funding your entrepreneurial goals, consider asking for a loan to launch your startup. It is important to note with this funding source that ensuring you have a written agreement and a repayment plan is key. Otherwise, you can have a messy legal or personal situation on your hands.
Four steps to respectfully source funding from friends and family: Present your case, propose clear repayment terms, share your backup plan, then create a written agreement.
There are many platforms that offer entrepreneurs the opportunity to crowdfund their business. If you aren’t familiar with crowdfunding, it's when your business or project is funded by several individuals through donations typically made through a crowdfunding site such as GoFundMe or Indiegogo. While many people offer some type of compensation or gift for donating to fund their project, this money isn’t required to be paid back unless stated otherwise.
Venture Capital Firms
Venture capital (VC) firms invest in startups that they expect to see rapid growth, and therefore, a high return on investment. Startups that receive this type of funding are typically tech-focused. It is common for VC firms to join the board of directors, actively participate in business decisions, or be otherwise involved to protect their investment.
Angel investors are similar to VC firms in that they invest in companies that they expect to see a high ROI. However, unlike VC firms, Angel Investors don’t typically take an active role in the startup’s operation. Often, angel investors are people with an excess of money to spend on risky investments such as potentially lucrative startups. Companies that receive this type of funding are typically tech-focused startups that are poised for rapid growth.
Startup accelerator programs provide not only funding but also a myriad of additional benefits for startups such as mentorship and business development tools. A few examples of successful startups that have used accelerator programs are AirBnb and PillPack. The goal of these programs is to provide entrepreneurs with the tools, information, community, and funding they need to launch a successful startup.
Similar to a startup accelerator, startup incubators are designed to provide entrepreneurs with resources during the early stages of their startup, such as funding and mentorship. In contrast, startup incubator programs are centered around developing a community of support for entrepreneurs. This means that incubators are typically housed in a shared space that members pay a month-to-month lease to access; this space allows access to training, business tools, and the opportunity to develop connections with other entrepreneurs.
A startup grant, essentially, is free money to launch, grow, or maintain your startup. With startup grants, the money you’ve provided doesn’t have to be repaid. However, they often come with stipulations. By accepting the money, you agree to the terms and conditions of how the money is spent. For example, if your grant is meant to fund technological support, you cannot use it to cover payroll or other business expenses.
Unlike startup grants, startup loans are money that has to be repaid to the lender. Startup loans are typically acquired via application to a business lender such as a bank or other lending institution. In addition to completing the application process, most lenders require a thorough business plan as well as proper documentation required by the lender to qualify.
Startup Business Line of Credit
For startups that already have some revenue coming in, a startup business line of credit (LOC) is a revolving line of credit that can be used for business expenses. This is typically available only for startups that have been in business for at least six months (if not more) and currently have sustainable revenue streams. For example, if you started by bootstrapping your business, a LOC can be a great way to maintain your startup’s funding as your business grows.
Startup Funding Summary
Whether you’re launching a startup or looking for ways to fund a growing business, securing funding for your startup can be a stressful process. However, with an extensive list of startup funding sources available, finding the right funding is a manageable aspect of starting or maintaining your company and working toward achieving your entrepreneurial goals.
Startup Funding FAQ
What is startup funding?
Startup funding is the money used to launch, grow, or maintain your startup company. There are a variety of startup funding sources available such as grants, loans, investors, and more.
How does startup funding work?
Depending on the type of startup funding you receive, you may be required to pay the money back incrementally, or for startups geared towards rapid growth, to simply provide a high return on investment for your investors. Most often, you will need a well-crafted business plan and to complete an application process of some kind to obtain funding.
How do startups get funding?
The process of obtaining funding varies depending on the source of funding. For example, startup grants have different steps and qualifications to receive funding than venture capitalists will require. There are, however, two things you’ll need to do to gain startup funding: write a well-crafted business plan and research the applicable funding options for your startup.
Can you get funding with just an idea?
There are certain grants and other funding opportunities that fund startups solely based on an idea or concept. However, more often than not, you will need to develop a business plan before applying for funding.
How do you calculate startup costs?
To calculate startup costs, you need to make a list of all of the expenses you can expect to pay to start and operate your business. Startup costs range from office supplies and inventory to formation fees and employment taxes. Generally, startup costs are divided into two categories: fixed costs that are continuous and variable costs that change in amount and frequency. To make it easier, we recommend using our Startup Costs Calculator to calculate your startup costs for free.