Reasons to Look for Outside Funding for a Startup
Outside funding may supercharge your growth as a startup, but it comes with a lot of baggage. It's not always the right decision for every business, so you need to be clear about your reasons for wanting to raise money before you go down that road.
You've Achieved High Interest
As a startup, it can be tough to find the amount of interest needed to secure funding. Investors are at the very least looking for ways to immediately make their money back, so having a product or service that's in high demand is a great start.
If you already have a large number of pre-orders or you're receiving a big amount of publicity for your business, you may want to consider looking for outside funding.
Your Resources Are Draining
The first few years of a startup are the most crucial, and even some of the most successful brands in the world have come close to running out of cash at one point or another.
If your resources are starting to drain and you don't see a way to turn things around, then it may be time to look for an infusion of cash from investors. Raising funds may take some time, so you'll want to make sure you are at least six months out from going under.
You're Looking to Expand
Businesses don't have to be suffering in order to raise funding for startups; it may be that they are doing so well they are looking to expand. If you're looking to open up new locations, hire more staff, or bring on a bigger team, then you may need some help with financing.
Investors can help you secure the money you need to get started with the expansion so you can continue to grow your business.
Types of Outside Funding for Startups
If you're asking yourself when is the ideal time to raise funding for startups, then you should at least be aware of the types of funding available.
There are five major types of funding you can seek from outside investors, including series funding, crowdfunding, loans, venture capital, and angel investors.
Series funding involves going to investors for money in rounds. The most common types of series funding are seed rounds, Series A, B, C, and D rounds.
During your Series A round, you'll be focused on getting your product or service to market to show interest and revenue capabilities. This helps entice investors who will be looking for immediate equity instead of convertible notes.
Series B-D will mainly involve the growth of your business. These rounds are for companies who have already shown market success but are now looking to push things further.
In these funding rounds, you'll be looking to add multiple locations to your business, further develop your internal team, and become profitable. Investors will again be looking for immediate equity in order to help you achieve your growth goals.
The key balance with raising funding for startups is to manage the amount of equity you give up with the number of resources you believe will help you succeed. It's important to remember that having a small piece of a very successful company can be better than having the entire share of a company that isn't doing well.
Crowdfunding is a method of raising money by asking for small donations from a large number of people.
Crowdfunding can be done through platforms like Kickstarter and Indiegogo or directly on your own website. At this stage, you offer special discounts or rewards instead of giving away equity in your business.
This type of funding is great for businesses that have a product or service that appeals to the masses, and it's also a good way to get your business in front of potential customers.
This is usually the first stage of raising funding for startups since they have the opportunity to receive large amounts of funding while still retaining the entirety of the business.
The only downside is if the business doesn't take off, you may have an overwhelming amount of investors to pay back, or you sacrifice your reputation.
Loans are a traditional type of funding tool for startups that can be used for businesses of all sizes. Loans can come in a variety of different amounts, which works well for any type of entrepreneur.
You can apply for loans from banks, credit unions, and online lenders. The interest rates on loans are usually lower than those of other types of funding, but you will have to repay the loan with interest.
This type of funding for startups is best for businesses that have been in operation for a while and have a good credit history. The only problem with loans is if you aren't able to repay the money, the interest will continue to grow, and you'll end up being in more debt than you would have liked.
Venture capital is a type of funding that's invested in high-growth businesses with the potential for large returns.
This type of funding is usually only available to businesses that are already generating revenue and have a solid team in place.
Venture capitalists tend to invest in businesses that are in industries that they are familiar with and have a good understanding of the market.
Angel investors are individuals who invest their own money in businesses that they believe have the potential for high returns.
Angel investors usually have a personal connection to the business or the entrepreneur, and they tend to invest less money in businesses than venture capitalists.
You won't have to jump through hoops if you have an angel investor because they don't need approval from anyone before throwing their money into your business.
Other Ways to Raise Money for Your Startup
You might not know exactly when is the ideal time to raise funding using the methods above. The five major types of funding may be the most common options, but there are still other types of funding that may come in handy.
Grants from the government are an excellent way to get free money for your business but are usually only available to businesses that are working on something that will benefit the public good.
You won't have to pay back any of the money from a grant, and you won't have to give away any equity either. The only problem is you'll be competing against hundreds of other businesses that are trying to receive the same grant. Some of the application processes may be complicated and take lots of time to complete.
You may also be able to get funding from family and friends, and most startups use this option as their first method of obtaining more money. It's easier to convince family and friends to invest in a business because they already know and trust you.
The only problem with raising money from family and friends is that if the company doesn't end up working, then you'll have strained relationships with the people who are closest to you.
Another alternative method to raise money is seeking out convertible notes. Convertible notes are loans that will eventually turn into equity in the company.
This type of funding is great for businesses that are struggling to raise money because it's an easy way to get more cash without giving away too much equity. The downside is that you'll have to give up more equity if the business ends up being successful.
Which Outside Funding Is Best for My Startup?
If your startup is poised for the masses and you believe a large number of people are going to be immediately interested in your product, crowdfunding is going to be your best solution.
You won't have to give away a piece of the business, and you'll be able to gauge just how much interest your service or product has. The only problem is you'll need to get a larger number of people to invest instead of getting one large angel or venture capitalist to invest.
If your business is B2B and you believe it has huge potential to disrupt or change an industry, but you don't have the resources to scale, venture capital is going to be your best bet. You can secure a large amount of money from venture capitalists, and they'll also offer you valuable resources and connections that can help your business grow.
The downside is you'll have to give up a larger percentage of equity in the business, and you'll need to be able to show them that your startup has high potential for growth.
Entrepreneurs who are on the cusp of a successful business but just need a little help to get over the hump may wish to turn to angel investors. These types of investors will invest less money than a VC firm, but they'll also take a smaller amount of your business.
Frequently Asked Questions
How long does it take to raise money for a startup?
It will take an average of three to six months to receive funding for a startup. Start your funding round early to avoid financial issues in your startup.
How much should I raise for pre-seed funding?
The answer will depend entirely on the type of business and how much funding you believe is needed to make a significant impact on growth. A typical pre-seed funding amount is around $400,000 to $500,000.
How long should a seed round last?
Once you have begun raising funding for your startup in a seed round, it will usually last anywhere from 12-18 months.