How to Raise Funds for a Startup in 2021
One of the first questions that come to mind when you think about creating a business is where to find funds for a startup. Finding the best way to fund your idea is not an easy thing to do. But not impossible.
Raising startup capital for your business will allow you not only to have financial support but also will instantly grow your network and provide opportunities for future plans. And we prepared the best tips to help you raise funds for a startup.
Analyzing the market and creating your own strategic business plan is one of the most essential steps. If you have a business plan that can back up your idea and show that you know your audience and competitors, it will increase your chances of getting funds. It also doubles chances for a successful project launch. Investors want to understand all the details of your idea, what you can offer to the market, why it has value to other people, and most important – how you plan to monetize it because the investor is interested in profit. This information will ensure them that it is worth giving funds for your startup.
“The best entrepreneurs are not the best visionaries. The greatest entrepreneurs are incredible salespeople. They know how to tell an amazing story that will convince talent and investors to join in on the journey.” – Alejandro Cremades, “The Art of Startup Fundraising.”
Ways of raising funds for a startup
Bootstrapping is the first step for most entrepreneurs. You start a company or a business using only your own money and savings. It requires you to be super-efficient with your spending but is also one of the riskiest ways of funding. There are many successful companies that started out by bootstrapping. Check, for example, GoPro and GitHub. Both companies started small and are now known for their success all over the world.
Crowdfunding is based on donations. It creates an opportunity for a business to raise hundreds of thousands of dollars by getting small sums of money from a large number of supporters.
There are 4 kinds of crowdfunding campaigns:
- Donation – It is one of the most popular types and means asking for a donation from other people to raise money for your startup idea.
- Debt – Debt-based crowdfunding is when the person is borrowing money from other people but with a commitment to repay later.
- Rewards – The rewards-based crowdfunding campaign is another popular type. People who contributed money to a project can expect to receive some rewards. The rewards are based on the amount they donate or what the particular company produces or provides.
- Equity – Equity crowdfunding is considered to be the best option for small or medium-sized businesses that need a large amount of capital. In exchange for donations, donors receive percentage ownership of the company.
Popular crowdfunding websites:
There are many crowdfunding platforms on the Internet that you can use for online startup funding without risks. But here’s a shortlist of the most popular and efficient ones:
Kickstarter – Kickstarter is a reward-based donation platform that attracts thousands of people that want to invest in the things they believe in. It is the largest crowdfunding platform that funded more than 160,000 projects.
Indiegogo – Indiegogo started out as a platform for raising money for independent films and because of the success it got, the platform began accepting projects from other categories as well a year after its launch in 2007.
GoFundMe – GoFundMe is a donation-based crowdfunding platform that is mostly used for charity, but a lot of businesses use it to raise money for their startup as well.
Technologies continue to improve and help in online startup funding but applying for a loan is what many business owners still use. The requirements for a bank loan differ based on the country you’re from but what you definitely need to have is a solid business plan. It will increase your chances for a positive outcome.
There are two different types of bank loans:
- A capital loan that is used to cover the company’s short-term needs
- Funding is used to cover the company’s daily and long-term needs
And to get approved you usually need to be 2 or more years in business with strong revenue, and have a good credit history.
Venture capital investors provide financing to startup companies or small businesses when they believe in their long-term growth potential. Venture capitals often come from individual investors, investment banks, and other financial institutions and are high risk for the investors. But if the business succeeds it pays off with high rewards. For example, in 2005 Accel Partners invested $12.7M in Facebook. And the firm sold a part of its shares in 2010 for half a billion dollars.
Startups often take more than 5 years to grow and the advantage of venture capital is that most of the investments are long-term. It lets business owners have financial support and money for strategic improvement without taking on the burden of loans.
An angel investor is an individual with a high net worth that invests in small businesses. Most of the time they operate alone but sometimes team up with other angel investors. Usually, angel investors don’t just give you money but they also help you with the development of your product. And sometimes their money is not as important as their advice because they know what is in demand on the market.
But how does one find an angel investor? There are actually many platforms for that. For example, Angel Capital Association is one of those platforms which business owners use to raise funds for a startup and meet angel investors.
Startup Funding Rounds
Startup funding rounds are series of stages through which a startup raises capital for further growth. Each round targets a different type of investors, for different amounts of capital. And depending on the type of industry, a funding round takes from three months to more than a year. The time between each round also varies.
The pre-seed round is the earliest stage of funding when the company’s founders are only starting the process of developing their ideas. And at the beginning startup owners usually invest their own money or ask for help from family and friends. Depending on the product this stage can happen very quickly or take a long time.
Seed-stage round happens after the Pre-seed funding. The seed-funding round is a phase when founders try to polish their idea and investors (usually angel investors) provide funds.
The next steps are rounds A to C, or even D. Round A is mostly focused on startups with a business model that will provide immediate profit. And because of that, in round A owners need to have a strong strategy for turning investments into long-term growth. Most of the time venture capital firms are investors during the round A stage.
After round A, comes round B. It is the phase when most of the startups are noticeably growing. And round B helps them to develop into lasting companies.
The name of the rounds represents the stage of the particular business. It is helpful for both startups and investors.
The startups at late-stage funding are usually highly successful and continue to grow. This stage means that startups want to keep their success and move further by expanding and creating new products. Late-stage companies often receive a steady cash flow and are ready to grow even more that’s why they generally bring in revenue and can be profitable. It is also the stage when a company can sell its stocks to the general public.
Choosing the right investors
Choosing the right investors for a startup is another important step that an entrepreneur has to take if he wants to raise funds for business. When you start to partner with investors, it is meant to result in a long-term cooperation. That’s why it is crucial to be very careful with who you choose. Investors are going to have a huge impact on your business improvement, funding terms, and who you will be able to attract for additional funding rounds.
Knowing what is important for investors can prevent future problems and improve further results. Because an investor is not only someone that gives money, he is interested in seeing a return on his investments. And because of that he consults, takes part in decision-making related to the company, etc. What kind of person you cooperate with depends on which way your startup will go. So here are key things to put on your checklist:
- Make sure that you are searching for the right level of investors for your stage or round. Everyone wants quick money from big investor companies but it is not always the right way to go. Better start with angel investors.
- Make sure the potential investor is able to fund. Check when they funded something for the last time, how their previous investments are now performing. You don’t want to waste your time by choosing an investor without money for investments.
- Choose a long-term partner, not money. Yes, it is important that a potential investor has money but it is also crucial to remember that people are different and you need to go with a person that has a similar mindset. This factor is often overlooked, which results in misunderstandings and issues later on.
- See how much influence the investors have in your industry, what connections they have. If they invest in your startup they can also provide you with connections in HR, marketing, etc.
- Make sure they believe in your idea and in your ability to attain set goals and will give you room for growing and doing your work and not control every step or compromise your reputation.
So in summary
Including tactics and tips from this article will definitely help on the journey of raising funds for your startup. And as you begin this journey make sure to keep the fundraising process efficient and organized. Remember about key factors when choosing ways to fund your business. Have a solid business plan with detailed information and details to show potential investors that your idea has the potential to grow. The key factor that is going to help you along the way is to remember that everyone starts small. It’s impossible to skip the stages of starting out and wondering if it is going to work or not. But you can’t get big without actually trying. Keep in mind the tips we provided and don’t underestimate your potential.