Startups raise hundreds of billions of dollars in funding every year – in 2023 global startup investment reached 85 billion. So how can you get funding for your startup?
Cash flow is often one of the biggest challenges for a young company, and raising capital can be the difference between a startup thriving and barely surviving.
This guide examines the different funding options available for startups and which type of funding could be the best fit for your business.
How Startups Raise Capital
All startups need funding to develop products, hire team members, market their services, and scale their operations. But how does a startup get funding?
The answer depends on what development stage your startup is in. Different funding types work best depending on your company’s current size and goal. For example, bootstrapping or crowdfunding can work for an early-stage company, but once your start up is ready to scale, it may be time for venture capital money that can support rapid growth.
Here’s how startups typically raise capital:
- Self-Funding: Many entrepreneurs begin by investing their own savings into their business. This approach is also called “bootstrapping” and it minimizes outside influence and allows for full ownership and control.
- Friends and Family: Personal networks are often the first source of external funding for a startup. If you go this route, be sure to draft clear agreements to avoid disputes down the road.
- Angel Investors: An angel investor is typically a high-net-worth individual and often an entrepreneur themselves. They invest their own money in early-stage startups, usually in exchange for equity or a share of the business.
- Venture Capital (VC): Venture capitalists are professional investors who use other people’s money to make investments in companies and startups. VCs typically make large investments in companies with high growth potential. However, this funding usually comes with high expectations for returns and a significant ownership stake.
- Startup Accelerators: Startup accelerators are intensive programs that usually last a few months and provide education, resources, and mentorship to early and mid-stage founders in exchange for equity. The most famous accelerators include Y Combinator and Techstars.
- Crowdfunding: Platforms like Kickstarter and Indiegogo allow entrepreneurs to pitch their ideas to the public and raise money from a large number of individual backers. The crowdfunding method can double as a marketing tool if the startup attracts a lot of attention.
- Grants and Competitions: Governments, universities, and private organizations have created grants and competitions to support innovative startups. Each year, VivaTech holds startup competitions and awards that help accelerate businesses with funding and recognition.
- Bank Loans and Credit: Traditional loans are also an option for startups with a solid business plan and financial projections, though this funding requires repayment with interest.
The Different Funding Options Available for Startup Founders
Choosing the right funding option depends on your business model, growth stage, and capital needs. Let’s take a closer look at the pros and cons of some common options:
1. Crowdfunding
Crowdfunding has become a popular method for startups to raise capital while at the same time validating a market exists for their products. Using platforms such as Kickstarter, Indiegogo, or GoFundMe, startups can pitch their ideas to the public and receive funding from individual backers.
Benefits:
- Non-dilutive: Founders keep all equity.
- Campaign success often signals product-market fit.
- Crowdfunding can generate buzz and attract early adopters.
Challenges:
- Creating a compelling campaign requires significant time and effort.
- Success depends on public interest in your product.
2. Investors
Once your business idea shows potential and you know the market well, you’re ready to approach investors. There are two main types of investors:
- Angel Investors: Ideal for early-stage startups, these high-net-worth individuals invest personal funds in exchange for equity. For example, Uber received its first funding from angel investors.
- Venture Capitalists: For startups ready to scale, VCs can offer large capital investments. In return, they want equity and often a board seat to influence strategic decisions. VC firm Sequoia Capital’s early investment in Airbnb helped it scale globally.
Benefits:
- Access to expertise and networks.
- Ability to secure significant amounts of funding.
Challenges:
- Loss of control: Investors often seek decision-making authority in a startup.
- Equity dilution: Founders give up ownership shares.
For an in-depth look at startup angel investors and venture capitalists, check out: A Startup Guide to Funding: How to Find Investors
3. Venture Schemes
A venture capital scheme is a government program that helps small and medium-sized businesses secure funding in exchange for equity. Countries including the U.K., Ireland, France and India started these initiatives to provide investment to startups with high growth potential. Some venture capital schemes are designed to stimulate the economy, encourage innovation, or support underrepresented groups in entrepreneurship.
Large companies have also created corporate VC schemes to invest in startups aligned with their business interests. Examples include Google's GV (formerly Google Ventures) and Intel's Intel Capital.
Benefits:
- Access to significant funding for scaling.
- Mentorship and guidance from seasoned investors.
Challenges:
- Intense competition.
- Loss of equity and partial control over the business.
4. Grants
Startup grants are typically awarded by governments, foundations or corporations and do not need to be repaid. Because of this, grants are low-risk and don’t dilute ownership stakes. Many grants also provide networking opportunities and mentorship and can boost a startup’s reputation. Examples include the Small Business Innovation Research (SBIR) program in the U.S. and the European Union’s European Innovation Council accelerator program.
Benefits:
- Non-dilutive and no re-payment required.
- Targeted Support: Grants are often created for niche industries or underrepresented groups.
Challenges:
- Highly competitive and often lengthy application processes.
- Grants may come with restrictions on how the funds can be used.
How to Determine Which Funding Route Is Best for Your Business
When deciding which funding option is the right fit for your startup, consider the following factors:
1. Stage of Development
Idea Stage: Pre-seed funding such as bootstrapping, crowdfunding, and grants are best suited for testing ideas and building prototypes.
Early Stage: Angel investors or seed funds can provide the capital needed to launch your product.
Growth Stage: Venture capital is ideal for scaling operations and expanding into new markets.
2. Business Model
Consumer Product: Crowdfunding works well for consumer products where public enthusiasm can drive pre-sales.
Tech Startup: Angel investors and VCs are often the go-to for startups needing substantial funds for research and development.
Non-Profit or Social Enterprise: Grants and impact investors can provide mission-aligned funding with lower risk.
3. Capital Requirements
Small Budgets: If the funds you need to reach your goal are small, bootstrapping or small grants may be enough.
Large Budgets: For more ambitious goals, consider VCs, crowdfunding, or venture schemes.
4. Ownership Preferences
Want to retain full ownership? Stick with crowdfunding, grants, or loans.
Open to sharing equity? Look into angel investors or VCs.
Funding your startup for success will likely require various, diverse types of funding across the company’s journey. Acquiring the investment you need takes the right mix of strategy, preparation, and perseverance. But there are more funding options than ever available, so don’t miss the opportunity to capture the funding you need to achieve your goals.