Startup Funding – Definition, Sources, Types, and More
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Startup Funding Definition
Startup funding is the money needed to launch a new business. It can come from various sources and can be used to help the startup go from idea to actual business.
What are the Top Sources of Startup Funding?
While we often hear about venture capital when it comes to startup funding, it turns out that’s just one of the six top sources of startup capital.
Of the $531 billion raised in startup capital each year, $185.5 billion is from personal savings and credit; $60 billion is from friends and family; $22 billion in venture capital; $20 billion is angel investors; $14 billion is from banks, and $5.1 billion is from crowdfunding.
What Are Some Types of Startup Funding?
As you can see, there’s a broad range of options when it comes to startup capital. So let’s take a closer look at some of the types of startup funding.
1. Personal Savings and Credit
Personal savings and credit account for the largest portion of startup capital.
Founders know that if they’re going to convince anyone else to invest in their company, they have to be willing to go all-in themselves.
It’s also the most accessible form of funding, as you don’t have to rely on anyone but yourself to use it.
2. Friends and Family
Many startup founders turn to their friends and family to help them with initial funding. After all, those are the people that already believe in what you’re doing — you don’t have to convince them the way you would a VC, angel investor, or bank.
Friends and family can be a great source for getting started, but it’s important to make sure that the relationship’s business part is clearly outlined.
Get legal documentation for everything and make it clear to your loved ones that they may not get any return on their investment at all.
Some entrepreneurs choose to avoid this type of startup funding because of the potential personal complications.
3. Venture Capital
Venture capital is financing invested in startups and small businesses that are usually high risk and can exponentially grow.
The goal of a venture capital investment is a very high return for the venture capital firm, usually acquiring the startup or an IPO.
Venture capital is a great option for startups that are looking to scale big — and quickly. Because the investments are fairly large, your startup must be prepared to take that money and grow.
4. Angel Investors
Angel investors are typically high net worth individuals who look to put relatively small amounts of money into startups, normally ranging from a few thousand dollars to as much as a million dollars.
Angels are often one of the more accessible forms of early-stage capital for an entrepreneur and, as such, are a critical part of the equity fundraising ecosystem. The biggest benefit to working with an angel investor is that they can usually make an investment decision independently.
Not having to manage a partnership or corporate hierarchy of decision-making allows the angel investor to make bets they feel comfortable with personally.
Often this is what an entrepreneur needs early in their startup’s development.
Small business loans are a more traditional way of getting startup capital, which means they may be easier for some startups to get than venture capital, which can be a long and arduous process.
They’re a great option for startups that already have some momentum and — even better — some income coming in.
That’s because while venture capitalists are all about taking big risks for the potential of big rewards, traditional banking institutions are more careful with their funds.
And unlike taking angel investment or VC money, taking out a small business loan means retaining full ownership of your startup.
Crowdfunding is a method of raising capital through the collective effort of friends, family, customers, and individual investors.
This approach taps into the collaborative efforts of a large pool of individuals — primarily online via social media and crowdfunding platforms — and leverages their networks for greater reach and exposure.
Traditionally, entrepreneurs spend months sifting through their networks, vetting potential investors, and spending their own time and money to get in front of them.
With crowdfunding, it’s much easier for entrepreneurs to get their opportunity in front of more interested parties and give them more ways to help grow the business, from investing thousands in exchange for equity to contributing $20 in exchange for a first-run product or another reward.
Startup accelerators offer not only startup capital — usually seed funding level, as in $50,000 to a couple hundred thousand dollars — but also provide support for startups that are getting themselves off the ground.
Each accelerator is different, but they usually offer a combination of funding, mentorship, and other forms of guidance.
Government grants for small businesses come in three forms: federal, state, and local. Federal charges usually offer the most money — and have the most competition.
They’re also pretty specific and traditionally tied to a government agency with clear requirements for qualifying for the money. And for what they expect you to do with it.
On the other hand, state grants are usually less money than federal grants and — depending on your state — less competitive.
State governments may work with the federal government to administer money set aside specifically for small business grants.
And on the local level, grants tend to be even smaller, but they may be easier to get because personal connections still mean something.
Usually, these grants are about improving your local community, so if your startup. Small business is focused on bettering your town or county. Definitely take a look at local grants.
9. Series Funding
Series funding is when a founder raises increasingly larger rounds of capital to keep their startup going. Founders usually start with seed funding, then move on to Series A, B, C, D, and even E.
While each Series can include different funding types, they almost always have venture capital, particularly in the later stages.
In a Series, A round, startups expect to have a plan for developing a business model, even if they haven’t proven it yet. They’re also likely to use the money raised to increase revenue.
A Series B round is usually between $7 million and $10 million. Companies can expect a valuation between $30 million and $60 million. Series B funding usually comes from venture capital firms, often the same investors who led the previous round.
The valuation of Series C companies often falls between $100 million and $120 million. However, companies can be worth much more, especially with the recent explosion of “unicorn” startups.
A series D round of funding is a little more complicated than the previous rounds. As mentioned, many companies finish raising money with their Series C. However, there are a few reasons a company may choose to submit a Series D. One is they’re looking to expand in a new way before going for an IPO.
If few companies make it to Series D, even fewer make it to a Series E. Companies that reach this point may be raised for many reasons listed in the Series D round. They’ve failed to meet expectations; they want to stay private longer or need a little more help before going public.