Finance

Business Startup Funding: A Beginner’s Guide

Your brilliant idea has no funding to back it up.

Sound familiar?

You’re not only ready to bring it to fruition, you’re prepared to make your idea into the largest startup that’s ever existed. You may have taken some first steps in hashing out your business.

Maybe you’ve chosen the right business model, locked down a co-founder, and drawn up a goal pyramid to outline your first steps.

But there’s still that one big problem: you lack funding.

You need to learn your best options on how to fund a startup. Here’s a quick guide to get you started on getting funding for a startup business.

It seems like every entrepreneur you hear about has some kind of connection, some friend of a friend, or they had a distant relative pass away and leave them a large fortune.

A lack of funding is a serious issue for many entrepreneurs, and it is a major reason why many businesses never even get off the ground.

Plenty of would-be business owners have the drive and passion, but not the dollars and sense to bring these into reality.

If you’re just not sure where to begin, and always wanted to see a clear-cut menu of funding options out there in this modern world of startups, this post is for you.

Editor’s note: This article was originally written by Assya Barrette but has since been updated by Lucas Spinella, a self-starter and entrepreneur specializing in marketing. Lucas has spent countless hours researching business ideas while spearheading Foundr’s newest course ‘Start Your Side Hustle‘.

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The Basic Categories of Funding

There are two models for funding a startup: that which costs you equity, and that which costs you debt.

There is a third, grants, and gifts, but this is less common for profit-seeking businesses.

Debt as a Form of Funding

Debt, a form of funding so many of us are unfortunately familiar with, is money that you’re obligated to pay back with interest over an agreed-upon time period.

This can be in the form of a bank loan or just racking up a bunch of money on credit cards. The latter is probably the easiest and fastest way to scare up some money, but there’s a reason it’s a bad idea!

Rates are usually terrible and if you don’t have a lot of cash flow, you can end up saddled with that burden for years. Small business loans are one traditional avenue for funding, but they are often restricted to people with existing cash flow or some kind of collateral to put up.

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Offering Equity in Exchange for Funding

Equity, on the other hand, means a percentage of ownership in your business offered up at market value in exchange for money.

This is what investors will typically deal with. Clearly, to offer equity to an investor, you need to have some perceived value or proof of concept to instill confidence.

Grants and Gift Grants

Grants are much more common for endeavors like charities, nonprofits, or social enterprises. Don’t be envious, though, it’s hard work to get a foot in the door with a grantmaker, and often funds come with stringent requirements and oversight.

As far as grand gifts go, well, here’s hoping a bag of money lands on your doorstep. If you’ve ever watched the show Shark Tank this will be familiar to you, as the sharks will often haggle over what kind of stake they get in exchange for the money they’re going to sink into the business.

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Entrepreneurs tend to want to reduce the amount of equity they give away because this means lower profits for them in the future. This can also be risky because if more than half of a company’s equity is sold, that means a potential loss of control.

Now, how do you get your entrepreneurial paws on this cash? On to the juicy bits:

Six Funding Options for Your Startup

1. Bootstrap as Long as you Can

We know that’s not what you wanted to hear, nor is it quite on point with the purpose of this article. Technically, this isn’t really a source of funding. You’re just paying for it yourself with your hard-earned cash, minimizing expenses such that you can still cover bills.

But this hard medicine is what you need to accept when it comes to funding: It will be much harder to convince someone, to take a chance with their money on your idea if you haven’t done the same first.

That means working on your project as a side hustle, self-funding it as much as possible, and burning the midnight oil to cover labor yourself. Or, that might mean saving up enough money so you can have a few months of runway, building out the basis for your idea before seeking out external funding.

And in doing this, you’re certainly not alone. Alongside the burgeoning generation of young entrepreneurs has come a sharp decline in reliance on investors. This means more young entrepreneurs have started building their value through bootstrapping as a primary source of initial funding for their startups.

A lot of people swear by bootstrapping, and for good reason. In fact, Foundr itself was a bootstrapped business run by our CEO, who moonlighted in the early days and gradually scaled up the business over time.

Bootstrapping can be extremely gratifying, like building something with your bare hands. And it’s great for first-time entrepreneurs because it proves you can hack it, making it easier to land funds as you launch future businesses.

This is not to say you can’t get your startup funding after you’ve bootstrapped. As Chris Strode of Invoice2go once told Foundr:

What I’d tell…every other early entrepreneur out there, is to bootstrap your startup for as long as possible. Founders are often eager to raise funding and take their businesses to the next level, but if you can build a profitable business on your own, you’ll be better positioned to have a favorable conversation with VCs when the time is right. Focus on getting your product right where you want it for your users, and grow it from there.

This method is advantageous as it lets you grow an audience and a user base that will serve as awesome validation, and possibly even lead to revenue or profit before you seek out additional funding.

And, of course, you get to keep all the equity.

2. Your Family and Friends

A great piece of startup advice is to start with your inner circle and branch out when it comes to selling your business. In other words, start seeking funding for your business from family and friends.

We know, this might send chills down some of your spines. And depending on your relationships with certain friends and family, it’s clearly not an option for everyone.

But the important thing here is taking stock of your existing support network. So often, entrepreneurs try to build something utterly from scratch, as if they have to concoct success within a vacuum. The truth is, most of us have a lifetime of connections all around us, many of whom may have tremendous confidence in us, and may even be part of our target audience.

Friends and family are one of the most common sources of funding. Over 38% of entrepreneurs report raising money for their ideas from loved ones’, and over $60BB is raised in startups from family and friends each year. Although these people may not have endless cash to throw your way, the money they are able to support you with may come with many advantages:

  1. Those close to you’re much more likely to take a chance on you and your idea in good faith and lend you money at a low-interest rate or even no interest rate or may ask for a lower amount of equity.
  2. Money coming from people you know makes you much more committed to success and providing a good return for their money.
  3. There is a better chance that your friends and family will stay at a supportive distance instead of breathing hungrily down your neck as some investors might.

Remember that you’re looking for a kind of partnership with like-minded people you have an existing connection with. If they truly believe in you and your business, they’ll be excited to get on board, and you couldn’t ask for a better backer than that. And if they’d use your product or service themselves, you’ve also got a potential test market and early adopter rolled up in one.

At the end of the day, though, this is a very personal decision that needs to be taken seriously. Some of the best startups in the world resulted from friendships… as did some classic disasters. Tread carefully.

Even if you’re looking for funding options for a startup online business (which can cost less money in many cases), if the issue is that you’re simply embarrassed to ask your family and friends to back your startup, then maybe it’s time to rethink your business idea. If you’re shy about going to people who know and love you, it’s not going to be any easier approaching investors.

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3. Crowdfunding Platforms

Crowdfunding has rapidly become a premier way for entrepreneurs to get their startups funded. Since platforms like Kickstarter and Indiegogo came on the scene, it has cracked open virtually infinite possibilities for companies to get started.

Long story short, crowdfunding involves getting a large group of people to back your company with relatively small individual contributions. These backers will not always get a say in how your business is operated, depending on the platform, and they collectively share a relatively small risk each, because together they enthusiastically want the project in question to exist.

Even veteran investors like Shark Tank star Barbara Corcoran told Foundr she’s been blown away by the potential of crowdfunding:

The access to capital isn’t at your local bank—it’s online. I would say that at least 40 percent of all the entrepreneurs we met on Shark Tank had already raised a lot of money online through crowdfunding. You can teach yourself how. Analyze successful campaigns. Figure out what works.

This funding model can not only be used to gather up some initial funding but can be used for subsequent fundraising for future products and services. Just for one example chosen completely at random, there’s our first print publication, Founder Version 1.0, which we funded with our first Kickstarter campaign. It went great!

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While earning funding through these platforms is incredibly convenient for both financial purposes and public exposure, it can be even more successful if you have a little something already saved up. According to Forbes, having around 25% of your monetary goal already raised before approaching the crowd can help account for relevant fees, while also enticing potential investors to keep the momentum going and the funding coming.

Crowdfunding is a great way to land some cash, but it’s not for the faint of heart. It’s both art and science, and now that it’s such a widespread practice, it takes some real work and even investment of its own to build up and execute a successful campaign.

4. Getting a Government Grant or Loan

This is an often-overlooked way to get your startup funded.

Many people don’t know that their government may be offering convenient loans or full-on grants for aspiring entrepreneurs in their midst. Because new businesses are a large source of economic growth in industrialized economies, governments have it in their best interests to support the individuals looking to throw their chip into the ring.

If you’re young (say, under 35 years old) or if you’re creating a new business in science or technology especially, you’ll have a decent shot at landing some funding. What’s more, governments at various levels tend to have their own individual loans available. To find this funding, search at the city, province/state, and federal levels.

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5. Accelerators

Now we’re getting into the fast lane. If you’re looking for much more than a simple bit of money tossed your way, accelerators are a great option to consider, especially if you’re interested in getting funding for a tech startup.

Accelerators focus on supercharging early-stage business growth by providing short programs (usually 2-4 months long).

They will take applications, dole out funding to those that pass in exchange for equity, plus usually welcome you, your business, and your small team (if you have one) into their program.

The program will often feature an enticing mixture of mentorship and office space. These programs are usually grueling affairs, but if you’re looking to speed up a stage in your business growth, these are the best option. One of the defining factors is their short-term timeframes (incubators, by contrast, tend to last a few years), often culminating in a big presentation session, or “demo day.”

These accelerators also tend to present startups with great opportunities to network with other startups and mentors in the business world. In fact, it’s worth noting that accelerators are often much more focused on developing the entrepreneurs or founding teams themselves than a business’s idea.

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Applications for accelerators tend to be very competitive, especially for “elite” accelerators such as TechStars and Y Combinator. These two accept only between 1% to 3% of their applicants.

But there are actually quite a few of them, something like 200, and more are always starting. Most of the top accelerators are based in California, including Alchemist, AngelPad, and 500 Startups. But not all of them, and TechStars actually runs 20 programs all over the country. Sometimes they’re broad, others are industry-focused.

To see assessments of the startup accelerator landscape in recent years, check out this research project’s rankings.

6. Investors

Before diving into the intricacies of how they operate, let’s look at the basic definition of an investor.

An investor is a person who has control over some pool of assets, and who invests money into a project in exchange for shares. This means they are not neutral actors in your business.

Investors will have expectations that you use the money in frugal and wise ways, such as for expanding market share through marketing, and not wasting funds on unnecessary expenditures. Second of all, investors by definition expect a return on their investments within a certain period—this return is often a 10x return within up to 5 years. This usually occurs either when your company goes “public” or is sold off.

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These expectations can make dealing with investors difficult and stressful. The emphasis will often be placed on growth, and pressure to expand your business asset will be coming from outside you and your team. Still, just as with bootstrapping, there are entrepreneurs who swear by raising capital.

If you’re looking to grow a huge business, accepting investment is usually the only option. Companies that grow large and fast can usually only do so through accepting an injection of investor cash.

Onto the types of investors. They fall into three main groups: personal, venture, and angel investors.

Personal Investors are typically in the form of friends and family, as described above.

Venture Investors, or Venture Capitalists, usually come in the form of experienced investors looking to make large returns by investing in business ideas. Rather than a loan, which a recipient is legally bound to pay back, a VC accepts a certain amount of risk that they won’t make the money back, in hopes that some of their investments pay off huge. Although there is acceptance of risk, they are very selective of who they support.

They will rarely be interested in pouring money into a new/unproven idea and will demand a track record and some demonstrable value before placing money into a business endeavor. Venture capitalists don’t deal in 100s or 1,000s of dollars—we’re talking in terms of millions of dollars invested. If you’re just starting out, a VC is probably not the breed of investor you should seek out.

Angel Investors are the investors that you’ll be looking for if you’re a burgeoning young business. These are investors who are looking to give relatively small amounts (usually tens or hundreds of thousands) into businesses in exchange for equity and will often be tolerant of other forms of growth besides revenue.

They are often other entrepreneurs who have wealth of their own, as opposed to huge pooled investment funds, and are looking to seed people or businesses they believe in at the early stages of their growth. They sometimes fill a gap between friends and family support and larger forms of investment such as venture capital.

In contrast to Venture capitalists, angel investors may not require a part-ownership of the company. Instead, he or she may request a percentage of return on her/his investment. But, as with venture capitalists, there will be situations where angel investors require ownership and management decisions in your company. Places to find angel investors include business competitions and websites such as:

And if you’re still not sure about whether you should cement your trust in an investor?

It might seem daunting to have to pay an investor back in this crumbling COVID-19 economy, but the pandemic also has some advantages for innovation. The last global economic crisis of 2008 saw angel investments rise by 34%—so if there’s ever been a time to get funding for your startup, it couldn’t hurt to start pitching.

Conclusion

There are many different ways to get funding for a business, and a lot of it really varies based on your experience level and track record. For early entrepreneurs, we here at Foundr are big fans of bootstrapping as long as possible, as attested by many of the entrepreneurs that Foundr has featured.

However, when that option is no longer possible or becomes a hindrance to growth, there are several great options to choose from.

Do you have any other great ideas or tips to land funding for your startup online business? Or any questions on these sources? Hit us up in the comments.

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