What are the main sources of funding for startups? What are the main categories of spending they use those funds on?
There are actually many different potential sources of funding for startups. What is right for your venture and current financial needs can depend a lot on your current stage of business and resume, as well as your type of business, product or service.
When preparing your business plan and pitch deck to market for funding, there are some common uses of funds which are more palatable to investors at different stages than others. It’s good to know that you are inside the box, rather than burning these hard worked for capital opportunities.
Here are some of the most frequent sources of startup funding, as well as appropriate spending categories.
The Major Sources Of Funds For Startups
Banks & Business Loan Lenders
Most first time entrepreneurs aren’t just going to be able to walk into their bank and get a loan for a new business idea. Banks like to fund existing and proven companies with profits. This isn’t exclusively true, and there may be a few exceptions, but don’t be discouraged if you get a lot of noes.
It’s more likely that you’ll get a positive response or inbound offers from these sources after you have been in business for at least two years, and have some strong revenues.
This category of financing can include SBA loans, and asset based loans for tangible assets, like real estate and equipment financing.
Personal & Business Credit Cards
It may not be the safest financial move, but many, many startups have been launched by using personal credit cards. More have been able to survive by floating on this credit through challenging times.
Once in business, business credit cards or store cards can be some of the easiest to get. Manage it well, and these credit lines will grow with you.
Self-Funding
Personal savings, surplus income from a freelancing gig, or cashing in a 401k from a previous employer can all present ways to self-fund your own venture. Serial entrepreneurs may even find they have millions of their own cash to invest from the exit of previous startups.
This lean bootstrapping approach can help you be financially disciplined, and starting this way can give you more control and then more negotiating power later on when you do decide to accept outside capital.
Friends & Family
The first round of funding that entrepreneurs often raise is from friends and family. This can be the cheapest and most flexible funding you can get. Providing you can set expectations well, and put some boundaries between your personal relationships and investments, it can work out very well.
Putting these funds in the bank can be a very positive sign for future professional investors. It shows that those who know you best trust in you, and believe in your capabilities. It’s obviously a red flag if they don’t.
Just be careful how you structure these investments, and don’t make it harder to raise more equity later due to your ownership structure.
Grants & Competitions
Many of the most successful startups have gained early traction from business school or coding competitions, as well as various levels of corporate or government grants.
While it may not provide a lot of funding, these awards look great on your pitch deck and fundraising materials. They show a vote of confidence from others.
When this capital doesn’t need to be paid back, it can give new companies a great advantage without giving up equity or taking on installment debt.
Crowdfunding Platforms
While crowdfunding platforms are no longer new, they have proven to provide many advantages to entrepreneurs. Whether it is donation based, debt or equity capital, this can be a great way to pull in money in smaller amounts from far more investors.
It has many other pros too, if done right. It can rope in many brand ambassadors and referral sources. It can elevate you in the press and help raise brand awareness, as well as distributing your early product.
Startup Accelerators
Startup accelerators and incubators can help provide initial seed funding. Even more impactful can be the support given during this several month sprint. It forces you to focus and gain momentum. Simply getting accepted to one of these programs can add a lot of credibility to your startup’s resume and pitch deck.
These programs also typically culminate in a Demo Day, which enables you to present your startup and pitch live in front of a room full of capable investors.
Angel Investors And Angel Groups
Angel investors typically participate in early funding rounds. The provide initial capital after friends and family. Angels are increasingly forming and organizing into angel investment groups as well. This enables them to attract more deal flow, commit larger amounts of capital, and to spread their risks. There are a number of celebrity angel investors that are highly prized as well. Investment from them can add a lot of credibility and access in addition to dollars.
VCs
Venture Capital firms are probably the most well known and desired of startup investors. These funds typically come in for larger and later rounds, and before a startup has matured.
This is a highly competitive space, which will require relationship building and a very strong pitch deck and pitch.
Chosen well, VC firms can also bring a lot of other resources and support. Though they also vary depending on terms and the returns they expect on their investments.
Corporate Strategics
Large corporations have their own incubators and investment funds too. This can help them diversify their businesses, as well as to vet, build and acquire new technology and products early on, and on better terms than sourcing companies to buy later on when they are bigger and more expensive.
As investors, this is a source that can offer a lot of additional help and resources. You may gain access to talent, technology and room to work and ways to test that you wouldn’t have on your own.
Private Equity Funds
Private equity funds are typically financial investors looking for more mature and stable companies to invest in. They often come into play in large startups with billions of dollars in valuation. Having these high profile funds onboard can provide a lot of credibility with others and customers. Though this doesn’t mean your company isn’t exposed to crises or flaws of poor management.
Author Bio
Alejandro Cremades is a serial entrepreneur and the author of The Art of Startup Fundraising. With a foreword by ‘Shark Tank‘ star Barbara Corcoran, and published by John Wiley & Sons, the book was named one of the best books for entrepreneurs. The book offers a step-by-step guide to today‘s way of raising money for entrepreneurs.
Most recently, Alejandro built and exited CoFoundersLab which is one of the largest communities of founders online.
Prior to CoFoundersLab, Alejandro worked as a lawyer at King & Spalding where he was involved in one of the biggest investment arbitration cases in history ($113 billion at stake).
Alejandro is an active speaker and has given guest lectures at the Wharton School of Business, Columbia Business School, and NYU Stern School of Business.
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