You may have a great business idea that’s worth its weight in gold, but a lack of startup capital is often a challenge that can keep your vision from coming to fruition. There are a lot of ways to get this initial capital, but not all of them provide the stability you need to launch a successful business.
This guide will teach you about startup capital, funding options, and how to pursue them so you can get your business idea off the ground.
What Is Startup Capital?
Google, Facebook, and just about every other globally recognized brand got their start thanks in part to startup funding. Startup capital helps cover the initial costs of launching and scaling your business. These costs can include getting an office space, hiring team members, developing technology, conducting research, or anything else you need to launch the enterprise.
Given that startups can fail — like any business — but have a much higher potential upside, early-stage funding is a high-risk, high-reward proposition. As such, investors perform plenty of due diligence to determine if an entrepreneur’s business idea is viable before they commit money toward it.
A potential investor commits significant time, energy, and resources to determine if a business idea is worth their time. You must do the same: If you believe your idea is worthy of an investment, you must research your funding options and put in the work to pursue the ones that could help bring your ideas to life.
Top 5 Startup Funding Options
There are five proven ways to build the funds to get off the ground when you’re ready to ask other people to put their money into your business.
Bootstrapping involves using personal savings to fund your business. You can also ask family members and friends to kick in funds to bootstrap your startup.
- Your business funds are easily accessible
- Flexible interest rates and loan terms
- You can avoid giving up equity (or a lot of equity) in your business
- There may be a limited amount of personal funds available
- It can be difficult to request and obtain funds from family and friends
Your willingness to bootstrap may itself dictate the potential for this model to make sense for you. Those who are fortunate enough to have funds available — or who feel comfortable asking family, friends, or financial institutions for funding — are better suited to bootstrapping than others.
You can use Kickstarter, Indiegogo, and other crowdfunding platforms to share your business idea with a global audience. Audience members who like the idea can then contribute funds or make a pre-order that provides the capital to get your startup off the ground.
- You can generate public interest in your business idea
- Anyone can instantly provide funding
- You can avoid giving up equity in your business
- Heavy competition among entrepreneurs
- Without a great consumer pitch, your idea may be ignored or rejected
How you promote your business idea via crowdfunding is key. Show potential customers that your idea is worthwhile, and they may crowdfund it to get you off the ground.
3. Angel Investors
An angel investor is an individual who believes in your idea and business plan enough to be willing to give you funds with no guarantee of success. The investor typically asks for a percentage of equity ownership in your company, and as such recoups their investment if your idea succeeds. You are under no obligation to pay back an angel investor if your idea fails.
- Angel investors take risks when most other investors are unwilling to do so
- Angel investors often serve as mentors for startups
- Angel investors may provide less capital than other investors
- Angel investors may take longer to review a business idea before they decide whether to invest in it
- You will need to give up equity in your business
Looking for angel investors can be a boom or bust proposition. Those who identify angel investors can receive risk-free financing. Those who don’t risk missing out on other potential funding opportunities.
4. Venture Capitalists
Venture capitalists are investing pros, and they know the ins and outs of investing in a startup. They will often prefer to invest only if they see the potential for a huge return, which usually means they will advocate a strategy that results in acquisition or launching an initial public offering (IPO), at which point, they take their payout and invest elsewhere.
- Venture capitalists are all-in, and they work closely with entrepreneurs to help launch their businesses and sustain growth
- Research has shown that venture capital-backed investments with a predefined exit strategy (Uber, Flipkart, etc.) can deliver exceptional growth rates
- Venture capitalists often maintain networks of companies and contacts that their portfolio companies can access
- This type of investor can grow as you do, and help finance multiple rounds of investment if and when needed
- Venture capitalists have high expectations, and this kind of investment often comes with expectations about business milestones — and a fairly high amount of pressure
- Working with a venture capitalist will require giving up equity in your business, and may also require giving decision making input to the investor
- While this is not the norm, per se, there are some examples of company founders losing control of their companies to investors who disagree with their approaches
Venture capitalists are partners in your business and can be a tremendous asset. They are, investing as their own business, however, and the pressure and expectations with this kind of investor will be higher than with other categories.
5. Incubators and Accelerators
Incubators and accelerators refer to programs that provide entrepreneurs with access to funding of other support-like mentorship. An incubator often offers access to funds that support an early-stage business as it gradually grows its operations, while an accelerator is designed to help put the company on a fast-track to success.
- Entrepreneurs can receive mentorship as part of incubator and accelerator programs
- Incubators and accelerators offer ample opportunities to connect with other startups, which can lead to partnerships and other funding opportunities
- Many do not require giving up any equity in your business
- Incubator and accelerator programs typically provide access to funding for only a few months and in smaller amounts
- Entrepreneurs who lack drive and commitment may struggle to capitalize on opportunities provided by incubator or accelerator programs
- Many incubators and accelerators are very specific in their interests, so it may be hard to find ones that match your industry or product
Your business can join an incubator program to lay the groundwork for long-term success. An accelerator is a superior option if your business is close to making its vision a reality.
There is no shortage of funding options at your disposal. You must evaluate these options closely and consider the best approach to raise the capital you need to help make your startup a success.
3 Tips for How to Raise Capital for a Startup
Regardless of which strategy you pursue, there are a few things every entrepreneur needs to work on to get funding. Here are three tips to help you raise the capital:
1. Make a Plan to Get Funded
Determine which prospective investors you want to engage, research potential funders in your area or sector, reach out to them, and be ready to sell your business idea. Be persistent: If the investors do not get back to you right away, follow up at least a few times to try to connect with them. It is equally important that you have a well-thought-out business plan, can clearly articulate why you believe there is a market for your product or services, and can explain how you will execute on the vision.
2. Nail Your Pitch
Craft a pitch deck that explains your business idea in a way that highlights the size of the opportunity, your specific business plan, why you are better than the competition, your team, how much funding you need (and for what), and the benefits for a potential investor. Your pitch deck should be concise and easy to understand. It should also show you’ve done your homework and prove to an investor that you are fully committed to building a successful business.
3. Track Your Results
Stay the course as you try to get funding. Monitor your results so you know which potential investors you’ve engaged with and the results of your funding efforts over time. Look for insights to help continuously update your funding strategy and ways to personalize your presentation to each prospective investor as well. Don’t be afraid to ask for advice! If you come across others who have successfully raised funding, don’t hesitate to ask them for tips. Likewise, if you engage an investor and have a good conversation but don’t find a match, consider asking if they have any feedback to help you in future approaches.
These tips can help you get startup capital, but you also need to understand the hiccups associated with raising capital for a startup. Knowing what can go wrong before you get started means you can be on the lookout for issues that might otherwise derail your entrepreneurial plans.
Additional Areas to Note When Raising Capital for a Startup
There are thousands of fledgling businesses out there trying to get investors to fund them. If you want your idea to stand out, you can:
- Ensure your business idea is fully developed
- Make sure you have a viable technology plan if your business involves software or app development
- Remain patient and resist the urge to try to raise startup funds too soon
- Define your target investors and your pitch to them
- Craft a funding strategy to guide where you’ll focus at each growth stage
- Set aside time to attract and meet with potential investors
There is no surefire formula for every entrepreneur to achieve their startup dreams. You may want to pursue help from a strategic consultant for early-stage projects to avoid spending big on software development before making your pitch to prospective investors.
Contact an Expert with Questions About Software Development
A startup software project can quickly go off the rails due to poor planning and execution. A partner that specializes in custom software development for entrepreneurs and startups will help you avoid this issue. This partner will do everything possible to help prep your software for demonstrations and eliminate issues that could hamper your ability to land startup funding.
Contact YourCTO today to speak with an expert and get answers to any questions you have about custom software development.