You need to have money to make money. This familiar adage is a rallying cry for business owners struggling to bring their ideas to fruition—and they’re not wrong. Financial projections for startups with limited funding are never good, so raising capital for business continuity must be a priority.
What you need to know
- Debt financing is when you borrow money and repay your loan with interest. Equity financing
is when you receive capital in exchange for ownership shares in your company. - Raising too much money could cause you to be overleveraged, which gets in the way of making your loan repayments and covering operating expenses.
- Since equity financing involves selling shares in your business, this strategy could dilute your ownership share more than you’d like.
Understanding startup financing
Startups use different seed funding strategies to raise the money they need to get off the ground. That’s typically followed by a series of fundraising rounds categorized by letter (Series A, Series B, etc.). Each round is triggered by milestones like finding your product/market fit or hitting a valuation goal. Here’s an example of what series fundraising looks like:
- Pre-seed investment: Pre-seed money can be raised using bootstrapping techniques, such as using personal money or bringing in friends and family.
- Seed funding: Initial seed funding can come from startup grants (which we’ll cover below), business loans, or investors. If you feel the investment is justified, it could also come from another business you own, but that’s a more complex scenario.
- Series A: Companies typically do a Series A when their valuation reaches $10 million. This is often an entrepreneur’s first exposure to venture capital for startups.
- Series B: This round should only happen when a company has found its product/market fit and proven its viability. The target for a Series B is usually $7 million to $10 million, so the company valuation should be well above $30 million, preferably closer to $50 million.
- Series C: Series C is typically the last round a company will do before preparing for an initial public offering (IPO), acquisition, or merger. The target for this round can be $25 million or more, with a valuation goal of $100 million to $120 million.
- Series D&E: These are optional rounds used for an expansion or extra cash flow boost before going public. Most companies never do a Series D or Series E.
When raising funds, it’s important to be careful. One of the most common startup funding mistakes is raising too much money too quickly. If you do that with business loans—a form of debt funding—you’ll be overleveraged and will have trouble covering your operating expenses in addition to loan repayments. If you raise too much money with equity financing, you might give up too much control over your company. Your startup team should include some folks who’ve been through this before, so you can rely on them to guide you through the process.
Equity financing options
Corporate venture capital is a form of equity funding. When you access it, your company’s ownership structure changes. The venture firm will receive shares, but you don’t necessarily need to give up decision-making powers. VC deals can be complicated, so retain an attorney who understands financial planning for startups and have them review the contracts.
Equity crowdfunding platforms and angel investing are other forms of equity financing worth exploring if your financial pitch in the VC world is unsuccessful. You’ll still need to give up shares of your company to receive funding, but the overall cost might be lower if you go with one of these options. Review them carefully before you sign off on anything.
Debt financing solutions
Business lines of credit and small business loans are forms of debt financing. The upside to using debt instead of equity is that it won’t cost you company shares. The downside is the interest you’ll need to pay on the money you borrow, not to mention the monthly installment payments to repay the principal. Budget carefully if you choose this option.
Other loan types include business loans for startups, short-term loans, and unsecured personal loans. Business credit cards are also considered debt financing but are more for paying day-to-day expenses. Debt financing is a form of non-dilutive funding for startups because you don’t dilute the value of existing ownership stakes.
See how a Bluevine Line of Credit can help your business grow.
Grants and non-dilutive funding
Grants come in different shapes and sizes but share one characteristic: You are not obligated to pay them back. If you qualify for a grant, it can be a great source of small business financing. You can find government grants at Grants.gov, and several private and non-profit groups also offer them. The easiest way to find them is by searching for grants offered specifically for your industry or situation, i.e., grants for minority-owned businesses.
Crowdfunding platforms
Non-equity crowdfunding platforms like Kickstarter and Indiegogo can also be used to raise startup funds. Crowdfunding success factors include your campaign settings, the characteristics of the participants, communication, and the size of the network. In 2011, Oculus raised $2.4 million on Kickstarter for its VR headset. In 2014, Facebook bought it for $2 billion.
Bootstrapping and personal financing
“Pulling yourself up by the bootstraps” is a common expression that refers to doing something on your own, with sheer willpower. In business, this means funding your business without the help of debt or equity financing. You can use your personal finances to start the company or ask friends and family members to help you bootstrap your operation.
Strategic partnerships and corporate sponsorships
Investor relations for new business require time to build trust and mutual interest. Forming a strategic partnership with a company that’s already achieved that could accelerate your timeline. Doing corporate sponsorships to raise awareness can also help build credibility with potential investors. That’s why many companies do charity work in their community.
Preparing for the funding journey
You’ll need a business plan, an investor pitch deck, and financial records to acquire any of the funding we covered in this article. VCs want to see revenue numbers and listen to innovative presentations, while lenders need to know you have the means to repay any debt they approve you for. You should have all this in order before you begin your search for financing.
Business plans can be highly detailed or more lean. In either case, you’ll want to have a list of key activities, partnerships, and resources, as well as a strong value proposition, a clear target market, and a solid revenue stream—sometimes more than one. This last bit is important, as it will play into the numbers that your equity or debt financiers will want to examine before giving you funding.
To sum up, most small business funding is categorized as debt financing or equity financing. With debt financing, you pay interest on the borrowed money and repay the principal over time. Equity financing is an exchange of money for stock, which dilutes your ownership. There are several variations of each of these. Research them carefully before you decide which is best for your business.
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