A Guide To Raising Capital for Startups

How To Fund Your Startup

A small group of potential investors listens to a pitch.
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Tom Werner / Getty Images

Once you decide to start your own business, one of the most important factor is funding your idea. As a founder, fundraising—whether one-time or ongoing—is a key part of the job description. While many new business owners believe they must save up and invest their own capital to make their dream a reality, there actually are many ways to raise money for your business.

Most startups rely on a combination of fundraising options, such as angel investors, venture capital (VC) funding, and microloans, as a way to get off the ground and stay in business.

Before starting your fundraising journey, however, you must lay the groundwork by doing your research, leveraging your network, and thinking realistically about how much cash you will need. In this guide, we will go over assessing your startup costs, different types of cash sources to consider, and how to go about closing the deal.

Key Takeaways

  • Before seeking outside capital, you must know your financial projections and capital needs inside and out, even if your product is not yet on the market.
  • Don’t just consider what you need to get started—make sure you include what you’ll need to stay afloat when fundraising.
  • There are many different avenues that founders use when seeking capital, so make sure to consider the pluses and minuses of each type of funding to assess which is right for your business.
  • Craft a solid pitch deck, hone (and re-hone) your pitch, and take advantage of your network to connect with and win over the right investors for your company.

Startup Costs

Regardless of the size of your future company, the first step is to understand how much you’ll need to get off the ground. This exercise is necessary for founders, both as a way to understand the financial realities of their new business, and because in order to raise funds, you will need to know how much your business needs on the first day as well as day 100. The quickest way to scare off an investor or a bank loan officer is by not being familiar with your own numbers.

Every business has different startup capital requirements. A brick-and-mortar operation might have licensing, inventory, and insurance burdens that an online startup may not. Most new business owners do not know all the detailed transactions that go into a business, so to calculate approximate startup costs for your company, you need to do research.

Speak to an accountant or bookkeeper in your chosen field, or employ an industry consultant and begin to think critically about everything that goes into running your proposed business.

If you’re at a loss as to how to figure the costs associated with your new business, connect with friendly founders who have done similar things. Finding a mentor or advisor for your business can be just as valuable as finding a source of capital.

Depending on your type of business, necessary costs might include:

  • Insurance
  • Incorporation costs
  • Legal fees
  • Equipment
  • Utilities
  • Licenses and permits
  • Office space
  • Marketing
  • Salaries

Once you understand these costs, you can begin to formulate your initial capital needs and your revenue projections. Build a worksheet and itemize your startup financial burden. Don’t forget to leverage your own skills and experience to keep these costs down. Consider doing marketing yourself, or lean on a handy friend to help with the build-out of a space.

What Are Your Options for Raising Capital?

There are many different ways to fundraise for your new business, but there is no one-size-fits-all approach, even within the same industry. Before beginning your fundraising journey, consider how much equity you’re willing to part with (if any), and how much input you’re willing to hear from outside voices. Regardless of the size of your future business, having a plan can help you understand how you might piece together funding from different sources to meet your goals.

Bank Loans and Lines of Credit

Although it may seem like an obvious choice, traditional bank loans and business lines of credit are very hard to secure for businesses with less than two years of tax records. If they are an option, they often set steep collateral requirements.

The best avenue for debt financing is likely through U.S. Small Business Administration (SBA) microloans, which are loans less than $50,000 given to help businesses get started and expand. They are available through certified intermediaries, and likely require some personal collateral or guarantees from the owner.

Alternative lending, which takes place outside of a banking institution, may be better suited to a new small business. Consider the SBA’s Lender Match program, or check your state’s division of small business for lists of lending alternatives.

Angel Investors or Friends and Family

Without an established business history, one way many founders start their fundraising is with friends and family or angel investors. This type of capital is usually unique to each individual deal, meaning there is more flexibility with deal terms. You may be able to raise debt capital, meaning borrowed money, from one family member, and take an investment from another.

Angel investors are non-institutional investors who may be entrepreneurs themselves and often have a passion for helping small businesses and startups. They may agree to offer capital in exchange for debt or equity. Extending your network can help you connect with individuals who are willing to invest, often without interfering too much with your business. Look for local angel groups, where like-minded individuals pool resources to make a more sizable investment as a group.

Crowdfunding

Some startups find success through crowdfunding platforms. With this route, money is raised via the internet through different platforms, often in exchange for a “gift,” depending on the level of investment. The traditional method of crowdfunding allows founders to raise small amounts from a large number of people, with no obligation of repayment or equity disbursement. This type of funding usually requires some basic marketing, as well as a robust network of friends and family in order to succeed.

Recently, the U.S. Securities and Exchange Commission (SEC) approved equity crowdfunding, which allows for companies to sell securities to the public via a registered broker, although there are limits to how much a business can raise and to how much one can invest.

Accelerators and Incubators

Depending on your industry, applying to accelerators or incubators may be a good path to consider. These programs can support early-stage companies with mentorship, operations, marketing, and access to capital. Startups enter one of these programs for a fixed period of time and often work alongside other emerging brands in their industry.

Acceptance is often very competitive and may require founders to travel to partake in educational programming. Many are focused on growth-driven startups, so it’s worth considering whether your business is the right fit.

Venture Capital

Venture capital funding often is used to take a startup to the next stage once the idea has been commercialized. Venture funds are intended to be a short-term cash infusion to enhance a startup's growth. These funds are useful when a business has a viable idea, but may not have many hard assets that a bank can use as collateral for a loan.

Because venture capitalists are investing in a balance sheet with the expectation of a profitable exit in the not-too-distant future, they often take a large equity stake and can be very involved in the operations of the business. VCs are usually industry-specific, and they usually invest in industries where they see massive potential for growth.

Family Offices

Family offices are entities established by wealthy families to manage their assets and provide tax and estate planning services to family members. They often participate in mission-driven investment, and fall somewhere between a VC and an angel investor. Investments from family offices have variable deal structures, but their involvement in a business is often more similar to an angel investor than to a VC.

Grants

Many founders believe that grant money will be an easy source of capital, but the reality is that they are very hard to access. Most grant money has stringent requirements for distribution. The best chance at winning grant money is by seeking out highly localized opportunities, rather than through the national SBA, but do thorough research on this option before building it into your plan.

How To Get Funded

Once you’ve identified the capital sources you’ll be targeting for your startup, the next step is to set yourself up for success. Whether you’re seeking a microloan, $10,000 from a friend, or a large investment from a VC, preparation is key to securing funding.

Know Your Financials

A founder must know their financials inside and out. In addition to startup costs, you should have a pro forma with at least three years of projections, a balance sheet, and a cash-flow statement.

You should also know how to discuss your projected earnings before interest, tax, and amortization, known as EBITA; cost of goods sold (CoGs); gross profit; and gross margin. Friends and family may not need as much financial detail, but banks, VCs, and some angel investors will want to fully understand the financials of their potential investment.

Hone Your Pitch

Having a strong and persuasive pitch is important regardless of which funding route you pursue. A good place to start is with a solid pitch deck, which should clearly explain your idea, your background, your potential market share, and in some cases, your exit strategy. Look for open-source templates, and remember to keep things straightforward and data-driven.

From your deck, craft and practice your two- to 10-minute pitch about why your idea has value in the market. Although loan officers and family may not want to see your pitch deck, they will certainly want to be “sold” on why they should trust you with their funds.

Activate Your Network

The best way to get funded is by using your network of friends and family. Not only will they be your first stop for early investment, loans or crowdfunding, they also may have someone in their extended circle who could be useful. Most early-stage money is gathered via a “warm introduction,” especially when it comes to venture capital, so always look for ways to make a connection. Instead of outright asking for money or connections, asking for advice and feedback on your pitch is often a good way to start.

Following Up

Regardless of the outcome of your pitch, you’ll want to follow up. Don’t be afraid to reach out, ask for feedback, and stay in contact with everyone on your list. Plan to follow up with contacts three times; even if you don’t receive funding, it’s always good to keep potential investors in the loop on how your business is growing.

Consider the Future

Beyond the basics of starting up, however, you need to keep your new business going. In addition to raising what you need on the first day, don’t forget to factor in what you’ll spend on a monthly basis.

Use your financial projections to assess how long it will take before your revenue can sustain your business, build any gaps into your capital search. A good rule of thumb is to seek six months of operating expenses.

Beyond that, consider how you see your business growing 12 to 18 months in the future. If you’re able to gain traction with investors or lenders, try to build those goals into your initial raise so that you have a longer time before needing to seek capital again.

Depending on your track record, some fundraising avenues, such as venture capital, might be better suited for later, when your business has established success and gained market share. You’ll have more leverage and may be able to negotiate more favorable deals at that point.

Frequently Asked Questions (FAQs)

What kind of business is best suited for raising capital?

Businesses of all sizes raise capital at different stages. Startup capital is perfect for early- or idea-stage businesses. You may not need capital if your business can be sustained on revenue alone.

What is the difference between equity and convertible debt?

An investor may require a percentage of your company, or equity, in exchange for funding. Another format often employed by angel investors is for the funds to act as a “loan” for a set time period, after which they convert that amount to equity shares in the company.

Within a business, who is primarily responsible for raising capital?

Generally, the founder or CEO is responsible for raising capital for the new business. As a business grows, other C-suite employees will likely join the fundraising team.