How to raise capital for a startup
Author: Bence Bíró
Date of publication: 21/04/2022
If you want to be a founder of a startup, there is one thing that you will surely need: money. The amount and the timing can be different, but at some point you have to take the way of raising into consideration in order to launch or grow. Here are some ways for achieving that:
Launching a startup usually requires a big amount of capital
3Fs (Friends, Fools and Family)
In this case, the launch of the startup is financed by the founders and their family or friends. Usually, the financing in this case is much more emotional rather than rational. It can be either a loan or money for equity. With this form of financing, be aware that friends and family rarely have much capital and it can seriously affect the relationship between them.
Individuals with a big amount of capital are willing to invest in startups in exchange for equity. They usually offer smart money by not only investing money but also their time to mentor you. Except for their cash, their connections and knowledge is valuable.
Because of this, their money is valuable: they most often ask for more equity in return of money than venture capital companies. Most of the time they are investing in early-stage startups and the team is more important for them than the idea itself.
Most common investing form for every startup is venture capital, from early-stage to mature ones. Compared to the others, the venture capital company spends the money of the investors, not their own capital. In general, they are investing 3-7 years and look for a high return with a high risk. Therefore, nearly all of the VC companies are interested in technology-driven startups and sectors, the ones which can grow really fast and expand globally. Just as an angel investor, they usually offer smart money.
A venture capital company often has interest even in a couple hundred startups. The vast majority of them will fail but if they manage to invest in a future unicorn, even one exit can give them a huge return.
Either you choose venture capital or angel investors as a funding, a good pitch will be needed
Nice examples of crowdfunding are IndieGoGo, Kickstarter and others. Users help these ideas with their own money. It can be in exchange for equity or for pre-ordering the startup’s product or service to help them launch their business. It’s more emotional than rational, since the users are usually not checking balance sheets or business plans. Not smart money but the equity for the same amount of money is usually less than venture capital or business angels. Starting a crowdfunding campaign is not just aiming to raise capital but also a great way of brand building for a startup.
Startup competitions and grants
Difficult and time-consuming but not impossible: winning a startup competition means some kind of prize, usually money. In local competitions it’s not a huge amount but an international competition can give your startup as much as it is needed for a launch. Attending a startup competition requires you to write a detailed description of your startup’s idea, business model, competitors, market and team.
You can’t lose anything participating in a startup competition. It’s a great way to get feedback about your idea, although competition is really high and takes time to prepare materials and a good pitch for it.
Bank loans are mostly for more mature companies. If you already have solid earnings month-by-month, a bank loan can be a great way of financing since you don’t have to give up equity for financing.
An investor is different from a bank: they take the risk and take the responsibility. If your startup fails, the investor fails its investment. Instead of this, the bank needs some security that you can pay back your loan – this is why an early-stage startup usually can’t have a bank loan. Since the investors have the equity in exchange for their investment, they will be the owner of the startup as well. Therefore, having the right to take decisions too. This is not necessarily a bad thing. This means that angel investors and VC companies both have a lot of experience and they know what is good for a startup. There is one rule of the startup world that applies here as well: you can’t make it alone.
Hakobyan, M. (2020) 9 realistic ways to fund your startup. Startup Grindhttps
Waida, M. (2021). The Essential Guide to financing for startups.
Harroch, R. (2021). Startup financing: 5 key funding options for your company
Anvire, K. (2020). 6 ways to generate funding for your startup