Raising money for a startup is never an easy thing to do. It requires a lot of time, determination, commitment. First of all, you need to know where to look and prepare everything required to pitch your dream to prospective lenders.
If you are decisive enough to get your startup off the ground, watch it grow into a successful company, it’s time to take a deep dive and check all the investment types.
Table of Contents
A lot of startup owners ask themselves when they should start looking for investors. Most startup ecosystem experts will advise you to start very early, to get out there before you need money.
Now let’s see the basic way of startup investment that can work for you. Investment type you will choose should be connected to the business type and its stage.
Bootstrapping, aka self-funding, is one of the most common options of financing an early-stage startup. At the very beginning, startup owners might face difficulties raising capital with no first traction and a clear company success projection. Most startups use their own savings or get family and friends to contribute.
In the case of self-funding, you use your own money into the business, you become more connected to business. Keep in mind this option works if the initial amount requirement is small. Your startup might require a serious upfront investment from the first day. For such businesses, self-funding may not be the best funding type.
Right from the start, you need to ask yourself whether you need an investor at all. In fact, about 90% of new businesses start with self-funding.
If you think you can go and raise a few million dollars right from the start, you are wrong. No investor will fund your seed-stage startup unless they make sure startup founders have skin in the game. If you request funding from any investor, first thing they will ask you is “how much did you put into this so far?”
Friends and Family
Another good option for the start is to go to your friends and family and ask them to help. This is a very common practice, as it’s a much easier way to get money, then, for example, raising money from VCs or from angel networks.
The investment from their side might be $10,000 or less. These are the people who invest in you without looking for a product. They’re not expecting you to have a customer or even MVP/ prototype.
As soon as you have your MVP ready or have customers, go to angel investors. These are wealthy people who fund promising and businesses using their own money for your company equity.
The investment size might be $30,000, $50,000-$100,000, but keep in mind that they expect to see a prototype. Some of them might even expect to see a dollar of revenue. They are not looking at the product only, they’re looking at the business potential in general.
A little down the road, you might need $5,000,000 or $10,000,000. That’s already a venture capital territory. Before applying for venture capital investment, be seriously prepared to convince investors you and your business are ready to handle all the responsibilities that come with the investment.
Be prepared that these people can expect to see a couple million in revenue and good traction. They are not even considering investing a small amount like $30,000. The investment size starts at $2,000,000 or so. When considering venture capital for the investment, remember that they will give you the amount for a good bit of equity.
If you are looking to raise money without a bank loan, pitching to angel investors or VC, check crowdfunding as an alternative. “Crowd” in this case refers to individuals, who are willing to donate/ contribute for your business idea in return for some profit or other reward, depending on the crowdfunding platform type.
So, how does crowdfunding work? To be able to raise money, first of all, find a crowdfunding platform that suits your startup the best. Post all of your project idea info, starting from product description to business plan.
Accelerators or Incubators
If your startup is at the early stage, incubator and accelerator are a good funding option. These programs will accelerate your knowledge, skills, and get you ready for the big game.
Such programs typically run nearly 5-8 months, requiring founders’ time and commitment. Besides, it’s a unique chance to build your network with other like-minded founders, investors, and mentors.
What’s required to apply for investment?
You might have heard the popular myth that you don’t need a business plan, claiming that the VCs don’t read business plans. Well, that’s not true!
The whole point of your business plan is to convince investors that you have understood everything about your business. Everything from product validation, market need, how to run business, generate revenue.
So after speaking to many investors, I realized that they are very attentive to every business detail, asking questions from a completely different perspective. So if you come to investors and say “I am doing business but I don’t have a business plan yet”. This is a sign for them that you’re not prepared for investment, you will only waste investors’ time.
How much to ask for investment?
The best option is to look at the next 12 months. maybe 12 -18 months. Don’t ever ask for more than that.
According to a recent study, lack of funding turns out to be one of the common reasons startups fail. Almost at every startup stage, founders ask themselves “how do I find investment for my startup”?
The fact is, you won’t find universal advice that suits all cases, investment size largely depends on your startup nature and type.
Find the right investor for your startup
Don’t forget to perform good research to find the right investor for your startup. Good approach is to look through all the companies backed by that investor. You may even contact founders and ask questions about investor approach or every other thing you are worried about.
There are so many investing options, so spend some time to understand what kind of investor you want to see onboard. Only hoping that any investor will be good for you isn’t really an efficient or successful approach. Try to match your business with investors that are interested in your idea or have the right connections to support your business.
Despite the new 2020 economic and entrepreneurial reality, the advice for how to give your startup the best chance at raising capital stays consistent. Venture capitalists are looking for startups that offer unique value propositions, who have the right growth strategy, know how to scale, and ultimately give a significant ROI to investors.
When looking for investment, remember one thing: investors don’t like taking big risks. The more you can help investors feel the low-risk percentage, the better. The goal is to prove that you can bootstrap! This can be seen from your past experiences or on the work you did so far without cash.