How to Secure Funding for Your Startup: A Comprehensive Guide

A startup may have been a long-standing dream or you may have recently figured out that you are showing all the signs of being an entrepreneur.  Once you have committed to moving forward with the goal of building or growing your startup, you are going to need funding. You will require funding for various purposes like prototype creation, hiring a team, product development, legal consulting services, administration expenses, marketing, and sales. 

Funds are required to get the business off the ground, conduct operations, and for the growth of the startup. It’s important to develop a proper business plan before approaching investors. You may have decided to tread the path of small business start-ups to obtain the benefits of a personal touch and strong relationships as well as high-growth business models. 

‘How to secure the required funding for the startup?’ – Many startups with ingenious business ideas get stumped here. Startup funding can be divided into three main categories. These are equity financing, debt financing, and grants. Each of these types has its own associated risks and advantages.

Here’s a quick rundown on these different types of funding sources:

Equity financing

In equity financing, you have to sell part of your company’s equity for procuring capital. The investors will have a say in the decision-making process. The sources for this type of financing may include family, friends, angel investors, venture capitalists, accelerators, incubators, and crowdfunding. There won’t be the pressure of repayment of invested funds. Investors will see ROI in the form of capital growth.

Debt financing

Under this category, you can borrow the funds and will be liable to pay it back with interest. You have to stick to the stipulated period for repayment. Sources of debt financing include conventional banks, financial institutions, and government loan schemes. If you procure funds through this financing option, you won’t have to deal with much outside interference in the decisions and operations of your startup. You may, however, be required to keep one of your assets as collateral.

Grants

Under this category, a company, foundation, government, or such an entity may grant a financial award to a startup. In most cases, the funds do not have to be paid back and there is no ROI. The source has no involvement in the decisions of the startup. The grant may be given in portions, depending on the achievement of set milestones. Grants may take a longer time for approval as applications will require review and approval. 

Sources of Funding

The source of funding will depend on the operation stage of your startup. The available options may vary depending upon the stage at which a startup is at present. 

Pre-seed stage

If your startup is at this stage, you are probably working hard to bring an idea to life. You may require minimal funds at this stage. Also, you might have access to very limited channels (and mostly informal ones) for raising funds. At this stage, you may have the following funding source options:

Bootstrapping: It means relying on your own sources like your savings for the growth of your business. Although it means depending on limited personal funds, it also means that the control of your startup won’t be diluted. 

Friends and family: This is another typical source of funds for startups in this stage. The main advantage of this investment source is the natural level of trust that exists between investors and business owners (your family/friends and you).

Competitive events: Many organizations and institutions conduct competitions and challenges that revolve around business plans. To the winners, they typically provide prize money, grants, or some type of financial benefit. You can try to secure these funds. Even though the amount of money is usually not much, it might be sufficient for you at this stage. However, to succeed at these events, you will need a robust business plan.

Seed Stage

You may need to conduct field tests and trials, bring on mentors, and assemble a formal team. For these, you can look into the following funding options:

Incubators: The sole purpose of incubators is to help entrepreneurs launch and build startups. They make investments and also offer value-added services.

Crowdfunding: As the name suggests, when a large number of people contribute small amounts of money to raise funds, it is called crowdfunding. 

Angel investors: These investors provide funds (in return for equity) to the startups they deem high-potential. Reach out to angel networks if you want to seek out an angel investor. 

Government Loan Schemes: It’s worthwhile to check out government schemes that encourage startups by providing collateral-free low-cost loans. 

Venture Capital Stage

If your goods or services have been introduced to the market, your startup might be at the venture capital stage. Multiple rounds of funding will be involved. At this point, key performance indicators like client base, revenue, and app downloads rise in importance. 

Series A

This investment round is the first one. You would want to increase your customer base, tap new markets, improve brand credibility, and basically grow your business. You might want to look at funding sources like venture capital funds, venture debt funds, banks, and non-banking financial companies. 

Series B, C, D, and E

Further rounds of funding are for when the revenue of your startup is increasing and the market growth rate is fast. Although there are no restrictions on the rounds of funding, you may want to be conscious from series C onwards. That’s because, with each round, more equity of the business is distributed. The common sources of funding at this stage are venture capital funds and private equity/investment firms. 

IPO (Initial Public Offering)

When your startup grows at a steady pace and has an impressive track record to show, you can list it in the stock market. You will be raising funds by selling your shares to individuals as well as institutional investors. When you do this for the first time, it is known as an ‘initial public offering’ or ‘going public.’ For this type of funding, you will need to take care of a lot of statutory formalities. 

Steps for Raising Funds for Your Startup

A successful fundraising round will require effort and patience. The process consists of the following steps:

Assessing fund requirements and fundraising goals

First and foremost, you need to take a look at the purposes for which funds are required. This will help you assess the amount of funding required. Develop a plan with clear milestones and timelines. Plan and calculate the cost of developing the prototype, research, and production. 

Assessment of the investment readiness of your startup

After you have assessed the funding requirements of your startup, you have to check its investment readiness. You need to convince the investor about your revenue projections. They may also look at factors like the uniqueness and competitive edge of the startup, and the reliability of your team. 

Pitch deck preparation

Through a pitch deck (also known as an investor deck or startup presentation) you provide potential investors with important need-to-know information about your startup. A pitch deck essentially tells the story of your startup and outlines the important details of your startup like the product/technology overview, the business model, the team members and their roles, the competitive landscape, funding needs, and exit options. 

Targeting investors

Speak to the entrepreneurs who have been successful in raising funds. You will also need to research the investment thesis of venture capitalists and gain some information and insights about their previous investments. These efforts will help you find out about active investors, geographic location, the sectors they prefer, the kind of mentorship they provide, and the average ticket size. You can personally interact with potential investors at pitching events. Share pitch decks with venture capitalists and angel investors via email.

Due diligence by investors

Before angel investors and venture capitalists finalize an investment, they also conduct a thorough assessment of the startup from their end. They analyze the financial decisions of the startup. They also assess the credentials and background of the team. All this is done so that the claims of the startup can be verified. This also helps investors uncover suspicious activities and risks. If after such an assessment, the investor deems it safe, they will finalize the funding on mutually agreeable terms. You will have to successfully navigate this step to raise the required funds. 

Term Sheet

Get the key terms of the investment on a term sheet. This will be the foundation for the investor-investee relationship and the eventual legal contract.

At every stage, multiple sources of funding are available as options. You need to select a source that seems suitable for your startup at its current stage. Remember that securing funds from outside sources takes time. Conversion may take around six months or more. It can be time-consuming and challenging. However, you can increase your chances of success with persistence and the right strategy. With proper planning, an optimistic attitude, and dedicated efforts, you can and will secure the funding necessary to turn your entrepreneurial dreams into reality. 

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