Startup Financing: When does a startup need funding

With startups,  the focus is hyper-growth in the shortest amount of time possible,  and to achieve this, one thing is certain, you need funds to keep the lights on and keep the team happy and focused.

Startup funding comes in many forms and also depends on the stage of the startup, but the majority of companies engage in some sort of fundraising to raise the funds needed for their growth.

Most Startup funding involves raising money through an outside investor, a term for this is known as funding rounds.

In those cases, these investors exchange their capital for partial ownership of the Startup(Equity).

.

Startups with high growth potential attract the most investors, but this funding comes with a caveat,  “investors often get partial ownership and take an active role in the company's decision-making process.”

Startup funding comes from a variety of sources and the funds can be used for any purpose that helps the startup achieve its growth purposes.

What are the types of startup funding?

Most of the time, we often hear about startups raising a VC (venture capital) fund, it turns out that venture capital is just one of the six top sources of startup capital

There are several options when it comes to startup funding.  Let’s take a look at some types of startup funding.

Personal Savings and Credit

For startup funding, personal savings and credit account for the largest percentage of startup funding. 

As a startup founder that’s going to convince anyone else to invest in your company, you have to be willing to go all-in yourself.

It’s also the most easily accessible form of funding, as you don’t have to rely on anyone but yourself.

Friends and Family

Many startup founders turn to their friends and family to help them with initial funding, maybe after taking and exhausting the first option. 

After all, these people already trust and believe in what you’re doing, you won’t do too much work trying to convince them the way you would a VC, angel investor, or bank.

Friends and family can be a great source for getting started, but ensure that the business part of the relationship is clearly outlined. 

All agreements must be legally bound in clear terms.  Some startup founders tend to avoid this type of startup funding because of the potential personal complications.

Venture Capital(VC)

Venture capital is focused on investing in startups and small businesses that are usually high risk, but also have exponential growth potential.  

The goal of a venture capitalist is a very high return on their investment, usually in the form of an outright acquisition of the startup or an IPO.

Venture capital as a source of funding is a great option for startups that are looking to scale big quickly. Because the investments are usually large, As a startup founder, your startup has to be prepared to take that money and grow.

Angel Investors

Angel investors are individuals with high net worth who look out for startups to put relatively small amounts of their money, typically ranging from a few thousand dollars to as much as a million dollars.

Angels investors are often one of the most accessible forms of early-stage funding and are a critical part of the equity fundraising ecosystem. 

One of the biggest benefits of working with angel investors is that they can usually make an investment decision on their own without the need to consult others, unlike VC funding.

Quick and maybe instant investment decision is often what an entrepreneur needs early in their startup’s development phase. 

Banks

Bank loans are a more traditional way of getting funding for your startup. They may be easier for some startups to get than getting venture capital, which can be a long and arduous process.

Crowdfunding

Crowdfunding is a method of raising funds through the collective effort of friends, family, customers/users, and other individual investors. This approach to funding taps into the collective efforts of a large pool of individuals via social media and crowdfunding platforms.

Accelerators

Startup accelerators offer startup funding and the education, resources, and mentorship needed to grow the startup exponentially in the shortest time possible.

You can join the startup LaunchCode accelerator program here

Series Funding

Series funding is when a startup's founder raises increasing rounds of capital to keep their startup running. 

Funding usually starts with seed funding and then moves on to Series A, B, C, D, and even E.

Each of the Series can include a combination of different types of funding already stated above, but almost always include venture capital, particularly in the latter stages of the startup.

Now that you know what startup funding means and several options to choose from if you intend to raise some funds for your startup, let’s take a look at when you should consider raising funds

When should startups raise funding?

If you are looking out for me to give you a specific point in your startup to consider raiding some funds, then I might just have disappointed you because there’s no right or wrong time to do this.

It is also important to note that as the startup expands and achieves each level of growth, each funding round serves as a stepping stone toward greater growth.

This simply means the type of funding depends on the stage of your startup.

Startup funding usually begins with an initial pre-seed and(seed rounds), which are then followed by Series A to B, C and beyond. Depending on the type of industry and investors, a funding round can take between three months to over a year. 

Irrespective of what stage your startup is, raising funds falls under one of these categories 

Seed-stage funding

Pre-seed funding occurs at the very beginning of a startup when the founders usually invest their own money. Family and friends can also contribute during the pre-seed round when the startup creators are trying to get their idea off the ground. 

Early-stage funding

Next is the funding rounds A through C (or in some cases, A through D). Round A is focused on startups that have a working business model that will elicit an immediate profit because Investors are looking for a high return on investment (ROI).

Late-stage funding

When startups move on to Funding Round C and/or D, it’s to continue expansion at a higher level. These startups are considered to be highly successful at this period, holding a value of at least $100 million and receiving upward of $50 million in funding. 

Round C usually means the startup wants to further expand either by creating new products, acquiring companies or expanding their reach – whether that’s in a new market or location.

It is strongly recommended that founders self-finance their startup to achieve a product-market fit, this is not always possible due to financial constraints. 

If the founding team can pool finances together, it would be suitable to avoid funding at the early stage and go directly for a Series A round to have more equity, flexibility, and control over the direction of the startup.

In conclusion

Before thinking of seeking some funds for your idea, your decision should be guided by these two questions – How Big and How Fast? That is, how big do you want the startup to become, and how fast do you want to get there?

Leave a Reply