Explore Startup Funding Options
Please note that terminology, laws and regulations often vary based on several factors, including industry, location, and more. It’s important you check your local guidelines before taking action. If you have questions, please contact us. Funding sources and stages vary based on many factors, the information outlined below should only be used as a starting point for further research.
According to a survey conducted by the NSBA, 1 in 4 startups don’t receive the funding they need to get off the ground. Knowing this, entrepreneurs should exhaust all options when it comes to securing seed and startup funding. Traditionally, there are five sources of funding you can pursue, at four different stages of development, each with their own pros and cons.
Stages of Startup Funding
As you can imagine, your funding needs don’t end unless your business does. As your business grows, you’ll need to continually pursue different types of funding options. Four common funding stages for startups include pre-seed, seed, series funding, and IPOs.
Pre-Seed Funding (Bootstrapping)
Pre-seed funding happens when you have a solid concept and plan to make it a reality – maybe a prototype or some proven success on a small scale. Pre-seed funding can be anywhere from 10k-250k and should last you at least one year. In many instances, this stage is when you’ll rely the most on your own finances, as well as support from your family and friends’ finances.
Seed Funding
Once your product or service is ready for customers it’s time to pursue seed funding. Seed funding should last you the first two years of your business and the amount needed can vary greatly from $10k to $42 million depending on the industry you’re in. During this stage, investing is still risky, so entrepreneurs tend to rely on friends, family, loans and angel investors rather than traditional investors.
Series A Funding
Once your product or service is ready for customers it’s time to pursue seed funding. Seed funding should last you the first two yearsSeries A funding occurs once your business has proven successful but still needs some finesse. You may need to hire more staff, conduct market research, develop your branding materials, or build better infrastructure. This funding will give you a large influx of cash to help you build in a way that you’re able to scale your business in the future. Typically, this is the first stage at which you offer equity and you will want to partner with a venture capital fund or angel investor. Because this is riskier than the other stages of funding, getting Series A funding is more intensive than previous rounds of funding, and you’ll need to undergo a valuation and due diligence process.
Series B Funding
When you have a solid business model, a loyal customer-base, and are ready to grow your business, you’re ready to apply for Series B Funding. At this point you may be looking to distribute more product, hire more staff, or expand to new locations. Series B Funding is both easier and more difficult to acquire because few startups make it to this point. If they do, there’s a larger pool of interested investors. Like in Series A, you’ll need to go through a valuation process to determine how much your company is worth.
Series C Funding
Businesses looking for Series C Funding are at a point where they’re ready to scale (learn more about what it means to scale your business). Your business is ready to tap into new markets, introduce new product lines, maybe even purchase another company. At this stage, entrepreneurs attract larger donors who take fewer risks, like hedge funds or private equity firms – they may even consider going public.
Startup Funding Sources
In our October webinar, Dallas reviewed several sources of funding in ASL. Take moment to watch his explanation before continuing to read on.
Friends, Family, & Self-Funded
Stages: Pre-Seed
- Less Experienced Funders
- Personal Financial Risk
- Less Funding
Pros
Easier Access
Less Formal
Support Network
Cons
Interpersonal Conflict
Limited Funding
Not Professional Investors
You, and your loved ones’ banks are an easy place to start looking for startup funding. This of course can be an uncomfortable topic to broach, so it’s important you set clear expectations of what their money will help you achieve, how long it will take you to pay back, and at what interest rate. Relying on friends and family may not be a great long-term strategy as they likely have more finite funds than more formal options listed below.
Angel Investors
Stages: Pre-Seed, Seed, Series A
- More Experience Funders
- No Personal Financial Risk
- More Funding
Pros
Don't need to repay
Business Support
Access to Resources
Cons
Loss of Control
Loss of Ownership
Difficult to Aquire
An Angel Investor is a wealthy individual that’s looking to get involved in a business during the early stages through an equity investment. Because an Angel Investor is purchasing a percentage of your company, you typically will not need to repay these funds. They, like a Venture Capital investor, are taking a risk investing in your company, which means they will likely want to have some involvement in your operations.
Crowd Funding
Stages: Pre-Seed and Seed
- Less Experience Funders
- No Personal Financial Risk
- Funding Varies
Pros
Large pool of funders
Early marketing
Less personal risk
Cons
Unclear structure
Additional fees
Public access to your ideas
Over the past two decades websites like Kickstarter and Go Fund Me have made crowdsourcing your startup an accessible way to fund your business. By pursuing this funding strategy, you’ll be able to reach a larger audience of potential funders – and future customers. There are three strategies people tend to rely on to get strangers to participate in their crowdfunding:
- Perks: offering rewards, like early access to products or a sit sit-down with the business owner
- Ownership: offering equity in the business and giving investors of a fixed level a percentage of your profits
- Connection: finding a message/product that inspires and people can connect with
Venture Capital
Stages: Series Funding
- More Experienced Funders
- No Personal Financial Risk
- More Funding
Pros
Don't need to repay
Business support
Access to resources
Cons
Loss of control
Loss of ownership
Difficult to acquire
When it comes to Venture Capital (VC), startups offer equity (partial ownership) of their business to an interested investor who in turn provides financial and technical support and shares in your profits. This investor could be a business, a firm, or a group of individuals who that are interested in developing businesses. A VC differs from an Angel Investor, in that it can typically provide more money, requests a larger stake in your business, and has more involvement in your business processes. When pursuing a relationship with a VC you should think of this like you’re gaining a new business partner.
Small Business Loans
Stages: Pre-seed, Seed & Series Funding
- No Funders or Guidance
- Personal Financial Risk
- More Funding
Pros
Maintain ownership
Boost in cashflow
Cons
Need to repay, plus interest
Use restrictions
There are loans specifically geared toward small businesses and can be funded by banks, microlenders, or through organizations that specifically fund small businesses. These can be used to purchase equipment, pay staff, cover rent, anything associated with operating your business. Like a personal loan, you’ll want to review all terms and find a loan with a reasonable interest rate. In order to secure a loan you’ll generally need:
- Business plan
- Expense sheet
- Financial projections
- Good credit
If you’re struggling to understand the stages and types of funding you can reach out to our professionals for guidance or subscribe to our monthly newsletter to continue to receive tips and insights.
Rosa Lee Timm
Division President & CMO
Dallas McCarthy
Venture Fund Associate
Helpful sources:
- Investopedia – Series A, B, and C Funding – How it Works
- Investopedia – The Basics of Financing a Business
