They say that startup fundraising has never been easier. While this may be true, the vast number of financing options makes it difficult to know which one is right for your company. Knowing where to seek financing based on a company’s stage in the startup lifecycle can help entrepreneurs get funded faster and save you time pursuing funding from the wrong place at the wrong time.
Idea Stage Companies – Every startup begins with an idea. In order to execute that idea however, you eventually need capital. While many investors do not want to back a young company at this stage, there are some options to consider:
- Friends and Family – Your longtime family friend, your favorite uncle, and of course, mom and dad, can be valuable sources of early funding to get your idea off the ground. Investors who fund more mature startup companies are primarily concerned with the bottom line and key metrics. A friend’s or a family member’s decision to invest will be rooted in their confidence in you, the entrepreneur. Since you have a personal relationship with these investors, take special care to ensure that they understand the inherent risk of investing in startups. They should not be investing primarily to see a return on their investments. So long as your friends and family understand this, they can be key partners in launching your startup, providing equally important financial and personal support.
- Rewards-based Crowdfunding – If you believe that your idea is compelling enough to excite people beyond your personal network, launch a rewards-based crowdfunding campaign on websites such as Kickstarter or Indiegogo. By doing this, you can build brand awareness, create a network of brand evangelists, and raise capital without sacrificing equity in your company. A successful crowdfunding campaign can serve as an indicator of credibility for investors in subsequent rounds of fundraising.
- Business Plan Competitions – Competitions and grants such as TechCrunch Disrupt and MIT $100K provide yet another way to raise funds without diluting your company’s equity. Often sponsored by corporations, universities, or research institutions, these competitions are excellent opportunities to leverage the networks of others and gain credibility. Securing capital from these outlets can be difficult and will usually require both an application process and pitching component that will take time out of your busy schedule. That said, the financial reward and potential to be recognized by an influential audience of investors can make the time and effort worth it.
Seed Stage Companies – Once you have begun to develop your idea by producing a prototype, gaining preliminary traction, or having early revenue, you’ll be ready for another round of funding to further grow your startup. The good news: you have more options at this stage of the game.
- Accelerators/Incubators – An accelerator or incubator will be able to provide your company with additional capital in exchange for equity, usually in the single digits. Your time with the accelerator may be a period of intense growth for your startup and can last from several weeks to several months. When applying to accelerators, be sure to target those that make sense for you. Currently, accelerators are often horizontally integrated (such as by geography: 500 Startups San Francisco vs. 500 Startups Mexico City) or vertically integrated (Qualcomm + Techstars (robotics), Barclays + Techstars (fintech)). These offer strategic resources, connections, and mentors to take your minimum viable product to a solid version 2.0.
- Angel Groups & Angel Investors – Angel groups and individual angel investors can be a key source of capital before you are large enough for institutional investors. Groups, such as Gust, the largest online angel network, require that you submit an application and go through a vetting process. Individual investors, on the other hand, have their own set of criteria when evaluating your startup. Angels can bring value to a startup beyond the monetary worth of their investment by becoming brand advocates, introducing you to their networks, and lending your company their own professional skill sets.
- Equity Crowdfunding – Successful seed stage companies can use equity crowdfunding as an effective and streamlined tool in a holistic fundraising strategy to diversify and speed up a raise. These websites can potentially connect you with investors who you would not have met via traditional fundraising approaches. By sourcing multiple investments from one channel, this method of raising capital delivers the simplicity of receiving one large check from a venture capital firm while retaining the value-add benefits of having multiple angels contributing their support.
Growth Stage Companies – Once you have demonstrated a track record of success through sales, partnerships, or user growth and are poised to begin rapid expansion to move into new markets, you will be able to solicit increasingly larger raises.
- Institutional funding – Institutional funding comes from a firm investing on-behalf of others, most commonly in the form of a VC fund. There are alternate institutional sources such as family offices, private equity, hedge funds, corporate VCs and sovereign wealth funds. Institutional investors typically make larger investments in companies with a proven track record of success and potential for massive growth. Be prepared to undergo intense due diligence; get your financials in order and consult with your legal counsel to be fully prepared ahead of time. From this arduous process, your company will emerge with the capital and prestige to drive exceptional growth.
At any stage of your company’s lifecycle, there are several funding options at your disposal. By carefully exploring your various options and asking questions to those who have been through the process, you will be better positioned to understand which funding source is right for you.