How can startups raise funds?
How do startups raise funds? What does the process look like?
Thanks for the question. It really depends on what type of funds and how much you are trying to raise.
If you are trying to raise a small amount of capital (less than $50,000):
- Friends and family - Hopefully, they would see the potential in your idea or in you and want to help fund you.
- Credit Cards - This is a dangerous idea and should be avoided if at all possible.
- Crowdfunding - If you have an interesting idea, you can share your vision and see how other people react (this is a great way to see if you have a market for your idea)
If you are looking for $50,000 to $100,000 you have a few options:
- Friends and family (see above)
- Crowdfunding (see above)
- Bank loans - These usually require a lot of detail to understand your cash flow, current equity, business plan, projections, etc.. The aren't usually easiest funding to get.
- Angel Investors - These investors typically aren't looking to make huge investments (typically between $10,000 to $100,000 (it can be more, but unless several are working together don't expect a windfall). The great thing about angel investors is that most times they aren't looking for an equity stake as big as a Venture Capitalist. They may want to be more involved in the day to day business or be a mentor or advisor for the business.
If you are looking for $250,000 to $500,000. This is typically a seed round of fundraising:
- Bank loans - Are still an option (but for this kind of an amount they are typically looking for an established business). (See Above)
- Crowdfunding - This level of success on crowfunding platforms is possible, but isn't reliable. (See Above)
- Angel Investors - Typically this amount would require several Angels or a group of them (See Above).
- Venture Capitalists - This is typically a small amount for an established Venture Capitalist firm, however, if they really like the idea or your team, it isn't out of the question. If you can land a Venture Capitalist at this level they may invest more money in later rounds of fundraising (Series A or B). Keep in mind Venture Capitalists are going to want a much larger piece of your equity pie (typically between 25% and 50% depending on the amount of money they infuse).
If you are looking for over $1 million dollars you should focus on:
- Angel Investors - They would probably only fund a portion of what you need (See Above).
- Venture Capitalists - Again this usually happens once a venture has already done some fundraising, but it isn't out of the question if you really catch the right person's attention or interest. (See Above)
- Crowdfunding - It is possible to raise over $1 million with crowdfunding, but it is a gamble when trying to raise that amount of funding.
Keep in mind the more money you are trying to raise the more effort you will need to apply. Getting large infusions of money will mean you need to explain how the money will be spent and how that will grow the business. Don't get frustrated, at each of these levels people can and will say "no" to you. That doesn't mean they don't want to help or aren't interested, sometimes the timing isn't right. Stay focused and keep looking at ways to fund your business. If you are passionate about your venture, you will eventually find some funding.
One last note, don't try raising more money than you currently need. If you only need $50,000 to grow your business to the next level, don't waste time trying to raise $1 million dollars.
Whatever type of investor you are chasing (and I loved Jef's answer as it really explains the different options well) I would also suggest that you should try and get some publicity for the business first.
It's free if you approach the media yourself (I have to admit that I teach PR to small businesses so I have a subjective perspective!) and the benefits are that it gives credibility to your business and the endorsement of a media outlet can be priceless. It establishes you as a 'real' business for potential investors and somehow implies solidity.
If your business is a start up then it is probably offering some sort of innovation, or solving a problem, so use that to make it an interesting story for the metro newspapers to write about. Or go to radio producers and see if you can get an interview.
It's a worthwhile exercise if you want to impress the investors!
I am newbie here and very impressed to read this questions and the answer given by Jef is very informative for me. I like the points he mentioned in here and yes i definitely use this strategy for my business also. I hope it will help me in raising my funds too. game developers in india
Some stats for you. 88% of new business use the Entrepreneur's, family, friends, neighbours, etc. funds. 8% use Business Angels and 4% use Venture Capitalists.
Money from freinds and family is also easier to obtain since they believe in you. When you go to strangers, you are in sales mode which makes it challenging... always check out any grants that are available too (although they can come with reporting strings attached).
I'd only recommend selling equity (i.e. .to Business Angels and Venture Capitalists) when every other single avenue (including banks) has been exhausted.