Startup funding is money that private companies receive from various sources and use to accelerate their growth.
The term may refer to anything from the initial capital that entrepreneurs use to launch their businesses to the large venture capital rounds that more established companies may raise en route to a strategic exit.
In this article you’ll learn about the common sources of startup funding, how startups get funding and more.
Types of Startup Funding
Venture capital gets most of the attention, but it is just one of many methods of funding a startup.
Entrepreneurs often use their own money to get their new business up and running. Personal savings and credit is not a common source of startup funding after launch, however.
Friends and Family
It’s also common for founders to receive funding from their friends or family members in the early days of a startup company. This funding may come in the form of a loan, which typically has more favorable terms than a bank loan would, or in the form of an investment, where the people supplying the capital receive equity in the company.
Loans are a method of funding a startup that provide a way to get capital without sacrificing equity. But they may come with penalties or other hidden costs beyond the standard fees and interest rates, and as such should only be used in specific scenarios, such as a short-term bridge before a formal fundraising round.
Many startup loans have less stringent qualifications than other types of business loans, because they’re specifically designed to be accessible to new companies. Revenue-based financing loans, for example, use a company’s future revenue as collateral, because startups may not have the typical assets required for collateral, such as physical inventory or real estate.
An angel investor is a private individual who gives money to a company in exchange for an ownership stake. Angel investors tend to invest at the earliest stages, before venture capital fundraising has begun.
Getting in on the ground floor and funding a startup at this stage can be extremely rewarding, both personally and financially. But it’s also risky, because the success rate for early-stage startups is low.
Venture capital is startup funding provided by firms that raise money from their limited partners and deploy that money in exchange for equity. U.S. startups alone raised over $312 billion in venture capital funding in 2021, according to York IE Fuel.
How Startups Get Funding
At the early stages, entrepreneurs seeking startup funding typically pitch venture capital firms on why their company is a worthwhile investment. Later on, investors may seek out startups on their own.
A typical pitch deck for investors should include:
- company and team overview
- market opportunity analysis
- product and intellectual property description; and
- go-to-market strategy details and successes.
Investors are looking for different things in a startup depending on its stage and market, so it’s important for founders to research firms prior to pitching. At the Seed stage, for example, York IE puts a focus on B2B SaaS companies that have a tangible product, signs of product market fit and at least some early customers.
Once a founding team and an investor both believe there’s a deal to be made, the two sides must agree to other details, including the startup’s valuation, which helps determine the amount of equity the firm receives in exchange for its investment. Again, these details will vary by stage; startups should generally expect to give up 15% to 25% of their company in a Seed round, for example.
How Startup Funding Works
The venture capital fundraising process involves a series of rounds, with each getting progressively larger in terms of dollars invested.
The industry by and large celebrates massive funding rounds, huge valuations and other vanity metrics, but York IE preaches responsible, capital-efficient fundraising. Startups should only raise as much as they need to grow into successful, sustainable companies.
Pre-Seed and Seed Rounds
As the names imply, Pre-Seed and Seed rounds have traditionally helped startups launch; founders plant a seed in the hopes of it growing. But as larger venture capital firms began to invest at earlier stages, the dollar amounts involved in these rounds grew significantly.
Today, some entrepreneurs at the Seed stage may still only have an idea, but most others are further along. Startups often use Seed funding for research, increasing headcount and accelerating their product development.
Companies that seek Series A startup funding should be able to demonstrate that they’ve put their previous funding to good use and are ready to go to the next level. They have demand for their product and get helpful feedback from customers, and they’re looking for additional capital to optimize their processes and otherwise build on this successful foundation.
Series B startups have proven product market fit and are ready to scale. Money raised in this round is to expand on everything they are doing right, by doing things such as moving into new regions and making new hires to support the growing business.
The Series B stage is typically when potential exits become apparent to both startups and their investors.
Series C and Beyond
Companies often use Series C funding to make bold, strategic moves to gain control of a market or expand into new ones, with the potential for a successful exit becoming ever more real.
Series D, E and beyond do occur, but not as frequently. Many companies that reach this stage no longer need to rely on venture capital funding.
Do You Need Startup Funding?
Startup funding should always be a choice, not the de facto.
Founders that take outside capital are selling pieces of their business. And the buyers become their new bosses. So the decision to seek startup funding should not be made lightly.
But while it’s possible to build a successful company with a nine-figure exit without taking on any outside capital, it’s exceptionally rare. At some point, the vast majority of startups will want or need to grow more quickly than their revenue alone allows for.