Starting a new business venture is among the most thrilling and challenging enterprises you can take on in life. In the adventure of entrepreneurship, you’ll encounter responsibilities you never knew existed and discover strengths and creativity you never realized you possessed. A nearly inescapable challenge faced by aspiring entrepreneurs is that of startup capital. How to fund your venture will be top of mind as you begin to plan the financial strategy for the launch and assess the startup business funding you will need to sustain operations while your marketing strategies are working to attract customers.
The amount of startup capital you need will depend on the product or service you provide. The initial funding requirement could range from the low four figures to the high six figures. If your entrepreneurial plan is especially ambitious, you could need seven figures of startup funding.
Unfortunately, nearly 40 percent of businesses fail because they run out of cash. Many aspiring business owners are under-capitalized from the beginning and cannot sustain their business until their customer list grows and sales revenue builds. If your startup business funding requirement is modest, you’ll self-finance, but if the projected need climbs through five figures, you may be compelled to look beyond your personal credit cards and bank balance.
Assess your startup business funding needs
It is essential that entrepreneurs accurately project the early-stage funding needs of their proposed venture, including a working capital budget. Insufficient funding will devastate your ability to invest in infrastructure to grow your business. You can’t sustain your budding enterprise without key resources like
- Technology that supports business processes, from accounting software to marketing automation that supports inbound marketing and the buyer’s journey experiences
- Appropriate staffing, whether full or part-time
- An optimized company website
When entrepreneurs anticipate that startup costs will outstrip their personal resources, they must learn which doors to knock on to find vital startup funding. Traditionally, most freelancers and small business owners fund their startup in three ways — personal funds, loans from friends and family or a Small Business Association (bank) loan. While these are good options, larger funding needs often require other sources.
The campaign to secure investment capital is time-consuming. Aspiring entrepreneurs should plan to devote a minimum of three to six months to the financing crusade. If you plan to recruit investors, you’ll also need time to negotiate the terms, as well as the amount of each investor’s contribution. You’ll have to undergo a legal process to finalize investments as well. Larger funding rounds often involve more extensive due diligence, negotiations and legal processes.
Know your funding timeline
Begin your search for investment capital at least six months before funds run out, to give yourself time to replenish cash. If you are raising seed money for a venture that will need a six-figure investment, you’ll be wise to project the amount of funding needed to sustain business operations for two years.
Projecting the number of months the venture can operate before running out of cash will document the financial stability of the company and demonstrate that you are a responsible financial manager—qualities that are inclined to inspire potential investors to fund your company.
Giving yourself plenty of lead time as you hunt for investment capital can only strengthen your negotiating position with investors. It’s always best to ask for money while you still have money. Position yourself to hold as much negotiating power as possible when discussing company valuation, terms of the investment loan and legal aspects of the funding deal. This can result in more favorable terms for you.
Investor database for startup business funding
An investor database allows you to build relationships and streamline communication with potential investors by enabling you to manage the networking and follow-up processes with those who show an interest in your venture.
The database will consist of warm contacts. Your strategy will be to initiate conversations with a pitch that sparks interest and opens doors to follow-up meetings that could lead to successful investment deals.
Your investor database will also contribute to the success of your pitch since you’ll have notes that document investors’ hot buttons, along with investment histories that enable you to customize your pitch with talking points that resonate. A personalized approach increases the likelihood of capturing investor interest and aligning your company with their investment priorities.
Options for funding your startup
Venture capital
Venture capital (VC) is a form of private equity and a type of financing for startup companies that have long-term growth potential. VC money generally comes from investors, investment banks and other financial institutions.
Venture capital firms raise money from limited partners who invest in promising startups or in larger venture capital funds. VC investments in startups can be monetary or may consist of technical or managerial expertise. Additionally, VC investors usually provide strategic guidance and industry connections that benefit the new entrepreneur.
The downside is that landing a VC deal is difficult. Just 5 out of every 10,000 startups secure VC funding. Entrepreneurs will need to prove themselves through rigorous due diligence. If they receive VC, they’ll have to meet high growth expectations. Many VC investors are looking to receive a fast, high-return payoff and may pressure the company for a quick exit. Furthermore, VC investors are likely to demand a large share of company equity and make demands of the company’s management that can put founders at risk of losing strategic control.
VC is not the right funding solution for most startups, but if pursuing VC seems reasonable for your venture, look for VC firms with expertise in your industry. Obtain more information about VC investors.
Angel investors
The typical angel investor is a high -net -worth individual. An angel investor could be certain of your family members, close friends or other associates. Angel investors may have acquired their wealth through any number of avenues; however, most are themselves entrepreneurs or retired executives from enterprise business companies. These investors are inclined to fund ventures that are involved in industries or business sectors with which they are familiar.
Unlike a bank, which will demand concrete proof of the viability of a proposed venture, an angel investor might be more willing to gamble on your great idea. Angel investors generally understand the risk of investing in startups and may not expect any return on capital if the business fails. No wonder we call them angel investors!
Potential angel investors
To find potential angel investors or VC sources, networking within your business community is a must. Do attend local business, trade and community organization meetings and other events to meet people—and have your pitch well-honed. Begin your research on angel investors by visiting sites that match them with startup entrepreneurs:
- Angel Capital Association: A collective of accredited angel investors
- Golden Seeds: A group whose members focus on women-led ventures
- Angel Investment Network: A network that seeks to connect entrepreneurs with business angels
Revenue-based fundraising
The downside to raising capital through traditional debt financing is that it requires the business to take on debt, plus interest. Revenue-based financing (RBF) is a type of business funding in which a company receives investment capital by promising a percentage or a certain amount of the venture’s future projected revenue stream to investors.
This is potentially a win-win for both the entrepreneur and the investors, as the startup entity receives the necessary capital to launch and build the business by generating sales revenue and the financer generates a return. Learn more about RBF.
Crowdfunding
Crowdfunding is funding a business or startup venture by receiving small amounts of money from a large number of people. While crowdfunding can be an effective way to raise capital, it will require the business to convey its brand through compelling storytelling, strategic marketing and vigorous promotion.
Perhaps the best news is that in addition to financial resources, crowdfunding can also help the venture build an excited and loyal community around its products and services. The process can simultaneously validate the level of marketplace demand for the venture’s products and services early in the startup phase.
Crowdfunding bears similarities to angel investing — while traditional angel groups seek to match entrepreneurs with accredited investors, crowdfunding sites allow many small investors to pitch in to move the venture forward. Crowdfunding sites often require an application process so they can vet business proposals before presenting them to members. Sites that are worth a visit include:
Government startup business funding
To help encourage business growth, many state, local and federal agencies offer grants, incentives or tax breaks to businesses that satisfy certain criteria, such as operating in a specific industry or within a STEM category (Science, Technology, Engineering, Math). Securing government funding can be time-consuming and comes with strings attached, so entrepreneurs should carefully consider their options before applying for government funding. Get more information about government grants for small businesses.
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