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Startups find funding from a variety of places, including founders’ personal savings, investments from friends and family, venture capitalists, angel investors and crowdfunding. When setting up a startup company, it is important to be aware of all funding options which are available and research which options would work best for the startup company.
In addition to this, it is crucial to have a business development plan to ensure the founders are aware of the stage their company is at so that they can plan for funding rounds to take place if necessary. Investments and funding are usually extremely important when it comes to progressing a startup company.
How Do Startup Companies Begin?
Usually, startup companies begin with an investment from the founder(s) to kickstart the business. The founder typically has some savings, income or investment which they are willing to use to get their company off the ground. After finalising a business plan, the founder must be prepared to invest in their company in order to make progress before they can begin finding funding from alternative sources.
After the founder has made the initial investment, they may wish to begin funding rounds to inject further capital into their business.
What Are Funding Rounds?
Funding rounds are stages at which a business searches for investments to progress the company. When the founder makes the first investment into the business, this can be referred to as the pre-seed round. This is because this investment comes from the founder or from an investor who was willing to inject money to get the business off the ground before it had made any profit.
After the pre-seed round, the business may wish to run a funding round referred to as a seed funding round. This is an analogy for the growth of the business, as any initial investments made here can help the business to grow through taking on more employees and further developing the business plan or model. At this stage, anyone can invest into the business, typically in exchange for a share of the company or their profit.
In addition to this, a business may wish to run further funding rounds, which are then referred to as Series A, B, C and D rounds. Within these rounds, the business will be looking for investment to further grow the company and begin scaling the available products or services as it expands. Both venture capitalists and angel investors will be looking for businesses they believe have the potential to make large returns on any money invested during these rounds.
Whilst startup companies usually only run through Series A – C funding rounds, those looking to make huge returns may run a Series D funding round, which is usually the final funding round which takes place.
What Are Venture Capitalists?
Venture capitalists are investors who are looking for businesses with a potential to generate high returns on any money invested. They typically invest after the seed funding round has occurred. In exchange for their investment, venture capitalists usually desire a share in the company and to be involved in the general operations.
The venture capitalist firms are usually partnerships, and the partners are able to invest in the fund. The fund will then seek to invest partners’ funds in up and coming businesses in return for equity stake in the company. Venture capitalists are useful for small businesses who do not have the knowledge, expertise or capital to progress their business much further than the seed funding round.
In spite of this, some businesses will not accept investments from venture capitalists due to the influence they may desire over the company. Some business owners are not willing to relinquish much control over the running of their company, and therefore would prefer to accept investments from alternative means.
What Is an Angel Investor?
An angel investor is an individual willing to invest capital into a business during it’s early days when alternative investors may not be willing to invest. In exchange for their investment, angel investors usually expect part of the company in the same way that venture capitalists do. The difference, however, is that if a business fails, they are not required to repay the investment from the angel investor.
This can make angel investors a more attractive option for businesses that have not yet made huge returns, as there is no pressure of repayment. This means that angel investors are searching for businesses that they believe can generate huge revenue to avoid any loss of capital.
What Is Crowdfunding?
Crowdfunding is an exciting way for startup companies to generate investments. This can be done through a variety of online platforms, encouraging people to donate and invest in the business while raising publicity at the same time. This means that the business can grow in popularity whilst gaining investments from those who believe in the business and it’s progression.
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