One of every two startups successfully raises pre-seed or seed funding. Seed funding is the initial round of startup business funding used to propel a business idea into a living brand. Despite the statistics, raising capital is never easy.
When it comes to entrepreneurship funding, there is no one size fits all equation. The means by which you raise capital depends on your bandwidth, network, timeline, and amount of capital you need to raise.
In the guide below we discuss the three main types of funding for startups and the pros, cons, and processes associated with each. Continue reading to learn the details!
1. Zero Equity Funding
Equity is a share of ownership in your business. This could be a percentage like five percent or if you are a public company, this could be an amount if shares in the company. While equity is an incentivizing exchange for business funders, it has its drawbacks for founders.
Sometimes startups make the mistake of giving up too much equity from a lack of experience. This means other owners of the company can veto decisions or make changes against a founder’s will. If you want to start funding a startup business without giving up equity below are three ways.
Crowdfunding
This extremely popular method of raising capital lets you keep 100% of your business. It is also a great way to test product market fit.
You can have your own crowdfunding page in as little as one day. You set up an account with a crowdfunding platform such as Kickstarter, GoFundMe, or iFundWomen. You’ll need to include a brief brand pitch, rewards for donors, and some images.
Pros:
- Start raising money immediately
- Keep 100% equity
- Accessible to all founders
- Can change your funding goal at any time
Cons:
- Lots of work to advertise and spread the word about your campaign
- Need the bandwidth for emailing network repeatedly
- Not everyone in your network can contribute
- Awkward to ask friends and family for cash
Win or Apply for a Grant
Grants are financial contributions made from governments, non-profits, or private companies to businesses with nothing taken in exchange. It’s the ideal situation for any business owner.
The grant application is fairly similar to a scholarship. You submit a profile on your business and sometimes a video and then a grant committee reviews all of the applications and selects grant winners.
Pros:
- One-time application, not time-consuming
- Some grants award prizes of $5,000+
- No equity taken
Cons:
- Very competitive
Join an Accelerator or Incubator Program
Accelerators and incubators are startup boot camps. It’s the combination of a grant offering along with mentorship and business development. Incubators are generally to solidify business concepts and accelerators are for established businesses looking to catalyze their growth.
Pros:
- One-time application, not time-consuming
- Money in addition to mentorship
- In most programs, there is no equity taken
Cons:
- Very competitive
2. Equity Startup Business Funding
Although equity is a scary thing to offer in exchange for funding, many startups do so. As new business owners, you might offer too little which will deter investors. But you might also offer too much as a naive mistake.
It is recommended that for your first $100,000 raised never offer more than 10-20% equity in the company. You want to make sure that the founding team always has majority ownership of the company.
The more equity you reserve, the less money you’ll be able to raise and vice versa. The three options below do involve equity in exchange for startup funding.
In addition to equity, angels and venture capitalists (VCs) come with networks, experience, and connections that can propel your business beyond just financial means.
Find an Angel Investor via Your Network or LinkedIn
An angel investor is someone with capital that they invest in startups or businesses. These can be professional investors or high-net-worth individuals who are curious about a company and want it to succeed. Even if your aunt gives you $15,000 for your company, that is considered an angel investment.
Pros:
- They are everywhere
- Find them in your network via alumni relations, LinkedIn, friends, and family
- Only have to work with one investor/mentor which removes equity complications
- Some offer mentorship
Cons:
- Requires you to give up equity
- Hard to find and convince them of your pitch sometimes
Use an Angel Funding Platform
These platforms work exactly the same as crowdfunding platforms, but instead of gifting donors rewards, they get a share of equity based on their contribution. This means everyone who has contributed whether $100 or $100,000 gets a portion of your company.
Pros:
- Short lead time to set up
- High net worth individuals connected to these platforms with capital and experience
- You have control over funding goals
Cons:
- Having so many investors can get complicated down the line
- Giving up equity
Venture Capitalist Firm
Only .05% of startup business funding comes from venture capital, yet it is all we hear. “X” company raised $100 million in series A.”
Venture capitalists are professional investors who use their own or a VC firm’s money to invest in promising businesses.
Pros:
- VCs are less risk averse since they are not investing their own money
- Huge investments that usually start at $50,000+
- VCs are well connected
Cons:
- Requires large sums of equity
- Need solid bookkeeping and traction
- Very competitive and sometimes founders have negative experiences
3. Debt Startup Business Funding
If the options above aren’t working out for you there is debt financing available. This works the same way as taking out a personal loan or credit card.
The major difference is the terms and application processes for businesses might require additional materials and financial paperwork to highlight the business’s stability.
Take Out a Small Business Loan
The most common startup business loan is the Small Business Association (SBA) loan. Bank and credit unions off these loans to provide money for businesses until they are cash flow positive.
Pros:
- Offered with limited or no business credit history
- Can be as low or high as needed
- Money in as little as one week
Cons:
- Debt and interest collect if not paid immediately
Open a Small Business Credit Card or Apply for a Business Line of Credit
An alternative to a loan is a business line of credit. This works exactly as a credit card would although sometimes the payback terms are more generous.
Pros:
- Can have new credit in a few days
- Full control over capital
Cons:
- Usually require a personal credit history check
- Debt and interest accrue
Managing Your Startup Business Funding
There are so many methods to obtain startup business funding. It is hard knowing which path makes the most sense for you.
Connect with a financial advisor for a free consultation. They help you assess your current financial situation and determine which move is best for you and your company!
