Startup Fundraising: How to Fund Your Startup

Figuring out how to raise startup capital—and who to ask for support—can be time-consuming and stressful. Adopting the right strategy can make all the difference.

This article will look at how to raise the cash necessary to help get your business off the ground and how Wise Business helps startups manage investor funds from around the globe.

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Table of contents
What to consider when seeking startup funding Stages of Startups Startup Industry What startup financiers want to know Sources of Startup Funding 1. Venture Capital 2. Angel Investors 3. SBA-backed Loan 4. Loans from other sources 5. Self-funding 6. Crowdfunding 7. Family and Friends 8. Government subsidies and programs 9. Institutional Incubators 10. Microlending 11. Business Credit Cards

What to consider when seeking startup funding

When you’re looking to secure funding for startups, there are a couple of key considerations to remember. It’s essential to develop a clear strategy from the start so you know which investors to target and when to bring them on board.

Whether you’re looking to secure a loan, bring in angel investors, or crowdfund with your friends and family, you’ll find many potential funding options to consider. However, not all are created equal, and the best path will ultimately depend on your unique goals and strategies.

It’s common for the earliest investors in your startup to have the most significant influence on its development. Founders tend to rely on these contributors for mentorship and guidance, especially during their company’s formative years. Depending on their approach, their involvement can be either to your detriment or your benefit.

To make the most of these early relationships, you’ll likely want to seek out investors whose goals, beliefs, and values align closely with yours. Similarly, partnering with industry professionals with extensive experience in your sector or region can be worthwhile.

As you navigate the inevitable ups and downs of launching a new business, their seasoned advice can be invaluable to your success. These investors can also facilitate networking opportunities with other potential investors.

You’ll also want to determine the right amount of capital to raise at each stage of your company's growth. Usually, you’ll base this figure on the key milestones you want to reach before the next round of funding.

Starting with a detailed startup budgetwill help you calculate this figure effectively. From there, you can ensure you get the necessary resources to succeed without diluting company ownership.

Let’s dig deeper into the various stages of startup fundraising to understand how to secure funding for key milestones in your startup’s growth.

Stages of Startups

As your startup develops, you’ll go through various stages of fundraising. Understanding the difference between those stages is vital to identifying which investors and funding sources are right for you.

The earliest stage of startup funding is usually known as the seed round. This tends to be the simplest stage of the fundraising process, as it normally doesn’t involve any professional investors. Instead, founders raise capital from family and friends, crowdfunding campaigns, accelerators and incubators, small business loans, or their savings.

The Series A round of fundraising is very different. You’ll usually need a much more significant capital injection at this stage of your company's development. Professional investors expect a clear business strategy with clear evidence of traction in your industry, either from revenue growth, a growing customer base, official partnerships, or more.

After a successful Series A fundraising round, you can start planning for Series B and other successive rounds of fundraising - Series C, D, E, F, etc. It’s likely that with each subsequent round, the amount of capital you’ll want to raise will increase significantly. By this point, you’ll likely become more involved with venture capital investments and other aspects of the startup industry.

Learn More: What is Stock Dilution?

Startup Industry

Any founder looking to raise capital should have an understanding of the startup industry and how it works. It’s important to understand the key players involved at each stage of the fundraising process and how they work.

To start, let’s explore venture capital. These firms are a form of private equity financing provided to startups and young companies with high growth potential. They'll receive equity ownership in your business in exchange for their money, guidance, and expertise.

Working with venture capital can be beneficial, especially if you don’t have access to other funding sources. Their mentorship may also make a difference in your company’s success. However, these entities won’t be the right fit for every startup.

Venture capital firms tend to ask for a large share of company equity in exchange for funding. As a result, founders risk losing creative control of these entities, especially as these investors push for changes that result in more immediate returns.

Startups looking for a more hands-off approach may prefer working with sovereign wealth funds, private equity firms, and other investors outside the venture capital space. However, it’s rare to see these entities involved in the startup space.

What startup financiers want to know

Whether you’re seeking investments from venture capital, angel investors, or private equity firms, you must demonstrate your company’s potential for success.

In the early fundraising stages, investors will want to see the opportunity associated with your startup. Tell them about your potential to disrupt the market, address key needs, and/or break into a growing customer base. If you plan to do business abroad, you’ll also want to make sure you account for local regulations, taxation, and other requirements to provide a complete picture of your business.

Investors will expect to see more detailed financial information as your company grows. At these fundraising stages, you’ll need to demonstrate rising profits, a growing customer base, and other essential metrics.

Learn More: How to Get Pre-Seed Funding

Sources of Startup Funding

Understanding what capital for startups is and how it works is the first step toward successfully raising capital for your business.

Now, let’s look at how to put it into practice. This section explores some of the most common sources of startup funding to help you get started.

1. Venture Capital

Venture capital is a go-to resource for startups. These firms specifically seek out startups and other early-stage companies with a high growth potential. Not only do they provide financial support, but they also offer guidance and mentorship to growing companies.

The financial benefits of working with venture capital are numerous. However, it’s important to remember that these firms tend to ask for a large share in your company’s equity in exchange for their support. Venture capitalists want to see returns fast and may push your company in whatever direction they see fit. As a result, many founders feel that their investments come at the expense of their creative control over their company.

2. Angel Investors

Angel investors are high-net-worth individuals who provide capital to startups in exchange for equity ownership. They’re another great way to source large sums of capital, especially in the early stages of your company’s growth.

Much like venture capitalists, angel investors tend to offer their guidance and support to the companies they invest in. Many prominent angel investors are former business professionals looking to invest in companies within their areas of expertise. However, unlike venture capitalists, they’re investing their own personal funds into the startup, rather than sourcing their capital from external parties.

3. SBA-backed Loan

A SBA-backed loan is a type of financing for small businesses that is partially guaranteed by the U.S. Small Business Administration (SBA). They aren’t directly issued by the SBA, but rather from approved lenders like banks or credit unions. Since the SBA guarantees up to 85% of the loan amount up to $150,000^{1 2}, they’re an excellent way for founders to secure funding with competitive interest rates, longer repayment terms, and lower down payments than traditional business loans.

4. Loans from other sources

It’s also possible to seek funding through loans from other sources. A personal credit line is one of the easiest ways for founders to get funding for their startup, as long as they have a reliable source of income and a good credit history. You may also want to consider applying for a small business loan through a bank or online lending platform.

These loans are a way to secure a one-time cash injection into your startup. However, depending on your credit history, you may be unable to access them. Also, you’ll need to repay these loans over time with interest. It’s essential to do your homework before you apply to ensure you can meet the repayment schedule.

5. Self-funding

There’s no one you can rely on quite like yourself. If you’re looking to avoid tight repayment schedules and high interest rates, it’s worth looking at your savings to get a sense of whether you can fund your startup venture yourself. Naturally, this option won’t be available to everyone. However, it can be a great short-term option, especially in the earliest stages of your company’s growth.

6. Crowdfunding

Crowdfunding refers to raising capital by collecting smaller amounts from many investors. It’s usually done online through social media to attract the widest possible reach. You can decide whether to offer products, shares in the company, or other perks in exchange for the investment. It’s an alternative for anyone unable to rely on self-funding or more traditional business loans.

7. Family and Friends

Much like self-funding, reaching out to family and friends for investments isn’t an opportunity available to everyone. However, it can still be a good source of smaller capital investments in your startup. You may get lower interest rates and better repayment schedules from people you know.

8. Government subsidies and programs

The U.S. federal government offers multiple programs and subsidies for startups. The Small Business Administration (SBA) provides millions of dollars to innovative small businesses and other sector-specific programs to address startups in health care, technology, and climate research. Locally, some U.S. states offer resources and support for startups and other small businesses.

9. Institutional Incubators

Some universities, companies, and government agencies sponsor institutional incubators to support innovative startups in high-value sectors. In addition to connecting founders with angel investors and government grants, these incubators may provide funding and resources to support your company through its earliest stages. Some may require an equity share of your company in exchange for their support.

10. Microlending

Microlending is a financial service aimed at underserved and/or low-income populations who can’t secure loans through more traditional means. Business owners receive smaller, more manageable loans governed by more flexible criteria. It’s a suitable option for anyone who a poor or no credit history who the traditional financial system may exclude.

11. Business Credit Cards

You may also consider financing your startup by opening a business credit card. Since they’re designed specifically for corporate use, they tend to have much higher spending limits than personal cards, facilitating greater capital advancement for your small business. These tools also help to keep your business and personal finances separate so you can build your startup’s credit history with greater peace of mind.

Save Time and Money On Overseas Payments With Wise Business

Wise Business can help you save big time on international payments.

Wise is not a bank, but a Money Services Business (MSB) provider and a smart alternative to banks. The Wise Business account is designed with international business in mind, and makes it easy to send, hold, and manage business funds in currencies.

Signing up to Wise Business allows access to BatchTransfer which you can use to pay up to 1000 invoices in one go. This is perfect for small businesses that are managing a global team, saving a ton of time and hassle when making payments.

Some key features of Wise Business include:

• Mid-market rate: Get the mid-market exchange rate with no hidden fees on international transfers

• Global Account: Send money to countries and hold multiple currencies, all in one place. You can also get major currency account details for a one-off fee to receive overseas payments like a local

• Access to BatchTransfer: Pay up to 1000 invoices in one click. Save time, money, and stress when you make 1000 payments in one click with BatchTransfer payments. Access to BatchTransfer is free with a Wise Business account

• Auto-conversions: Don't like the current currency exchange rate? Set your desired rate, and Wise sends the transfer the moment the rate is met

• Free invoicing tool: Generate and send professional invoices

• No minimum balance requirements or monthly fees: US-based businesses can open an account for free. Learn more about fees here

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Sources:

1. Types of 7(a) loans | U.S. Small Business Administration
2. Unconditional Guarantee | U.S. Small Business Administration