If you have a great business idea, chances are you’re thinking about the best way to get it up and running. In the early stages, you need to either raise funds or invest your own capital. When considering the different types of startup funding out there, it helps to evaluate your current place in the market and what you have to offer.
If you haven’t done one already, start out with a valuation of your company. Then you can begin to assess your options for funding. At Founderpath, we’ll delve into different types of startup funding.
Funding Rounds
In general, series funding refers to a startup conducting multiple rounds of raising funds, in exchange for equity. Your startup will begin with seed money which refers to the very first investment towards your startup, which can include debt and equity financing.
After the seed funding stage, the business value increases with the passing of each round, from series A to E, and the amount of financing increases after each round. When you’re just starting out, you’ll be most concerned with the pre-seed stage through series B, so we’ll highlight those below.
Pre-Seed Stage
Also known as the friends and family round, this stage is the most informal but most necessary step to getting your business off the ground. Even if it’s a small investment, anything that gets the ball rolling is valuable. Depending on where you’re at in the business planning process, this stage might go on for quite some time, which is normal. Sometimes, you might not even have a minimum viable product yet, and only have the idea to work with.
You won’t want to exchange equity for funding just yet. In most cases, investors rarely fund pre-seed startups, as it’s too risky. The pre seed stage involves your own personal investment, and in some cases, that of friends and family.
Seed Funding
This refers to the first initial investment in a business that contributes to its overall growth and success. Considered the first official stage of equity funding, this step introduces the idea of exchanging ownership for funding.
Many entrepreneurs don’t want to exchange equity though, so you can consider revenue-based funding if you already have a customer base.
Series A
Series A funding starts with identifying your KPIs. These are your key performance indicators and can include things like views, revenue, or users. Typically, a startup enters this stage after the seed stage.
Series A funding sources:
- Venture capital firms
- Angel investors
- Equity crowdfunding (growing in popularity)
$10 million to $15 million is a common valuation for a company at this point. However, it’s not uncommon for many startups to fail during this phase even if they were successful at raising funds during the seed stage. Industry professionals often refer to this as the “Series A crunch.”
Series B
If you think you’re ready for series B funding, the main thing you’ll want to consider is your ability to scale your business. At this point, you should already know your place in the market. Founders at this stage are looking to expand.
You can usually expect this round of funding to come from the same source as series A. It makes sense for investors to reinvest since your valuation will continue to increase. This round is typically between $7 million and $10 million, leaving you with a valuation anywhere from $30 million to $60 million. You also have the opportunity to connect with VC firms that invest in late-stage startups during the series B funding round.
Alternative funding types
But of course, the vast majority of SaaS startup founders won’t most likely need venture funding, or want the conditions that come along with it. Below, we highlight types of startup funding types that you can choose from.
Revenue-Based Business Loans
Founderpath offers a unique option to turn monthly subscriptions into upfront cash for your business. It’s great for anyone who doesn’t want to give up equity in their business or deal with the headache of a bank’s approval.
You can start by creating a free account and get a sense of the different tools the platform has to offer. These include:
- Valuations
- Customer metrics
- Business metrics
- Integration with SaaS tools
- Convenient customer hub to track invoices and subscriptions/payments
The whole purpose of Founderpath is to provide SaaS founders with the capital they deserve, to continue business operations and achieve growth. This unique platform allows you to turn your customer loyalty into capital, a simple yet innovative concept that is sure to take the fundraising world by storm.
Crowdfunding
If you have something you’re preparing to launch, crowdfunding can be an excellent way to connect with an audience. When crowdfunding was first introduced, founders relied on family, friends, colleagues, and word of mouth. In today’s digital age, we have plenty of tools to engage with your audience all over the world.
You can use your social media to direct people to your crowdfunding page. There is an assortment of platforms available, depending on your specific preferences. It also helps to network within your industry, so if you’re in tech, consider joining the waitlist for founderConf 2023. Hundreds of SaaS founders will gather in March to discuss the latest in tech startups and entrepreneurship.
Equity Crowdfunding
If you want to offer ownership of your company to people who participate in your crowdfunding efforts, then you’re ready to practice equity crowdfunding.
Incubators
Sometimes referred to as an accelerator program, a business incubator is a dedicated team that is focused on helping you launch your business. Most of the time these are created by other founders that wish to help others with similar aspirations.
Many incubator organizations offer additional perks like mentorship, which is invaluable to any budding entrepreneur. If you’re looking to get your business idea funded and gain insight along the way, business incubators offer a great combination of support.
If you like the sound of this and you’re in tech, consider applying to something like Founderled. It’s a dedicated community of SaaS founders that are focused on building their businesses without depending on traditional sources of funding.
Loans
Bank loans are a common source of funding for startups. The only thing to pay attention to here though is research. There are a multitude of loan arrangements to choose from, which is great if you need more specific options. Although you will owe the loan back regardless of your success or failure, you maintain complete control of your operations. Some founders consider this worth the extra paperwork and risk.
SBA Loans
The Small Business Administration guarantees a certain number of bank loans, typically with lower-than-average interest rates. Typically, this loan is beneficial because it will help you get approved for other lines of credit in the future.
Credit Cards
For certain expenses, credit cards can be very useful in the beginning stages of your startup. You should be able to find a business credit card with a 0% introductory APR. As long as you don’t carry a balance when the interest kicks in, your first year almost functions like a free loan. It’s easy to lose track of credit cards though, so make sure you are in a good position to pay them off each month.
Friends and family
While not an official startup loan, your friends and family might be a good option for loans or investments. You’ll just want to make sure you have everything organized and in writing. Money can make relationships turn south very quickly, so just make sure you do your due diligence as a business founder. Try to treat them more like an investor rather than a casual friend or family member.
Venture capital
Venture capital firms operate with the funds of limited partners (LPs). It’s their job to discern where the large sums of money get invested. Like all investments, the name of the game is ROI. Venture capital firms measure their own success on the large returns from their investments. So, make sure you have promising projections ready when you show up to any meeting with VCs.
Angel investors
Angel investors are extremely wealthy individuals that put money into different startups that pique their interest. You can expect an initial investment to range anywhere from a few thousand to a few million dollars. Whatever the amount, it’s usually considered small by the high net worth individual.
There are a few benefits to doing business with an angel investor.
- They usually have valuable experience and expertise.
- They are usually autonomous—you won’t have to wait for approval from any firm or convening group.
- Angels are considered a crucial part of the startup process and industry as a whole. Many founders depend on the accessibility of angels when just starting out.
Personal savings
The best sign of good faith is a personal investment. While you might be reluctant to invest any of your personal savings, it could give you the boost you need to acquire funding from other sources. For instance, if you’re going to sit down with an angel investor, you can explain how you’ve already invested, and that their investment will give your business the boost it needs to really hit it out of the park.
When it comes to your personal savings though, try to secure other types of funding just to be safe.
The Bottom Line
At the end of the day, it’s all about launching your business in a way that sets you up for success. You need to have more money than it takes to create and launch your products. When you consider marketing efforts and any other expenses you might incur, it becomes clear why so many people depend on different sources of funding.
If you’re ready to take your business idea to the next level, Founderpath allows you to take control by your bootstraps, create a free account and get started today!
