How Startups Raise Money: Top 8 Strategies for Startup Funding
In this article, we will reveal how startups raise money. It is no secret that startups can be risky investments. In fact, many fail to succeed and end up in a downward spiral of bankruptcy.
However, there are some methods that can be used when looking for startup funding that will help minimize the risks for both the investor and the entrepreneur.
In this blog post, we will outline 8 strategies you can use to find startup funding from angel investors or venture capitalists with less risk involved.
1). Angel Investors
Angel investors are individuals who invest in startups on a more personal level.
They often have some sort of connection with the startup or entrepreneur and can be instrumental when it comes to introducing them to other potential angel investors.
This is one of the most common methods used by entrepreneurs looking for funding from an angel investor because they are able to not only provide capital but also valuable business advice that will help you succeed where others may fail.
However, finding an experienced angel investor willing to work with your startup can prove difficult as many companies struggle at this stage due to lack of experience which typically leads to failure down the road.
2). Venture Capitalists
Venture capitalists (VC) offer up much larger sums than angels do; however, their investment is accompanied by additional expectations such as taking an active role and participating in the running of your company.
VCs typically invest after you have encountered some success, but before a larger corporation comes along to buy out your startup which can be beneficial as they are able to provide advice on how best to maximize the value of your business by growing it organically first.
This is one of the most popular ways of how startups raise money.
Bootstrapping is another common route for startups looking for funding from angel investors or venture capitalists as there is less risk involved compared to taking out a traditional loan with interest attached that needs to be paid back no matter what happens.
This means entrepreneurs are free from having any other external pressures such as meeting deadlines or paying off their debt at certain milestones, allowing them an opportunity to focus solely on building up their product into something bigger and better over time.
Bootstrapping is also beneficial as it is harder to acquire than traditional loans which mean you are less likely to be forced into selling your company should things go wrong, or partner with another organization that wants to use your product for their own gain.
Crowdfunding has recently become popular among entrepreneurs looking for funding from angel investors and venture capitalists.
It allows startups the opportunity because users are able to invest in them using an established platform where they can see how successful previous campaigns have been.
This type of crowdfunding doesn’t require any equity share so there isn’t a huge risk involved compared to taking out a loan.
However, one downside is that many potential backers won’t participate due lack of trust when it comes to new companies asking them for money without anything tangible in return.
5). Venture Debt
This is another untapped way of how startups raise money.
Venture Debt is a less common form of startup funding, but it is worth mentioning as many entrepreneurs struggle to find capital from angel investors or venture capitalists.
This means they have little choice but to take out traditional loans with interest attached which usually carries the risk that if their company fails then they will be forced into bankruptcy and will lose everything including equity in their business.
However, Venture Capitalists offer up this type of debt without requiring an active role within your organization.
For this reason, you are free to run things however you see fit provided you make scheduled payments on time each month/quarter, etc…
You can learn more about how venture debt works here.
6). Convertible Notes
Another untapped way of how startups raise money.
Convertible Notes are another option for startups looking for funding from angel investors or venture capitalists as there is less risk involved compared to taking out a traditional loan with interest attached.
Convertible Notes are beneficial because they provide funding at a lower valuation than what you would get from venture capitalists or angel investors who invest in your company after it has been established and shown some success.
However, there is the risk that if you are unable to meet certain milestones then this could result in the conversion of your debt into equity which would dilute the value of existing shares making them worthless.
7). Business Grants
Risk free way of how startups raise money.
Business Grants may seem like an unlikely choice for startups looking for funding but can be surprisingly effective when done correctly.
This form of startup funding requires entrepreneurs to submit proposals detailing their plans along with contact information so experts within relevant industries can properly review these before deciding on whether they will approve or reject your application.
Grants are beneficial because they usually have no interest attached so it is risk-free.
However, there is a downside in that you will need to wait for approval which could take several months.
8). Debt-based Crowdfunding
Debt-based Crowdfunding allows startup founders who don’t want to give up equity share or control of their business when raising funds from angel investors and venture capitalists the option to raise money from lenders instead.
This means entrepreneurs aren’t forced into selling their company should things go wrong as debt doesn’t equate with ownership as an investment would.
Although one potential downside is that your valuation may be lower compared to taking out a traditional loan with interest attached due to how much less risky this form of funding can potentially make any future investments by private companies down the line.
Wrapping up how startups raise money
The content above provides a variety of strategies for startup funding that you may find beneficial.
We have described the different types and how they work, as well as what makes them unique from one another.
Startups looking to receive the capital can use these tips to decide which avenue is best for their needs.