Types of Funding for Startups (All You Need to Know)

People have many exceptional business ideas. But to grow your startup business, you will need to secure appropriate funding.

The fastest way to raise capital is from personal savings or money from friends who believe in your idea.

There are many other types of funding for startups, but as you will find out, raising startup funds is tedious work that takes time.

This article reviews seven viable options to fund your startup company.

Types of Startup Funding and The Businesses That Need Them

Each funding option for your startup business is different from the other. Even though all will inject your business with money, not everyone is ideal for every business.

Before you pick a funding option, you should assess your current situation to determine the best fit for your business.

Types of funding for startups
Types of funding for startups

Small Business Loans

There are many similarities between small business loans and personals. For starters, the funding amount is approved with an attached interest rate.

Banks and other financial institutions offer small business loans primarily through the Small Business Administration (SBA).

Similar to a personal loan, the amount of loan you attract depends on your business credit. If you have stable business credit, you will get bigger loans at reduced amounts of the loan and low interest rates.

Ideal for:

Suitable candidates are businesses with responsible spending patterns and habits with equally decent credit.

Before you acquire the startup funds, ensure that you have plans on how to invest them. If you invest wisely on your first loan, there are high possibilities that you will qualify for a second loan sooner after paying off the first.

Funding Rounds

Funding rounds define the periods where companies look for different funding options. There are five groups of funding rounds that companies can seek.

They include Series A, Series B, Series C, Series D, and Series E funding. Every funding series corresponds with the current stage of your company.

For every funding round, you will exchange money for the company’s equitable resources. It means that investors are expecting a return on investments (ROI).

Funding rounds help companies in various ways, including marketing and product distribution.

  • Series A

Series A targets companies that have attained success at the seed stage and have generated interest through their key performance index (KPI) like views, revenue, number of users, etc.

Valuation for most companies to raise a funding round seed ranges between $10 million to $15 million or more. The primary source for Series A funding comes from venture capital firms and, in some cases, angel investors. Some companies may also opt for equity crowdfunding when looking to acquire Series A funding.

Most companies fail at the Series A stage. In what people know as Series A crunch, a stage where startup companies fail to secure Series A funding even if they succeed at the seed round.

  • Series B

Series B funding is available for startups that have already identified their product niche and market fit but need funds for expansion.

However, the main issue is if you can make your company operate at a scale. For example, can you make your product rise from 100 to 1000 users?

A series B funding round is estimated at $7 million and $10 million. However, startup companies should expect valuations ranging from $30 million and $60 million.

Most Series B funding will come from venture capital firms. Usually, these are the same investors from the series A funding round. It is because each funding round comes with new valuations and the investors reinvest to continue getting ROI.

At this stage, startup companies looking for Series B funding rounds also attract other investors willing to invest late in the startup company.

  • Series C

Startup companies that reach Series C funding round are already successful and looking to expand by developing new products, acquiring other businesses, or venturing into new markets.

Series C is usually the last funding round for most startup businesses. However, some companies can go beyond Series D and E. A series C funding is a final stage that prepares companies for an exit plan through Initial Public Offering (IPO) or mergers and acquisitions.

Merger and acquisition

The best company is one that is being bought and sold. As you grow your startup company, keep close relations with strategic players in your industry and competitors. It makes it easy for potential buyers to buy your company when you are ready to sell because they are already familiar with your business.

Most startup companies either exit the market through mergers, which means they partner with other companies, or acquisitions, selling to a more prominent player.

Initial Public Offering, IPO

Most companies consider IPO as an exit strategy. It means that you list your company stocks to be traded publicly.

Whereas Series C funding round is obtainable through good product concept and selling skills of a good team, raising funds at later stages requires math.

Each round should increase a company’s user base and turnover. Therefore, funds invested in different funding rounds will only grow if your scaling and earning logic is clear.

At the later stages, it is unwise to invest in funding rounds indefinitely. It is because each round eats some of the early investor’s stakes in your startup company. In which case, it will also indicate that your business is yet to find an exit strategy or functional business model.

It can also mean that you have a strategic reason for why you don’t want to go public.

Valuation at the Series C funding round uses data points that include:

  • The number of customers your company has
  • The revenue your company generates
  • The company’s current and projected growth rate.

Series C funding also comes from venture capital organizations that invest in private equity firms, late-stage startups, hedge funds, and banks.

  • Series D

Most companies stop funding rounds at the Series C stage. However, some may extend towards Series D, which is more complicated than the previous three rounds.

The reasons a startup company may consider a Series D funding round are:

Expansion Opportunities

Most companies looking for series D funding aim to increase their value before they take the business public. While IPO is an exit strategy, an opportunity may arise to expand the business and make it private for extended periods.

Down Round

It refers to companies that fail to meet the expectations after Series C funding rounds. It also refers to companies that raise lower valuations than the previous funding rounds.

In Series D funding rounds, venture capital firms are the primary investors. The valuations vis a vis the amount a company raises vary because most companies never reach this funding stage.

  • Series E

Even fewer startup companies make it to Series E funding rounds and beyond. The reason a company may wish to raise money at this stage is few. They include:

  • Failure to meet market expectations
  • Desire to remain a private company
  • Help to increase the company value before they go public.

Ideal for:

Funding rounds are suitable for companies that have or don’t have seed money. It is an investment option for businesses willing to exchange partial ownership of their company in return for additional funding. All you need is a business plan to be ready for the Series A funding round.

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Venture capitalists

types of funding rounds for startups
types of funding rounds for startups

These are private investment companies that find promising startup companies that need money for business growth. Venture Capital firms have boards that decide on the companies to back through a voting process.

If a venture capitalist firm identifies your company’s potential, they approach you with a funding offer. Venture Capital firms buy your company’s equity.

However, if your business fails, it is a bad investment, and they end up earning nothing.

Ideal for:

Venture capital firms are suitable funding sources for companies that have minimum viable products past the ideation stage.

Even though Venture capitalists are business people, they seldom take unnecessary risks. To qualify for venture capital funding, you must show that you can take your product to the people but lack the means to do so.

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Angel Investors

These are business individuals that target aspiring business people and startup companies. Angel investors differ from venture capitalists because they are solo investors, and they don’t need a board to decide which business to back.

Like venture capitalists, they purchase partial ownership or equity of your company, with an expectation of return on investments.

Angel investors can also suffer the same fate as Venture capital firms if they make a terrible investment. Thus, startup companies prefer angel investors as they are a safer alternative to conventional business loans.

Because you are selling partial ownership of your business, it means giving up total control as you have to answer your investors.

Ideal for:

Angel investors are suitable for any startup business that has a solid business plan. Angel investors are also part of the seed funding rounds which means they fund businesses while still their stages. It is ideal for companies that are still at the idea stage.

It is not easy to find Angel investors, and when you do, they aren’t as organized as venture capitalists. But Angel investors can be family members or friends with money.

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Crowdfunding

Crowdfunding is for business individuals with little funding or just a business idea. It involves business investors buying your service or product before it becomes available to the market.

Therefore, crowdfunding enables business owners to fund their business ideas in exchange for products and services to the investors.

Crowdfunding is achieved through digital campaigns and events. However, you can accomplish the same through crowdfunding platforms.

Crowdfunding platforms offer business investors the opportunity to browse through numerous business ideas and back the ones that interest them.

Ideal for:

It is suitable for business owners who have consumer-oriented services and products. It requires that you have a solid business plan to execute the funds if you acquire them.

You will need to be transparent, stretch your goals, and explain your funding goals to potential investors.

different types of funding for startups
different types of funding for startups

Also, check out, 15 Home-Based Business Ideas for You to Consider When You Have Less Than $1000.

Equity crowdfunding

Similar to crowdfunding, equity crowdfunding also encapsulates a large funding group of investors. Unlike conventional crowdfunding, you will not sell your product or services to investors.

As the name suggests, it involves selling your equitable resources to investors. It means you will sell stakes that include revenue shares and stocks.

Ideal for:

Equity crowdfunding involves selling your company’s equity; hence it is suitable for companies that are still at their early stages.

Equity crowdfunding helps startup business owners get their companies off the ground. If you are looking for equity crowdfunding, you should have a business idea that doesn’t involve selling services or products to the investors before they hit the market.

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Incubators

Business incubators are accelerated programs that help startup business owners get their company off the ground running. Incubators are organizations funded and founded by other companies to mentor, work with, and assist in funding.

Incubators enable companies to achieve their full potential and expand when the time is right. They can provide office spaces for the companies they fund.

There are many incubator companies available for different startup businesses. You can find local and international incubators for your business if you are interested in this kind of funding.

Ideal for:

All early-stage startup businesses fit the criteria for incubator funding. For business owners with a business idea or plan, you need a team to get you incubator investors and get the most of the early stages of your business.

Businesses that are yet to start will also benefit from incubator funding to ensure all funds’ full utility.

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Conclusion

There is no single funding solution that fits all startup businesses. Because every business is unique, you should find funding from sources that match your business’s interests while leaving you with the freedom to run your business as you see fit. You can make consultations with financial advisors if you are unsure which funding source is suitable for your business.

After receiving funds from whichever source, always focus on delivering the metrics of your services or products as envisioned. A lousy investment and misuse of appropriated funds are not acceptable to everyone involved in your business.