How Startup Funding Works: The Complete Guide

Mar 12, 2018

So, you’ve got an idea and you want to turn it into a business. There are a lot of aspects you need to consider, especially if you don’t want to end up failing in your first year.

According to small business statistics, a little over half of all small businesses fail in the first four years, with around 46% of this attributed to incompetence.

To avoid becoming another statistic, you need to ensure that you have adequate funding. If you want to find out how startup funding works and which method is best suited for your idea, keep reading.

What Is Startup Funding?

Startups usually begin with a simple idea. But not all ideas you come up with are worth looking into. You need to assess whether an idea is a good idea, which you might turn into a business.

This is where one major problem comes in — funding.

Gladly, there is a solution to this problem: Startup Funding.

Startup funding is simply the acquisition of money by a budding entrepreneur to support the growth of his/her new business. The sources of this money can vary greatly.

But before we delve into this topic further, there is one important thing you need to note about how startup funding works.

Startup funding isn’t just about receiving money for free. You are also expected to give back in return. For example, an investor gives you money upfront and in return, you will give them a share in your business.

If all goes well, they will get money back in the future.

When you begin a startup, you need to have a clear idea in mind for a product or service that can grow into a business and reach a target audience.

Three Main Funding Models

Did you know that 29% of businesses run out of money before they can become fully established?

It’s a shocking fact but it’s one that you can avoid if you get the right startup funding.

At this point, you may be wondering how startup funding works. Well, when it comes down to it, there are three basic funding models you can choose from.

1. Grants

Grants are gifts of money that can come from various sources. However, these tend to be more common for groups like non-for-profits, charities or social enterprises.

But there is a catch.

It can be quite difficult to get money through grant makers as they often come with specific requirements and conditions.

2. Debt

This is often the most common form of funding for practically everything such as cars, college, credit cards and of course startups. The only problem is that with this form of funding, you have to pay back with interest over an agreed upon period.

There are several ways you can get money this way, including through credit cards or a bank loan. But although it is a quick and simple way to get money, it does come with its disadvantages.

The biggest one of these is that if your idea is a flop, you may be left with heaps of debt and little to no way to pay it off for years.

You could potentially get a small business loan in order to fund your startup. However, they are often restricted to those who already have a decent amount of cash in their accounts.

3. Equity

Equity is the concept of offering pieces of ownership of your business in exchange for cash to fund it. Usually, this is how investors will help out.

The only way you’ll get an investor is if your idea is perceived as valuable or you have proof of concept.

Who Specifically Can Help Fund You?

How startup funding works is that you need to find a person, or group of people, who can provide you with funds for your idea. There are pros and cons to each supplier, but they can all help you in starting up.

1. Bootstrapping

Technically, this is a form of funding, but it comes from your own pockets. Bootstrapping is all about self-funding yourself as much as possible, even if it means taking on more work to do so.

It may even mean saving up money to build your idea before trying to seek extra funding.

There are plenty of benefits to bootstrapping. One, it’s a very satisfying way of building up a business as you are essentially doing everything yourself.

It can also be a great way of showcasing yourself as a competent entrepreneur, which can help you get funding easier for any future endeavors.

However, it can also be very risky.

You may not end up making enough money to allow your idea to become a successful business, or you may lose all of your hard earned money on what essentially turned out to be a pipe dream.

2. Family and Friends

One of the best ways you can receive funding is to start with those closest to you. This means that you should consider seeking funding for your startup through your family and friends.

Those who know and love you are more likely to give you funding in good faith. They may even lend you money at a low-interest rate or even no interest rate.

You might even find that you’re more committed to success because you want to give them a good return for the money they gave you.

However, there is also that added pressure of whether or not the startup will succeed. If you’ve got loved ones investing their money into your project, you certainly won’t want to let them down.

3. Online Crowdfunding Platforms

Crowdfunding is a hugely successful way of getting a startup funded. Platforms like Indiegogo and Kickstarter can provide anyone with the means of earning cash from a limitless number of online investors.

How startup funding works through a crowdfunding platform is that a large group of people will provide you with a certain amount of money, each. These backers don’t get a say in your business. However, they are all willing to put in a small risk in order to see your idea thrive.

They may be provided equity from you in terms of backer rewards. These rewards could be anything from free products or exclusive access to certain things.

4. Government Loan or Grant

A type of grant model, this is quite often an overlooked way to get your startup funded.

How startup funding works through the government is that you approach them with an idea, preferably one to do with science or technology. As the government is often looking for new businesses to help support economic growth, they may offer you funding to assist you.

This funding could be anything from a small loan or even an entire grant. It differs depending on the level of government you approach. The Canadian government offers a variety of business grants and loans, many of which can be found here.

5. Accelerators

If you want more than just a bit of money, you should consider getting yourself an accelerator.

Lasting around two to four months, accelerators focus on supercharging business growth through short programs. They provide you with funding in exchange for equity and they will welcome you, your team (if you have one) and your business into their program.

These programs usually have a mix of office space and mentorship. Although they are a great way to get quick funding for the growth of your startup, they can be quite challenging.

They often end in a big presentation session which is also known as a demo day.

6. Investors

Of course, one of the easiest ways to get funding for your startup is by gaining investors. An investor is someone who can invest money into a project.

How startup funding works with an investor is that they usually exchange funding for shares, so they are not just providing you with funds for free. They will expect you to use the money wisely and not waste it unnecessarily.

As expected, investors will also want a return on what they’ve given you within a certain period of time. This could be up to ten times higher than what was originally invested and within five years.

These high expectations can be very stressful and difficult to deal with. Investors will often emphasize on growing and expanding your business assets, even if they’re not technically part of your team. However, there are some entrepreneurs who swear it is the best way of raising capital.

Now You Know How Startup Funding Works, You Can Get Started Today

Once you understand the basics of how startup funding works you can start looking for investors today. If you need assistance getting your business started, all you need to do is ask for the help of the professionals.

For more information or to get some advice, click here!



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