No matter how great your idea is, it’s tough to make an impact on a market without startup fundraising. 

Sure, some of the most recognized brands succeeded through bootstrapping—taking off without significant financial backing. But the reality is that these are the exceptions. 

Ambitious startups know they need a serious amount of cash to cover initial costs such as development, marketing, hiring, and day-to-day operational expenses. 

It’s not just about money, either. Many startups see funding as a way of building relationships with investors. Owning a stake in the company, investors offer guidance, connect teams with collaborators, and boost credibility. 

However, if you just need a helping hand to reach your next milestone, there are ways of getting a startup loan without giving up a percentage of the company. 

In this article, we’re going to explore startup funding from several different angles so small organizations can better understand their options. So if you've had a breakthrough idea that you don’t know how to put into action, read on. 

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What is startup fundraising?

Startup fundraising is a catch-all term for a variety of ways that fledgling businesses can raise capital. That capital helps companies get off the ground by enabling them to hire a team, rent office space, buy inventory, and launch effective sales and marketing campaigns. 

In other cases, smaller amounts of bridge financing give startups a loan to keep them alive until they reach their next stage of growth. 

Usually involving a pitch to investors, startup funding can come from venture capital (VC) firms, revenue-based funding, or even friends or family. Each of these methods comes with its own pros and cons, which we’ll explore next.

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Types of startup funding (and how to find them)

Securing the right type of funding can be a life-or-death decision for small businesses. Raise too little and you could miss the zeitgeist. Ask for a big chunk and you may have to give up a large percentage of your shares. 

Revenue-based financing

Revenue-based financing (RBF) sees investors provide capital in exchange for a percentage of the startup’s ongoing gross revenues or a percentage of the capital in question. Both parties agree on the percentage and a timeframe, and the startup is released from the contract upon payment. 

RBF is a non-dilutive funding method, meaning no equity is exchanged. This makes it an ideal route for businesses with steady revenue streams who want to keep full control of their operations and avoid taking on debt. 

You can find specialist fintech capital providers like Efficient Capital Labs (ECL) online and get startup fundraising without going through the time-consuming traditional fundraising stage. 

Venture capital

Perhaps the most well-known startup fundraising channel thanks to Shark Tank, VC firms invest in startups with high growth potential in exchange for equity. Venture capitalists source their funding from a risk capital company, which uses other people’s money, as opposed to their own cash. 

Venture capital is generally where the largest sums will come from, so company pitches need to be perfect and equity requests will be substantial. If the startup takes off, founders can go through multiple Series of VC funding to keep the ball rolling.

As venture capitalists deal with later investment stages and larger funding amounts, they’re less likely to be at startup events and more likely to be at tech summits, demo days, and VC conferences. Sites like Crunchbase list leading venture capital companies that you can reach out to directly. 

Bootstrapping

Bootstrap financing typically involves funneling an entrepreneur’s personal wealth or business profits into their organization. Most companies start by bootstrapping before reaching a stage where they need to reach out for more significant financial help.

It’s not without risk; bootstrapping can lure people into a downward spiral of propping up their company at the expense of their own financial stability. 

Friends and family

Entrepreneurs lucky enough to have wealthy connections often call on friends and family for easy loans. The size of these injections can vary wildly, depending on the investor, and repayment terms can be very favorable if the relationship is close.

It will come as no surprise that mixing money with friends and family comes with the risk of strained personal relationships if the business is struggling. Further, a scaling business will likely need more capital than any single individual may be able to provide.

Angel investors

Angel investors are individuals who make their living through shrewd investments in businesses. 

As opposed to venture capital firms, angel investors tend to offer only their personal money and focus on early-stage startups. In exchange, angel investors will take equity or convertible debt, which can be off-putting for some founders. However, the potential for close support and mentorship is an attractive proposition, especially for underrepresented entrepreneurs.

Angel investors usually make an appearance at startup meetups, pitch competitions, and industry competitions. You can also find them online through sites like AngelList and Angel Investment Network.

Crowdfunding

Crowdfunding platforms like Kickstarter and Indiegogo allow businesses to raise small amounts of money from a large number of people. Crowdfunding usually goes hand-in-hand with marketing campaigns to raise awareness, generate early interest, and offer incentives for payments. 

Other models, such as Crowdcube and Seedrs are more business-orientated, with individuals buying up equity to support ideas.

Grants and competitions

These startup fundraising channels come in myriad forms, from government grants and college capstone awards to business competitions and incubator programs. In the USA, institutions like the Small Business Administration and the National Science Foundation offer funding for companies of all sizes. 

Grants and competitions are also examples of non-dilutive funding, so entrepreneurs can keep their equity and use the capital as they wish. These prizes are highly competitive, but they are an excellent route for startups in the innovation or social impact spaces.

Bank loans

In a very route-one approach, businesses can go to banks or other financial institutions for traditional loans. Companies pay a startup loan back with interest but don’t give up a share of their business. 

These loans are often more difficult to secure than revenue-based financing, as banks are more risk-averse than other lenders. Founders will typically need to provide proof of a strong credit history or collateral for the loan.

For a closer look at financing methods, head to our dedicated article on different funding types.

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What are startup funding rounds?

Fundraising rounds are stages in the lifecycle of a startup. Each round funds a certain phase of the company’s financial needs and maturity. These funding rounds aren’t an obligation—each startup can choose how to fund itself—but they are a tried-and-tested pathway that many small companies have used to grow. 

1. Pre-seed round

The earliest stage of funding often comes from the founders themselves or friends and family. It only needs to cover validation of the idea, a bit of market research, and a minimum viable product (MVP). Therefore, these amounts are typically small and informal.

2. Seed round

The seed round is the first significant external funding and usually comes from angel investors, seed funds, or early-stage VC firms. For companies who are revenue-generating - they may use revenue-based funding to boost their growth in this stage. Funding anywhere from tens of thousands to a few million dollars goes toward product development, market testing, and building a core team. 

In this stage of its life, a startup should be working on refining its product, finding its place in the market, and preparing to scale up.

Seed funding provides a solid base for companies to grow from. Photo by Christian Joudrey on Unsplash

3. Series A round

Now we’re safely in the territory of multi-million-dollar investments, startups should be scaling operations and demonstrating a clear business model. Investors want to see significant traction and potential for the product and its revenue streams. Businesses need to refine their product and expand their customer base to achieve this level of startup fundraising. Most software startups will be generating revenue at this stage - allowing them to leverage revenue-based funding to grow further without dilution.

4. Series B, C, and beyond

By this stage, companies are looking at expanding their market position, so capital goes toward increasing production and penetrating new markets. They may even have an eye on acquisitions or an initial public offering (IPO) and often need over $100 million to do it. It’s not uncommon for the same investors to stick with successful businesses throughout all of these series. 

5. Closing the fundraising round

Once the startup and investors agree on the terms and conditions of a fundraising round, they write up a document outlining the specifics of the investment. In traditional startup funding methods, such as venture capital and angel investors, this can be a relatively drawn-out process that involves a lot of due diligence and document revisions before funds are transferred. 

However, more and more startups are turning to revenue-based financing companies that often cut a great deal of time and admin out of the approval process. The just-in-time funding model allows startups to be more dynamic and move faster to the next milestone.

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What founders need to know about startup fundraising

Getting startup fundraising is no walk in the park. When large sums of money are involved, investors want to feel confident that an idea has strong market potential—and that involves much more than an inspired idea. 

Strong, trusting relationships are an important part of successful fundraising campaigns. Investors will conduct thorough due diligence and expect full disclosure of a business’s financial health, potential risks, and competitive landscape. Therefore, aside from savvy networking, entrepreneurs need to have a solid answer to any question thrown at them. 

Here, we’re going to outline the key steps behind any bid for startup funding. 

When to consider fundraising

Timing is critical when seeking fundraising. It can take several months to get in a room with investors, and several more months before they make a decision. You don’t want to run out of money in that time, so you should start the fundraising process well before you’re desperate for cash. 

Revenue-based financing and bank loans significantly reduce the wait time, in some cases to as little as 72 hours.

Even so, you’ll still need to be in a convincing position before you can secure startup fundraising. To stand the best chance, make sure to first validate your business idea and have a clear plan for how additional capital will accelerate your growth. 

A checklist of what to do before fundraising 

• Make connections with investors who you may pitch to, as well as industry experts who can point you in the right direction and add credibility to your idea.

• Develop a prototype or minimum viable product (MVP) to make your idea tangible. Showing product validation, along with user feedback or early adoption metrics strengthens your pitch and boosts investor confidence. 

• Establish how much funding you need by running a thorough analysis of your business plan, including projected expenses and revenue. 

• Write a one-page executive summary that condenses your business down into your value proposition, market opportunity, business model, competitive advantage, key financial metrics, and milestones for the future. This will be the first document investors see, so it needs to make an impact.

• Create a pitch deck that digs into the details of your one-pager, and preempts questions about your model, traction, projection, and funding plans. Include a risk assessment to ease any fears, as well as your legal and financial due diligence. 

These elements are all good practices for businesses of any size or stage. However, they’re not strictly necessary if you plan to fund your startup with revenue-based financing. RBF institutions will often approve offers if you have a proven track record of strong annual recurring revenue. 

How to pitch your startup

Even the strongest ideas will fall flat if founders don’t have the skills and preparation to deliver a compelling pitch. Although revenue-based financing offers a far more streamlined application and approval process, it’s good to know what traditional investors expect.

1. A compelling story engages investors from the get-go. As much as we expect decision-makers to be entirely data-driven, strong narratives with real-life examples get your message across in a memorable way.
2. Your value proposition should be at the core of your pitch, explaining what makes your product or service unique and why customers will choose it over competitors. 
3. A go-to-market strategy will convince investors that there is a place for your product now and in the long run. 
4. Your current traction is proof that your product is viable, so include testimonials, user and revenue growth, and partnerships.
5. A detailed business model explores how your startup makes money, what your revenue streams are, and how you plan to grow. 
6. Your team is an important part of gaining trust, as investors are often convinced as much by people as they are by ideas. Introduce the key players and their expertise to show you have a team capable of success.
7. Financial projections for the next three to five years instill confidence in startup fundraising. Be prepared to discuss the assumptions behind your projections and how you plan to achieve them. 
8. Your funding requirements are the reason you’re pitching, so specify how much you want and how you plan to use it. Break down the overall figure by category to reassure investors.
9. Q&A sessions are where you fully convince investors, so come prepared and leave enough time to get into the details.

How much capital to raise 

Raising too little funding can leave you underfunded and unable to reach key milestones while raising too much can dilute your ownership and create unnecessary financial pressure. 

So how do you strike the balance right?

Identify your funding needs

This involves an in-depth analysis of your business plan and identifying the milestones you want to achieve with funding. Let’s say you want to break into a new market. You may need funding to rent new premises, hire and train a new team, and raise awareness with local marketing. By predicting the costs involved, you come close to a ballpark figure.

Buffer for unexpected costs

Anybody who has been in the startup game for more than two weeks will know that things rarely go exactly to plan. That’s why any bid for startup fundraising should include a buffer to account for unforeseen expenses such as delays, changes in market conditions, and a boost in sales and marketing efforts to give you an extra edge. Investors expect this buffer amount, and it shows you’re aware of the reality of scaling a business. 

Consider investor expectations

Investor expectations can range from super-specific grant requirements to fully transparent conditions for revenue-based fundraising. As you prepare for startup funding, you need to have a clear idea of what your investors are ready to pay up and what they expect back from you. Sometimes what seems like a golden deal can turn out to be too much of a sacrifice once you dive deeper. 

Forming a legal entity 

A frequently overlooked necessity when bidding for startup fundraising is that you need to be a legal entity before most kinds of startup investment will entertain you. A sole proprietorship is the simplest option, but lacks personal liability protections and doesn’t come across as professional as others, such as a limited liability company (LLC). 

Simply setting up a company covers a lot of your bases for startup fundraising. You need to outline the governance, management structure, and profit distribution, which investors will all want to know. 

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More about startup fundraising

For a quick snapshot of the startup fundraising ecosystem, we’ve put together some frequently asked questions to cover the basics.

Which funding is best for startups?

There is no right and wrong when it comes to startup funding—each method has its own pros and cons to match the different needs of each startup. For example, social impact and tech startups frequently take advantage of grants and competitions designed to support innovation. However, more and more startups are turning to non-dilutive revenue-based financing so they can receive funding without losing equity. 

How do you raise money for a startup?

Raising money for a startup essentially involves a blend of a proven business idea and a savvy understanding of the investment landscape. Typical steps toward startup fundraising include:

• Creating a robust business plan
• Demonstrating market demand for your product
• Networking and relationship-building with investors
• Pitching your idea

How do small startups get funding?

Small startups get funding through a variety of sources including:

• Personal savings
• Family and friends
• Angel investors
• Incubators and accelerators
• Revenue-based financing

As businesses grow, so do their financial needs. Therefore, they should expect to look to advance from small amounts provided by individuals to larger sums from financial firms. 

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Access non-dilutive funding for your startup 

Startup fundraising is an essential step in the lifecycle of any business, and it’s great that founders have so many options available to them. From bootstrapping and bank loans to angel investors and VC firms, entrepreneurs can choose a pathway that works for them.

However, more and more businesses are looking to revenue-based funding as a more transparent, simple, and efficient alternative to take them to their next milestone. 

Efficient Capital Labs is at the forefront of this movement, providing anywhere from $25,000 to $2 million in as little as three days. 

With ECL, you can: 

• Receive up to 65% of your projected revenue as upfront capital
• Extend your cash runway
• Get a better valuation on your next fundraiser
• Access an easy 12-month repayment term with a transparent, fixed annual fee between 10%-14%
• Raise future equity on your terms and timeline
• Complete your last mile to profitability

So if your startup needs a non-dilutive cash boost fast, calculate your funding eligibility with ECL.