Startup Funding 101 – The Beginner’s Guide To Winning Investors For Your Startup
Bad news first: no matter how great your idea is, it may never get off the ground without the funds to make it happen. And most entrepreneurs do not have enough capital to fund their own startups or expansions.
And now the good ones: as new businesses are popping up all over, there have also popped up more sources of funding – VCs, angel investors, crowdfunding, peer-to-peer lending – the opportunities to fund your venture are endless.
This guide will give you an introduction to the sources of available funding, how to prepare for a funding proposal, and some general tips for making that golden “pitch.”
Table of Contents
Section I: Funding Sources
Every business is different, and so are potential funding sources. This section will describe the most common and popular sources, so that you can choose the one or two that will be a best fit for your needs.
This is the newest form of fundraising but also perhaps the most competitive. Entrepreneurs access crowdfunding websites and present their businesses – a description of the product or service, a simple business plan, the plan for growth, etc. Those who are looking to invest in businesses then access the site and look for those that interest them. Crowdfunding usually involves small donations from large numbers of sources, and, in return, the “funder” usually receives some type of token gift when his/pledge money has been received.
Because of their popularity, these sites (e.g., Kickstarter; Indiegogo) are crammed full of individuals hoping to find funds, so your presentation will have to be pretty phenomenal to get noticed and win press coverage, which is essential to having a 100% funded campaign.
What should your campaign include:
- An heart-warming, inspiring backstory explaining who you are and how you came to this point in your life.
- Media kit for the press
- Professional demo video and product screenshots/photos.
- Persistence in promoting the heck out of your campaign and attracting the right people to it.
Where Else To Look For Opportunities
- Grow Venture Community
- Venture Capitalists
In short, VCs are groups of people who pool their money and look for solid startup investments. The startups that usually get funded by venture capitalists are those that have been around for a couple of years and have proved themselves viable. They are now ready to take their businesses to the next level and need a pretty large infusion of cash to do that.
Venture capitalists deal in large-sum investments, so if you are only looking for several thousand, this is probably not a good option. The other downside of using venture capital is that the investors generally want to participate in your company’s growth, either by mentoring you along or by asking you to modify some of your services, plans, etc. If you are the type of entrepreneur who wants to remain totally independent in the operation of your business, this is probably not a route you want to go.
Where To Look For VC Investments
- Attend niche events held in your area or around e.g. Startup Safary. Our team has been to Startup Safary in Berlin this year. Grab the insights here.
- Keep an eye on pitchfests, hackathons and other similar events held in your area. High chances are they are organized by a VC firm.
- Do you research on Google and get to know the big names investing in your niche and learn how you can connect with them.
- Angel Investors
Angel investors operate much like venture capitalists, except that they are single individuals and their funding amounts are far less. Most angel investors want a stake in the company, so that they make profit as the company does. A lot of entrepreneurs like using an angel investor. They can keep control of their companies, by giving the investor less than a 50% stake, can get mentoring if they need it.
If you are looking for an angel investor, there are small business development centers, as well as websites that match investors with startups, such as Gust and Angel List. Attending niche events and googling the right people is another vital strategy to use.
- Bank Small Business Loans
Banks have many loan options for small businesses at various stages in their growth. A bank, however, is a lot more conservative that individual investors, so you will need to be prepared with a formal business plan that accounts for every dollar you want to borrow. There is also a longer waiting period for approval, and, even then, banks are not disposed to take risks.
First-time entrepreneurs have a tough time getting bank loans, unless they have collateral. An alternative may be to look for funds from a private lending company – just be aware that interest rates are usually higher.
- Credit Cards
If you have great credit and little debt you may be able to get a line of credit through your credit card company. The big benefit here is that you keep full control of your company. It is a risky route, however, because you are on the hook for the amount you borrow, whether your business makes it or not. Again, interest rates can be high.
These are the five most common methods of gathering cash for your business. There are other less common sources, such as government grants and friends and family. While these may be attractive to some, grants require an enormous amount of paperwork, and relationships can often be strained when borrowing from family members or friends.
Section II: What You Need to Do Before You Look for Funding
No one will lend you money unless they have enough information to make a decision. And they usually want this information in writing, even when you are going for crowdfunding.
You will have to develop a funding proposal of some type, informal or formal, depending upon the source. No matter what type you are writing, however, your proposal should include the following parts:
- Introduce Yourself: Anyone considering making a loan to you wants to know your background. Do you have the background, the expertise, and the passion to make a go of a new business? You need to demonstrate that you are personally a good risk, that you have integrity, and that you are trustworthy.
- Provide a Detailed Demographic of Your Customer: Lenders want to know that you have done the research and have developed a “persona” of your typical customer, and that you have data regarding the numbers of potential customers you may be able to reach. In most instances, they will also want to know about your competition in the specific market.
- Describe your Product or Service: This should be in detail, and a part of your description must include how what you are offering will meet a real need on the part of your target customers. Use any data you can find on that need.
- Present a Budget: What are your expected expenses for production, marketing, delivery and customer service? How will you price your product or service to ensure profit? The more conservative the lender, the more detail you will provide. Include your repayment plan too.
- Present a Marketing Plan: Have at least a general marketing plan mapped out, to demonstrate that you have given this some thought.
The most important thing in a funding proposal is probably to show that there is a need for the product or service you will be offering. If you can show that definite need, investors will sit up and take notice.
As Dave McClure, a veteran angel investor, brilliantly puts it: “Great products and companies do 1 of 3 things: Get you laid (Sex), get you paid (Money), get you made (Power). How does your solution tap into the emotional, powerful, evolutionary needs that we as humans have?”
Section III: Where to Find Investors
Depending upon the type of investor you are looking for, finding sources will sometimes require some digging, sometimes not.
- Obviously if you have decided upon crowdfunding, you perform a Google search and get the names of relevant sites. Some are totally general, taking any kind of pitch; others are limited to specific niches. Do your homework before your put your proposal on any site.
- Bank loans, as well, will not require big searches. Find banks that are local and/or regional, and go in and ask for an appointment. Sometimes the smaller banks are more “personal.” Some of the “big boys” want you to submit your proposal in writing, and will contact you if interested. Don’t sit by the phone too long.
- Finding angel investors takes a bit more work, although technology is lightening the load a bit. These individuals might be found among family and friends; you can also join entrepreneurial networking groups in your community. There may be some business owners who themselves had angel investors, who are looking to invest themselves, or who can point you to organizations of such investors. There are also websites that act as clearinghouses for angel investors
- Venture capital will almost always involve an introduction by someone who believes that you are a good risk. If you have been in business for a while and are achieving success, you might want to try contacting leaders and influencers in niches related to yours, but not direct competitors. Be honest about your situation and see if they cannot steer you toward a venture capital group that might be interested.
Pitchfests are becoming a common and popular activity that can match up entrepreneurs and funding sources. Finding these events will take some time and research on your part. Originally held primarily for screenwriters, pitch fests are now held for a wide range of funding in almost any niche. Many college campuses host them every year. If yours does not, find others close by and just “crash” them. You can also search online using the term “pitch fests for [your niche business].” And many pitch fests are held virtually today.
During pitch fests, you have about five minutes to present yourself and your business, so be certain you are well practiced before you “go on.” They want to see passion, confidence, and a demonstration that the “world” needs what you have.
There are also startup “events” scheduled throughout the year. Here is a great source for finding events in your locale.
Section IV: Do’s and Don’ts of Getting Funded
You have to consider a search for funding much like a job interview. And just like in a job interview, there are some pretty important do’s and don’ts.
- Practice your presentation, if you will be meeting with a potential investor, even via Skype. Practice it so much that it rolls off of your tongue very naturally. Sound confident. Sound professional. Sound like someone who knows their stuff and more.
- Show passion for your business. Investors know that entrepreneurs who make it have passion, almost above all else. Passion means you will eat, sleep, and drink your business until it becomes successful.
- Be confident. This is almost as important as passion. You know your product or service inside and out, and you know that there is a market out there for it. Describe that market and show how you will find it, engage it, and “sell” it.
- Have the data to back up your facts. Numbers are especially important for convincing financially minded investors.
- Consider a video presentation for crowdfunding. When potential investors can see you, they will engage more.
- Don’t lie and don’t exaggerate. If you get funding and your exaggerations are discovered, you are “toast.”
- Don’t beg and don’t sound desperate. These are emotions investors don’t want to see.
- Don’t try to answer a question to which you don’t know the answer. It is perfectly fine for you to say that you don’t have an answer but that you will get back to them with it.
- Don’t accept funding if you do not like the stipulations or conditions. You will regret this later.
This is truly a beginner’s guide. As such, it should provide you with the general information you need to begin to seek funding for your startup. If you are serious about the need for funding, you have a lot of work ahead of you, to be sure, but getting that investment with the right conditions can mean the difference between success and failure!