In this article, we’ll look at what it takes to get funding for your startup. Where to get money from to hire staff, IT product development, and sponsoring marketing campaigns.
Of course every case is unique, but here we will highlight the most famous methods of raising money and analyze the reasons for the success of famous startups.
Startup Funding: I’ll do everything myself!
It is quite realistic (and probably desirable) to finance a company with your own money. If you have a new idea, you don’t need millions to bring it to life. A good business model can be profitable even with a small initial capital.
MVP implementation does not require large investments. You can make the site for free, on your knees (with no-code tools or with WordPress). You can find the first users from your own social networks. Zuckerberg spent first half a year developing Facebook using only his own money and this did not prevent him from creating a trillion dollars company.
Startup Funding: Borrow wisely.
Most of us don’t want to risk even small amounts of money. And when it comes to starting a business, many people think of borrowing first.
If people invest in me, then the project has a prospect!
The main disadvantage of getting a loan for a young business project is its uncertainty. Guaranteeing future profits (or estimating their scale) is not yet possible. Banks are reluctant to lend money to aspiring entrepreneurs. They regard startup financing as a risky transaction with a high probability of failure to return the investment. Hence the stringent requirements for the borrower, complexity and length of the procedure of obtaining credit.
How to increase your chances of getting a loan for a startup?
More chances for approval have small and medium-sized businesses that have worked for at least 6 months. With a loan for a new project will be much more difficult: there is practically no turnover, no customers, no suppliers. There is only the founder’s desire to develop.
There are countries with special programs to help small businesses and startups. For example, the US Small Business Administration (SBA).
It is a state agency which supports entrepreneurs. It cannot give money directly, but it can give a guarantee to a certain borrower. This borrower would have an order of magnitude better chance of obtaining a loan from a bank.
There are several such programs in Russia, too. For example, the National Guarantee System (NGS). You can immediately apply for a loan at one of the banks which are partners of the NGS, and they will apply on your behalf to get a guarantee. We also still have “Skolkovo”. The purpose of the fund is to support technological entrepreneurship in Russia, and it is definitely worth applying to them (it will be worth your while). Sber also has an interesting project.
Find a list of existing programs and competitions for grants, you can on special portals for small and medium-sized businesses.
Get Angel Investment in Your Startup
Business angels are professional or ambitious private investors. They invest personal money – usually at the pre-launch stage of IT project development. They can be found on special sites.
To impress angels, you will need excellent presentation skills and a lot of luck.
How does a startup get money from angels?
A business angel wants to understand how the company plans to promote itself, how much it will cost to attract each client. So you need to be 100% prepared to answer the following questions:
- How much profit will each client make?
- How do you plan to advertise? Where, when? What is your PR strategy?
- What will be the typical sales cycle from first customer contact to closing the deal?
- What is your social media strategy?
- How much will it cost to engage a customer?
If you have a business model, an MVP, and a decent idea, getting money won’t be that hard. There is a lot of angel money in the world right now, and there are plenty of angels too. But, of course, if you believe in the potential of your startup, it will be unpleasant to give part of it into someone else’s hands. Fortunately, there are alternatives…
Startup Business Grants
What’s the difference between investments, loans and grants?
With an investment financing, the owner of the company sells his part (capital) and receives funds for its further development. In turn, investors (business angels) often take startups under their wings and help get the next rounds of investment.
When getting a loan from a bank, the latter will require collateral. Even if a startup manages to find an amount or facility against collateral, the risks are still very high. If unsuccessful, you will have to deal with refinancing for a long time, or lose said collateral altogether.
Startup grants are funds that are donated to startups to cover basic expenses. They allow you to pay for finding and training a team, buying equipment, or renting an office. The main advantage of this type of financing is that the recipient does not give a part of his or her company to the fund. As a rule, all that is needed is to report on the intended use of the funds received.
Grant-givers are usually state business support funds, which do not receive anything in return. And being a recipient of a grant is doubly beneficial because the grantors trust each other’s choices. That is, after receiving the first grant, the likelihood of receiving the second one is not reduced, but increased.
Startup Venture Capital
Venture capital investments are investments in a growing business or startup. These are no longer private angel investors, but funds that are not inclined to take too much risk, and who will need to be convinced by clear numbers. They will also demand a share of the startup/project.
But it will be worth it. Venture capitalists have helped companies such as Amazon, Apple, Facebook, Gilead Sciences, Google, Intel, and Microsoft to grow thanks to venture capitalist advice.
It is important to understand how venture capitalists learn about the companies they invest in. About a third of their investments go through professional networks: the venture capitalist talks to other venture capitalists, lawyers, financiers, professors from top universities. And they recommend them new talents and promising startups. That is, you don’t have to go straight to a venture capitalist, it’s better to get a recommendation from one of his contacts first (see LinkedIn).
Remember that the investor is just as interested in finding a promising startup as the startup is in attracting investment. So if you are confident about your product, do not hesitate to get to know it and tell investors about it.
Examples of Successful Startup Funding:
Oculus, virtual reality helmets
Many great software companies started in a garage. Oculus here followed in the footsteps of Apple, Google, Amazon and HP. After a long day at the Mixed Reality Laboratory (MXR) at California State University, Oculus founder Palmer Lackey would head to his garage to work on his own helmet.
Palmer had been building virtual reality helmets by hand for several years. His salary was small, so he saved as much as he could. He bought gadgets he wanted to throw away, participated in eBay auctions, and even went to sellers in person to avoid paying for shipping. By his own estimate, Palmer had the world’s largest private collection of unfinished virtual reality helmets.
After he prototyped the Oculus Rift, he launched a company on Kickstarter. Which raised $2.5 million with a goal of $250,000. The campaign served as a great MVP and confirmed that such helmets have a market. Lackey quit his job, dropped out of school, and began building the Oculus production chain. Six months later, venture capital firm Andreessen Horowitz invested $75 million in the company. A year later, Palmer sold his IT product to Facebook (now Meta) for $2.3 billion. No one expected such a successful and quick sale.
Youth to the People, skin care products
Youth to the People was one of LinkedIn’s top startups in 2021. The founders of this brand, Joe Cloyes and Greg Gonzalez, had a small store in Los Angeles that lasted only a few months. Then, after assessing the situation, they quickly switched to just online sales.
They went on crowdfunding and raised $2 million on Kickstarter. The skincare industry grew very quickly in its volume during the pandemic (such a paradox), and now this startup is making under $8 million a year.
GitHub, a web-based Git repository hosting service
GitHub was founded by Tom Preston-Werner and Chris Vanstraat. The startup started out simply as a collaborative “fun project”-to collaborate on something with friends. In 2008, Preston-Werner, while working for Microsoft, turned down the company’s offer of $300,000 in bonuses and options, and quit his job to work on GitHub on a permanent basis.
All 3 founders funded the startup themselves, covering the cost of the domain and hosting. Today GitHub has 3.4 million users with 16.7 million repositories, making it the largest code hosting service in the world.
In January 2009, GitHub won Crunchie (an award given by TechCrunch) as the best startup. In 2018, Microsoft bought GitHub from the founders for $7.5 billion.
eBay, an online auction site
eBay was first called AuctionWeb. It was founded by Iranian-American programmer Pierre Omidyar in his living room in September 1995.
The project was conceived as a marketplace for selling goods and services to individuals. One of the very first items sold on it was a broken laser printer for $14.83. eBay was just a side hobby for Omidyar until his Internet service provider asked him to switch to a more expensive plan because of the high volume of incoming traffic.
In 1997, the company received $6.7 million in financing from venture capital firm Benchmark Capital. The following year, eBay went public in an IPO. The company is now valued at $41 billion.
As we can see, in most cases, at the initial stage, in the first two years, the founders’ own (small) capital was enough. And outside money was only needed for rapid scale-up.
How to increase the chance of getting a grant/angel money/investment from VC:
- Come up with an idea for your document, create a clear template. Then it can be supplemented or altered to meet the requirements of a particular investment fund or business angel.
- Find a grant, fund, or competition for small business assistance. Familiarize yourself with the requirements and conditions, study when you will receive funds, and why you may be rejected.
- Read carefully what documents you will need to submit. You will usually need to provide a project description and a business plan.
- Submit an application for a grant or project. How to apply is written on the website and is usually done online.
- You may be asked to fill out additional information about yourself or the project. The application will be reviewed and an answer will be sent via e-mail. Then you may be invited to a public discussion, where you will have to defend your project in person.