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If you are planning to start a start-up, the type of funding is one of the most important things to think about. Depending on the type of funding, you can expect more or less money. The more money you have initially, the faster you can usually get started - but this also increases the risk of your venture. In order to decide which type of financing is right for you, you should first answer the question - What do you want to get out of your startup. Is it the freedom of being your own employer or is it the money? The answer to that question will determine which type of funding would be the best match for you.
Here are the most common ways Startups get funding.
Series Funding, or Series A, B or C are for startups that have already done their ground work, have a stable user base, steady revenue and the real potential for future growth. The Series fundings differ in the amount of money that they can generate for the startup as well as the startup valuation. Series Findings can be generated through individual investors in addition to Venture Capitals.
Venture Capital investments are for startups that have the potential for exponential growth. While somewhat risky of an investment, if everything goes according to plan the generated growth is very high. Usually a Venture Capital firm will invest in the startup that it truly believes will bring in huge gains, in return they expect to be given a share of the company either in the form of an IPO or an acquisition.
Angel investor is usually a high net worth investor willing to invest relatively small amounts of money into the startup. Having an Angel investor will help your startup to raise money but it will also increase your chance of getting to other types of funding like Series or Venture Capital.
Crowd Funding is one of the simpler ways to raise money for your startup. Crowd funding allows you to connect to a much larger pool of interested individuals allowing you to raise small sums of money from a lot of people, usually via Crowdfunding websites and social media. Investors either invest for potential profit from the startup or other type of reward.
Self funding (Bootstrapping)
Funding the project yourself, or what is known in the industry as Bootstrapping is what most startups do, at least at the beginning stages. While you don’t have the steady user base or revenue you will need to fully rely on your own financial means. This requires some planning and financial management on your part, but it is absolutely achievable with a bit of effort. For some people Bootstrapping is their preferred method of funding, because this means you are in full control of the money as well as the decision making process of the startup.
Family and Friends
Some startups may use the financial help or investments from their family or friends at some point. They can invest in the startup for some equity or they can simply donate. But just because they are family or a friend does not mean that this isn’t a business deal so make sure that the terms are clear to all parties involved.
There’s always the more traditional way to go about startups and that is getting a loan. But it comes with its drawbacks. For example, when you get the funding from the Venture Capital, it does not matter what the outcome is, the firm will not ask for its investments back. But with the bank, whether you fail or succeed, you will have to pay back the loan, so keep that in mind.
Bootstrapping is almost impossible without savings unless you already have a steady and sufficient income. Savings is the great way to avoid paying loan interest, while not relying on the Angel investor or Crowd funding for the initial phase.