10 Smart Methods To Raise Money For a Startup
As a startup founder, you face a lot of different obstacles. You’re attempting to succeed where 90% of others fail. Even if you're skilled, you'll eventually need outside funding to move your startup forward from just an idea.
But, funding a startup business is easier said than done. There are many ways to do it, and it's important to choose the best method (or combination) for your situation. To help you determine which startup fundraising methods are right for you, we’ve put together this list of 13 different ways to raise money fast for your startup.
Why Is Raising Capital Important?
First of all, let’s clear something up: the word “capital” doesn’t need to be intimidating. Raising capital is simply raising money for your business. It’s no different than fundraising for any other purpose, except in the startup world, we have some special channels for raising large amounts of money for business ventures.
Whatever you want to call it, raising startup capital is almost always a necessary part of the startup process. If this is your first venture, you might be feeling a little overwhelmed. There’s a lot of uncertainty at the beginning of a startup’s life — the unfortunate truth is that most startups fail because they run out of money, not because the idea is bad. Finding additional sources of capital is the best way to ensure your startup has enough funding to make it through the precarious early development period.
Raising startup funding also allows you to scale your business faster. Launching a startup is no easy task, and it’s going to take a lot of time and dedication to see results. Securing the capital you need early (preferably before you need it) will help you accelerate growth and keep you on course to become profitable.
Additionally, every dollar raised also raises your business’s credibility. Bootstrapping your way to success is certainly impressive, but so is having a line of investors willing to put their own money behind your venture.
Do You Have a Business or a Startup?
Startups and small businesses are often spoken of interchangeably, but they aren’t the same. Before you spend another second thinking about fundraising strategies, you need to decide whether you have a startup or a small business.
What is a startup?
- Startups intend to impact an entire market. Think of companies like Uber or Airbnb that completely changed their industries.
- Startups also intend to grow quickly. As entrepreneur Steve Blank famously said: "a startup is an organized form to search for a repeatable and scalable business model."
- Innovation is a primary motivator for most startup founders. The goal of a startup is not only to solve a problem or make a profit but also to find a new and inventive way of doing so.
What is a business?
- A small business intends to identify and target a relevant local or regional market. Finding a reliable customer base is more important than disrupting an industry.
- Small businesses seek a sustainable model that will keep the business afloat for the long haul. Exponential growth isn’t the end-game.
- Generating revenue is the highest priority for a small business. Don't forget the goal is to operate a fairly standard business model that earns a profit, not reinvent the wheel.
Our guide focuses mainly on how to successfully raise capital for startups, not small businesses. However, if you are a small business owner, we do have three methods to share that most founders can use.
What to Consider Before Raising Money
Should I raise money for my startup?
Most startups need to raise capital at one point or another. However, fundraising isn’t the right move in every scenario. You might find yourself in a situation where it makes more sense not to fundraise. Here are a couple of examples:
Don’t raise money before you know what you’re going to do with it. There’s no sense raising capital just for raising money’s sake. Before you start seeking funding, you should know exactly what you need it for. You might be tempted to start raising money as soon as you’ve come up with your idea. If you’re eager to get started, that’s understandable. But it’s better to wait until you’ve mapped out a clear business plan and then approach fundraising with defined goals in mind.
Do raise money when demand starts to pick up. Once you’re attracting paying customers, that’s a sign it’s a good time to start fundraising. If you can time your fundraising just before you start bringing in customers, even better. When demand starts increasing, you’ll likely have a hard time keeping up without additional capital — plus, you’ll have an easier time securing funding when you have evidence of profitability.
How long can it take for a startup to raise funds?
The time it takes for a startup to raise capital varies from case to case. You should expect to spend at least 6 months fundraising before you meet your goal. It might take a few months more or less, but it’s never a particularly fast process. (However, if you’re nearing a year of fundraising time, something isn’t working right.)
Even though a drawn-out fundraising process may feel agonizing at times, it’s important to remain patient. The best way to remain sane during these stressful periods is to talk to someone. You can chat with one of our experienced mentors who can help you cut down your fundraising timeframe and give you advice about how to manage the stress of entrepreneurship.
10 Methods - How to Raise Money For a Startup
1. Startup Accelerators
One of the most reliable ways to raise funds for a startup is to go through a startup accelerator program. Some accelerators simply offer access to office space or mentorship, but many of the best ones offer the chance for an equity investment as well. These accelerators will offer funding in exchange for a small ownership stake in your startup. The amount you’ll be offered and on what terms varies greatly from program to program. To take advantage of a startup accelerator, you’ll need to complete an application process and be selected. YC is recognized as one of the best accelerators in the world and companies who go through Y combinator get very high valuations.
2. Venture Capitalists
Venture capital (VC) firms can inject your startup with a significant amount of cash in exchange for equity, but the vetting process can be intimidating in both directions. You’ll need to consider your startup’s domain, product, location, and stage of growth and make a list of VCs that are interested in investing in startups like yours. Once you’re on a VC’s radar, they’re likely going to be researching you and conduct due diligence to determine if you’re a good match for their investment portfolio.
3. Angel Investors
If your startup doesn’t yet have the traction to impress VCs, you can try angel investors. They usually won’t be able to offer as much money as a VC firm, but angel investors are known for being more willing to invest in unproven startups they believe in. Like VCs, angel investors will usually ask for equity in return for their investments.
4. Family Offices
A family office is a private wealth management firm that oversees investments for high-net-worth families. They are usually only interested in investing in specific industries, so you’ll need to research which family offices are good matches for your startup. The size of the investment will typically fall somewhere between the amounts offered by VCs and angel investors. Different family offices may offer very different investment terms. If you’re hoping for a less structured approach than VCs require but looking for more capital than an angel investor can offer, a family office might be the best choice for you.
5. Friends and Family
Friends and family can be a good source of capital very early in your startup’s journey before you have anything concrete to present to investors. Many successful founders got their start with a donation from a friend or family member while their company was still just an idea. Who better to help launch your startup than the people who already believe in you most?
Crowdfunding sites like GoFundMe or Kickstarter make it possible to source capital directly from your (potential) user base. This is one of the simplest methods of raising funds for a startup. Each person who contributes is like a micro-investor. Crowdfunding is a great low-risk funding angle because contributors don’t expect a slice of ownership the way VCs, angels, or family offices usually do. Instead, you can entice them to donate by offering perks like early access to new product features or personalized thank-you packages.
If you have the means, investing some of your own capital is another way to give your startup some momentum. There are lots of ways to do this. You can earn extra income working a side job and pour all your earnings into your startup. You can examine your assets like real estate or retirement accounts and redirect some of those resources. If you’re comfortable with the risk involved, you can tap into your savings or refinance your mortgage, if you have one. While it’s unlikely you’ll be capable of self-funding your entire venture, you can definitely give yourself a strong head start.
Startup contests are very similar to the “demo day” that’s usually held at the end of an accelerator program, and some startup contests function like an extremely condensed accelerator program in themselves. The rules vary from one competition to the next, but typically, each team is given the chance to pitch their startup to a panel of investors and the winner receives a substantial investment. There are all kinds of startup competitions held around the world. Some of them are open to nearly everyone and some of them only accept entrants that fall within a particular niche.
Similar to crowdfunding, you can rally your potential customer base directly by asking them to pay for your product in advance in exchange for a guarantee that they’ll be first in line to receive it when it’s ready. In effect, this lets you borrow from future sales to fund production today. Like any kind of borrowing, pre-selling can be risky, but the risk is minimal as long as you don’t promise more than you can deliver.
Banks are very reluctant to hand out loans to startups because of the risk involved. However, micro-lenders will lend smaller amounts of capital to startups that fall within certain parameters. Micro-lending organizations are usually nonprofits that use the donations they collect to support entrepreneurs who don’t have access to traditional methods of financing for a variety of reasons. If your startup isn’t able to get a traditional bank loan, micro-lending could be an alternative.
The above detailed how to raise capital for a business. Keep reading to learn more about how to raise capital for a business without a loan.
How to Raise Money for a Business Without a Loan
Method #1 - Grants
A small business grant is a sum of money given to a small business for a specific purpose. Some government agencies and private institutions offer grants to help small businesses get started or expand. Unlike funding from investors, grants do not come with the expectation of repayment. Instead, the entity offering the grant will probably be more interested in whether or not your business goals align with their particular mission for the grant money.
Method #2 - Purchase Order Financing
Purchase order financing works best for early stage companies that produce physical products. A purchase order financing organization will pay for supplies now with the expectation you’ll pay them back after you’ve used those supplies to produce and sell your product.This method is a good choice if your business is gaining momentum quickly and you find yourself scrambling for funding to sustain growth. Some businesses use purchase order financing to help them fill large bulk orders if they don’t have enough resources on hand.
Method #3 - Strategic Partnerships
Suppliers, distributors, or even other businesses can become valuable sources of capital. If you have a mutually beneficial relationship with a supplier or distributor, they may be able to offer you a better deal. Emerging companies are often able to secure investments from larger, more established companies that are impressed with your product or service and want to position themselves as early adopters.
Raising money for a startup is a challenging and time-consuming process, but it’s an important part of nearly every startup’s growth. Once you have a solid business plan and you’re ready to put it into action, you can use the methods on this list to help you get the funding you need. Whether you choose to approach investors, apply to an accelerator program, crowdfund, self-finance, or pursue another option, the extra capital will support your startup through its rocky early stages and help fuel future growth.