How Startup Funding Works

This is how the story usually goes. You’ve come up with the perfect idea for a new business. It’s such a good idea that you decide to start to seriously consider making it happen. Then after spending a considerable amount of time going over every possible scenario, you make a decision. You’re going to bring your idea to life. 

The first step is the idea. Then it’s about transforming that idea into a real life startup. The second step is the one that separates the great ideas from great businesses. What is it?

Getting the right kind of funding to make everything happen. Because without the necessary cash to get up and running — not much more will happen. 

This article will give you a primer on what options startups have to fund their enterprise and how to make the most out of them. 

Evaluate if Startup Funding is the Right Move for You

Getting funding is a great way to get a startup off the ground and transforming it into your vision. Having said that, funding isn’t the best option for every business. Some business models are better served taking a more conservative approach and simply growing at the pace that is sustained by it’s revenue. 

The other reason why funding might not be the right option for you is because the investor who will fund your business will own a portion of your business and will be someone who you have to be accountable to. 

In other words, you have to consider the pros, cons and do your due diligence on the implications that getting your startup funded implies. 

Here are some scenarios in which funding is the best option for your startup:

• You have aggressive growth goals: This is the best case scenario for funding. If all your startup needs is to grow faster, then getting a healthy injection of cash will get you there faster.

• You need to develop your prototype: If your startup needs a significant amount of funds and resources to research and develop your prototype, then obtaining funding becomes a necessity.

• You need to fund your operations: Small businesses can come across a situation where they simply can’t grow due to their limited cash flow. In this case it makes sense to work on obtaining the necessary funding to pursue growth.

Bootstrapping Your Startup

Bootstrapping is the term that is used when you decide to fund your startup with your own money, a personal loan or a small amount of help from friends and family. 

You would choose this route if you have a high degree of confidence in your startup’s ability to monetize quickly and become profitable in a short amount of time. 

Many startups bootstrap themselves off the ground and keep going until they have proof of concept or a working prototype. At this point they decide to start looking for external funding. The main benefit from this approach is that it increases the odds of getting funding since you already have data and real life financial projections to share with your investors. 

Securing Venture Capital

Venture capital is a source of funding for small business that is provided by angel investors, investment firms, incubators and accelerators in exchange for equity. 

This type of funding is done with the expectation that the startup can grow significantly at one point and that it won’t be able to get there unless they get the necessary injection of funds. 

Investors that invest venture capital into startups assume a higher risk but can potentially get a much higher reward. 

A really good example of this is the case of Whatsapp. Sequoia Capital invested 60 million dollars into the startup. When Whatsapp was sold to Facebook, their share was then worth 3 billion.  Granted, venture capital firms don’t always win this big, but this the kind of expectation they have. 

Seed Funding

Seed funding is the highest risk investment for investors, but it’s also the stage where funding amounts are lowest. This type of funding is provided to startups so that they can create the foundation of their business, whether it’s in research and development or to acquire the talent they need to start becoming profitable. 

Series A

Series A funding is provided to startups that have proven that their enterprise has the potential to be a profitable investment, even if they haven’t been able to monetize it yet. 

For example, if an app grows a huge user base and they need additional funds to accommodate their growth, investors would provide Series A funds. These funds keep the app running until it becomes profitable, or at least until they can access the next round of funding. 

Series B

The average amount of series B funding is $33 million. This gives you an idea of the type of company and expectations that investors have from this round. 

Startups that receive series B are no longer small, at this point they’ve usually already made it so to say, now this is where they go big. 

Series C

Startups that receive series C funding are companies that have made a significant impact in their market. This is the type of funding they receive so they can take over a much bigger share of their market. They can do this by acquiring other companies or making big investments in infrastructure that will allow them to reach these very aggressive goals.

Cash Burn and the Importance of Managing Funds

It’s vital to remember that once your startup is funded you are now accountable to others. It’s no longer just you and your partners. This is why finance becomes such a big part of a founder’s scope when they receive financing. 

Investors expect to get an ROI, so they’ll be expecting clear metrics on the state of your company and their capital. This is why metrics like cash burn become so important. Cash burn gives investors a clear timeline into how their investment is developing as well as a clear indication of whether or not the startup will be successful. 

In conclusion

Many startups get funded, but having money to operate isn’t the end goal, the goal should always be to become profitable. Understandably, once your startup gets a sizable injection of cash, your focus as a founder inevitably gets split between developing your product and keeping track of your startup’s financials. 

If you find you’re struggling with this aspect and think “if only I could afford a CFO…”, please feel free to reach out to us for a free consultation. We’re experts in helping startups have the financial expertise that can take them through every step of their growth journey.