The many types of startup funding and when to use each one
Startups run on more than coffee and hard work. Every business needs funding, a point that's especially true for startups. The right early-stage startup funding can make the difference between hiring a key employee or missing out on sorely-needed talent.
Finding startup funding may feel like an aimless, hopeless task. But with the right knowledge, you can look in the right places for the right kind of funding — and get your startup exactly where it needs to be.
Types of startup funding and which businesses need them
There are numerous types of startup funding options. While each funding type will net you money, no two types are the same. Think about your current situation when reading the following descriptions to decide which type of startup funding could be the best fit for you.
Small business loans
When it comes to funding sources, small business loans are the bread and butter of the bunch. Small business loans are similar to personal loans, meaning you're approved for a set amount of funding with an interest rate attached.
You can get a small business loan through banks and other financial institutions, many of which can be found through the Small Business Administration (SBA). Keep in mind that, like a personal loan, you'll need to have solid business credit. This will help you acquire a bigger loan with a lower interest rate, and reduce the amount the loan costs you on the whole.
Ideal for: Any business with decent credit and responsible spending habits can be a great candidate for a small business loan. Make sure you have a plan for the funds before acquiring them, as squandering a small business loan can be costly. It's also unlikely you'll get approved for a second loan immediately after taking out the first one, so again: spend the first one wisely.
Many startups will go through various funding rounds, which are periods during which companies seek different types of funding. Funding rounds are lumped into three groups: Series A, Series B, and Series C funding, each corresponding with the stage of the company. In every funding round, money is generally exchanged for company equity, meaning the investors expect a return on their investment.
Funding rounds can be necessary to get your company off the ground, invest in essential marketing, or help your product reach shelves.
Ideal for: Many companies with seed money, and even some without, will go through funding rounds. If you're comfortable exchanging partial ownership of your company for necessary funding and you have a solid business plan, you could be ready for Series A funding.
A venture capitalist (VC) is a type of private investor who funds promising startup companies. Venture capitalists are often members of a larger venture capital firm. These firms often have boards that vote on which companies they'll back.
If the company is chosen by the venture capital firm, a VC will reach out with a funding offer. Traditionally, venture capitalists buy equity in a company, meaning they expect a payout in one form or another, if and when the company is successful. But, if your business isn't successful, the VC essentially made a bad investment and will receive nothing in return.
Ideal for: If your startup is past ideation and has a minimum viable product, you could be a good candidate for venture capital. Venture capitalists are business people, but aren't in the business of taking unnecessary risks. In order to acquire venture capital investment, startups typically need to be ready to bring their service or product to the masses but lack the funding to do so.
Angel investors are individuals with the money to back startups and aspiring business owners. Unlike venture capitalists, angel investors are generally solo and not involved with a board or firm. But, similar to VCs, angel investors generally expect a return on their investment, as they’ve purchased some form of equity or ownership from your company.
Much like VCs, angel investors can be left high and dry in the event of a bad investment. This makes them a safer option than traditional business loans. But remember: You're selling equity in exchange for funding. This means you may not have complete control over your business anymore, as you'll have to answer to the demands of your investor.
Ideal for: If you're looking to attract angel investors, you'll want to make sure your business is organized and you have a plan to move forward. Angel investors are typically considered part of the seed round of funding, meaning they provide funding for businesses in their early stages. This makes angel investors an ideal match for businesses with little more than an idea.
But, Angel investors, like unicorns, are hard to come by and not always as organized or regimented as a venture capital firm. Angel investors can even be friends or family. This makes them a bit of a wild card. If you know someone with funds, they could be a potential angel investor.
For many people with a business idea and little-to-no funding, crowdfunding is the way forward. Crowdfunding is a type of funding in which private backers (individual investors) purchase your product or service before it's available. This gives business owners with an idea the chance to fund their project in exchange for providing that product or service to their backers.
Crowdfunding can be accomplished by holding local or digital events, but it's more commonly accomplished through crowdfunding platforms, like Kickstarter or Indiegogo. These platforms make it possible for users to easily browse thousands of ideas and back the ones they're interested in.
Ideal for: If you have a consumer-oriented product or service, you could be a solid candidate for crowdfunding. You'll want to have a plan for using any funds, and more importantly, a detailed map of the funding required and how it will be used. On many platforms, including Kickstarter, you must lay out your funding goals, or stretch goals, to provide transparency to your investors.
Equity crowdfunding is similar to crowdfunding in that you're looking for funding from a large group of people. Unlike traditional crowdfunding, you're not selling your product or service. Equity crowdfunding involves selling equity in your company. This means you're essentially selling numerous stakes in your company, through stocks, revenue shares, etc.
Ideal for: Because equity crowdfunding involves selling equity and not a viable product or service, equity crowdfunding can be better-suited to businesses in the early stages. If you're comfortable selling equity and you have a solid business idea, equity crowdfunding can be a great way to get your business off the ground.
A business incubator, also known as an accelerator program, is a group that's dedicated to helping aspiring businesses take off. Incubators are generally founded and funded by other companies that want to help young business startups reach their full potential. Incubators often offer space for companies to work in, funding assistance, and even mentorship.
There are a number of incubator organizations available, so be sure to do some additional digging for local and international options if you're interested.
Ideal for: Virtually any early-stage business or entrepreneur can benefit from an incubator. Those with a solid business idea and team will get the most out of it, but even early stage startups that have barely left the ground can benefit greatly from the right incubator.
The right startup funding for you
Your business is unique. No funding solution is right for everyone, so think about where your business is and what you're comfortable doing. When in doubt talk to a financial advisor or speak with a financial institution.
Eventually, you'll come to a decision that's right for your startup and find the funding you need. From there, you can focus on bringing your product or service to those who need you most.