Funding one’s startup can be challenging, especially if this is one’s first foray into business ownership. As we venture into 2024, an estimated 3.2 million people are going to be kicking off their businesses. They will be competing for funding that declined in availability over the last couple of years, though the funding landscape did show signs of stabilizing as 2023 came to a close.
No matter what kind of venture you are building or what the current year is set to bring, securing the funds necessary to bring your dream to fruition can be a daunting task that looms large over the startup process. It can be difficult to know where to start when seeking funding and how to navigate some of the common pitfalls that come with traversing the funding landscape.
Here, we delve into how to fund your startup and speak to some noted entrepreneurs who have been down that road.
Funding options
There are abundant options for startup funding, and the option you choose will depend on a variety of factors. The size of your startup, scalability, and valuation all play a role in the type of funding that you pursue.
“Each funding option has its pros and cons,” says Amanda Webster, COO of Fund & Grow. “The important thing is to think about your startup’s needs, growth plans, and what feels right for you.”
1. Bootstrapping
“Bootstrapping involves using your own money or the business’s revenue to fund growth,” explains Alex Fedotoff from eCommerce Scaling Secrets. “The benefit is retaining full control and ownership of the company.”
While the control bootstrapping offers is appealing, it can also limit growth if the startup has a low amount of available funds. Bootstrapping can be a mark of financial independence, but can also encourage frugality and lean operations when that may not be the best course of action when attempting to scale.
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If you have family or friends who strongly believe in your venture, allowing them to contribute funds could be a great way to get off the ground. “It can be less formal and more flexible,” says Fedotoff.
Friends and family can also act as angel investors. “Angel investors invest their own money in start-ups in exchange for a stake in the company,” explains Webster, “and often bring expertise, connections, and mentorship to the table. It’s like having a partner who believes in your vision.”
This option can also bring a level of organization and structure to funding that bootstrapping does not offer. “This can provide funds as well as mentorship and network access,” explains Phil Alberstat of Embarc Advisors.
Nevertheless, mixing money, business, and family or friendship can sometimes have disastrous results for personal relationships and the business, so think long and hard before mixing business and personal connections.
“Sharing the load or finding someone willing to financially back the business is a great option,” says Jay Avigdor, President and CEO of Velocity Capital Group. “However, finding partners and setting up an operating agreement for all parties involved can be time-consuming.”
3. Venture capital
Venture capital (VC) firms can provide significant funding and expertise to a startup in exchange for equity. While they’re appropriate for startups that have high growth potential, they typically require the business owner(s) to relinquish some control in return for their investment.
“You can get a large amount of funding, valuable expertise, and networking opportunities through VC investors,” says Judah Longgrear, CEO of Nickelytics. “On the other hand, there is a loss of some control and high expectations for growth.”
4. Crowdfunding
A fairly recent concept in the investing world, crowdfunding was born largely out of the rapid growth of social media. This investment avenue involves gathering support and funding for your concept from small groups of people online.
“While crowdfunding can give one validation of their concept and broad marketing opportunities, it is also time-consuming and success is never guaranteed,” says Longgrear.
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5. Business Loans
Several loan options are available to startups, including government grants and loans to traditional bank loans. Still, bank loans and some government loans usually require a solid business plan and some collateral, so entrepreneurs should weigh all the options available to them before signing a loan agreement.
“Founders have to be very detailed on their timeline and business plan, so the more detailed they are, the better off they will be in the long run,” says Todd Camp, CEO of Camp Systems. “This helps investors see exactly what the money will be used for. Founders need to be overly detailed on a milestone plan because that creates a vision plan.”
Navigating the funding landscape
“For emerging entrepreneurs, understanding financial needs and aligning them with the right funding source is crucial,” Alberstat offers. “A robust business plan and a clear valuation of the enterprise are essential, as is researching and targeting suitable investors.”
A robust and complete business plan is the bedrock of any funding attempt. Whether it is a loan officer, a VC firm, or personal friends, any investor will want to see a concrete plan, including an accurate company valuation, to know exactly what it is they are investing in.
It can also help to ask for help. Founders often tend to want to do everything on their own, but no one is truly a master of all trades. Seeking the advice and guidance of a professional to guide the startup through funding and eventual profitability can be crucial.
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“In the high-stakes world of startups, one lesson stands paramount: the art of recognizing when to pass the baton,” says Reema Khan of Green Sands Equity. “As venture capitalists, we’ve observed countless entrepreneurs with brilliant ideas and groundbreaking technologies. Yet, what sets truly companies apart is not just the novelty of their innovation but the maturity to acknowledge when the founding vision needs new stewardship to scale.”
Avoiding common pitfalls of funding is also critical for entrepreneurs, such as giving up too much equity (or giving it up too early), focusing only on money instead of on other attributes of funders like mentorship, and putting one’s eggs in one basket with funding options. “Avoiding these missteps is as important as choosing the right funding option to ensure a solid foundation for the venture’s growth and success,” says Alberstat.
After a wild few years in the funding market, experts are looking forward to a more stable 2024. While not every startup will succeed, the future is looking bright for innovative new businesses that manage to secure funding and effectively scale.
Securing funding for one’s startup is a pivotal step on the entrepreneurial journey, offering both opportunities and challenges. Whether you decide to fund through bootstrapping, angel investments, venture capital, or alternative financing methods, the key lies in aligning your funding strategy with your business goals and growth objectives. By carefully weighing your options, leveraging available resources, and staying resilient, you can more easily navigate the funding landscape with confidence and chart a course toward sustainable growth and long-term success.
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