Developing your startup idea into a solid product requires more funding and a bigger team. To actualize your business idea, you need to hire employees, pay expenses, and maintain the operation of your business.
Depending on your industry, be it a tech or a business field, your startup can access various funds from multiple sources. It might be difficult for a new startup to secure adequate funds for its operations due to numerous challenges, such as inadequate assets.
In this guide, you will get a lot of insights into various types of startup funding, criteria used by investors to finance startups, the best ways of pitching, and negotiating your startup concept with investors.
Types of startup funding
There is a broad array of types of funding you can get for your startup. In this article, you will familiarize yourself with multiple funding types, including SBA loans and grants, venture capital, crowdfunding, friends and family, and angel investors.
Since its establishment in 1953, SBA has guaranteed small companies and startups with reliable loans to fund their operational expenses and scaling purposes. The loan type came to the rescue of the small ventures from the commercial lenders who imposed high-interest rates on their loans.
You can access SBA loans from various financial institutions, including banks, who act as lenders. All you need to do is spotlight local lenders under the SBA listing from their official website. It would help if you reached a potential and reliable SBA-loan lender to pitch your idea. The lender will get an opportunity to review and give you enough feedback about the loan’s possibility.
All startups do not have a guarantee of receiving SBA loans. You need to meet some requirements for you to secure a loan backed by SBA. To enjoy the full benefits of the loan offered, you need to follow various steps.
Go through the steps below:
- Make a proper review of your credit history. SBA loan lenders would always like to know the character of the borrower. It is advisable to check your borrowing history once every year, to ensure positive outcomes. SBA loan lenders prefer borrowers with high rates on their credit scores.
- Come up with a proper business plan, which maps the details and purpose for your startup and its financial requirements.
- Develop a financial history of the startup. It is typically advisable for existing startups seeking SBA loans to prepare financial statements, including balance sheets and income statements that outline the business’s cash flow behavior for the last three fiscal years. The step is not necessary for new startups.
SBA employs specific criteria when offering secure loans to their borrowers:
- The business size requirement. SBA considers the size of the startup, depending on its respective industry. Other sectors align with the basis of the number of employees available on the operations or the average receipts for an entire business period.
- The startup needs to have received various turn downs from other private loan lenders. Lenders can be found on B2B aggregators such as Wimgo.
- The startup also has to qualify the lender’s requirements after succeeding through the SBA requirements. SBA has its preferred lenders, who serve their roles in offering loans to startups.
Friends & Family
A significant way of sourcing for your startup funds is to begin from your innermost network, families, and friends, before sourcing from public channels. Depending on how close you are with your friends and family members, it is certainly not the best pick for most individuals.
You can approach a friend and pitch your startup concept confidently, detailing all the vital financial and general information about the startup. It may also be difficult for your family to raise a fortune of money for your startup. However, your closest family or friend may get to test your startup concept or even become a target market for the services offered.
It is easier to request your family or friend for some funds back up for your startup, unlike startup investors, whom you barely have no bonds.
This type of investors often provides an investment of small amounts to young startups in exchange for a reasonable amount of equity or return on their investment. Angel investors come in handy in narrowing the gap between the support from families and friends, and even supreme investment types like venture investors. They are mostly ideal for startups in their early stages of operations. You can acquire several angel investors for your startup from competitions for businesses or even websites online.
Venture capitalists have a few similarities with the angel investors. They have extensive experience and usually make more significant returns by providing investment in startup ideas. Since venture capital accepts the risks involved in the startup, they tend to have a stringent selective nature when it comes to picking the right startup for providing investment.
It is up to you to fully prepare for the startup pitching by disclosing relevant and necessary details to win the venture capitalists’ hearts. You can do that by drafting appropriate value propositions and market segments for your startup.
Crowdfunding is an excellent type of startup funding. It involves gathering multiple individuals who accept the risks involved to assist in raising funds for your startup. Typically, the group of people lacks ownership rights of the startup. It can be achieved by holding digitally or locally events, or through platforms, including Kickstarter. Crowdfunding requires a pool of efforts and perseverance for more remarkable outcomes. It is mostly ideal for individuals with consumer-oriented services. It would be best to map your financial goals for the startup to enhance transparency to the investors.
Most of you are not aware that startups can receive funds from your respective governments. Since startups affect the country’s economic growth, governments are willing to offer grants to help their performance. Startups for young individuals or those belonging in the STEM (Science, Technology, Entrepreneurship, and Mathematics) field are more likely to secure grants from the government. Depending on your geographical location, you can look for available grants through Google.
Have questions about business planning or the capital raising process? Contact our experts at Pro Business Plans by scheduling a free consultation.
What Investors look for in Startup Funding
The probability that a funder is likely to invest in a potential startup highly corresponds with the intensity of energy that the founder and its company team entail. If the group seems passionate about how they handle operations, objectives, and actions, then the investor is with zero doubt likely to be associated with the respective company.
Investors target several significant factors before investing in a company, such as founders with clear goals and accurate objectives that are likely to be achievable and meaningful. Does the company serve as an excellent fit for investment? How determined is the company team? How big are the company goals? Investors need to be impressed by your company’s actions and ought to predict massive success from the potential company in question. Some of the factors that investors consider before investing in your company include:
A passionate and determined company management team is attractive to any type of investor willing to fund a potential startup.
Passionate and experienced entrepreneurs
A passionate and determined company management team is attractive to any type of investor willing to fund a potential startup. A vibrant startup founder with big plans and great desires is highly capable of getting financial aid from an angel investor simply because they express big plans for the company and future investors in general.
A market study is another significant factor that investors use as a measuring tool. The startup founder should be in an excellent position to define the market’s status in terms of its level of competition, maturity, price of entry, etc. Good market competency is a win-win strategy whereby the startup founder and the entire management team acquire a bigger picture of the market and get to present their investors’ general market understanding.
Consistent progress is much attractive to an investor rather than stagnant and unsteady growth. Investors are likely to provide funding to a growing company with great potential of increasing its scope and enhance general growth. Continuous revenue growth, technical advancement, increased consumption rate, etc. typically measure the amount of progress in an absolute startup.
An absence or unstructured business plan is always a sign of unpreparedness for any investor. A business plan serves as an overview icon for the primary startup objectives, financial margins, company goals, the effective management team, etc. A well-drafted business plan initiates a one step forward of acquiring reasonable amounts of funds from an investor.
How to Pitch Investors
Pitching to investors about your existing idea or product is another fundamental aspect of any startup needing financial aid from investors. Discarding a statement to investors entails explaining and presenting a basic overview of the startup vision and its significant components, including its problem-solving aspect. For an existing investor to provide funding to a startup, the founder has to impress and fascinate the investor about the startup idea in question, with much passion and great potential.
Some of the crucial tips in making it all a success involves:
Researching and studying the kind of investors likely to show up during pitching is a big deal. Where is the geographic target of the investor? Is she familiar with my startup? Has she made any recent investments? They are the kind of information that sets a founder prepared and ready to tackle the audience. The accurate, diverse, and researched knowledge is likely to build intense confidence to the founder and enhance success during pitching.
An elevator pitch defines an overview summary of an individual or organization within a short time frame. To enhance effective communication and possible future funding, the founder should fascinate and initiate a simple, unique, and accurate short project presentation to investors with good energy and confidence.
Statistics help in evaluating the value and transparency level of a particular startup. Investors may be willing to invest in the startup once there is a detailed and precise report of any startup information set that dictates any previous operations’ quantity and quality.
A revenue model dictates the expected sources of revenue for a potential startup. The founder showcases to the investors the different methods and techniques that the startup project expects to gain revenue and any relevant future financial projects. The revenue model should be simple with a structural declaration of income sources, the pricing tiers, and even potential economic challenges.
How to negotiate with Investors
Negotiating on the healthy terms with the available investors comes in after the potential entrepreneur pitches their fantastic project idea with all its relevant details. The negotiation process should be simple, ethical, and more straightforward, following a standard array of conducts and principles. The entrepreneur should correctly adhere to the following set of principles to enhance a healthy negotiation.
Establish conduct of trust
A code of trust is essential between the startup founder and the potential investor since no party would be willing to build a fishy bond with an unfaithful body. Disclose any relevant information that may most probably win a specific investor’s trust and create a healthy working connection suitable for future startup growth.
Understand the leverage that you have
The company interests should remain definite, accurate, and highly measurable with or without relations made by kind of investors. The founder should highly leverage its strengths and pick amendments that highly favor the company’s growth and generally existing assets.
Staying open-minded allows the founder to seek and agree on the most healthy terms to serve an excellent fit. Listen to understand, weigh, and pick options that would create tremendous value for the company. Also, remember to establish good negotiation skills with the investors appropriately to encourage more similar future operations.
Your startup requires enough funding to handle any operational expenses or make improvements. Your startup has multiple financing types, which depend on the startup’s experience and field category. It would be best to do some more in-depth research and have a proper business plan before your concept pitching since you need to assure your investors that the money, they are willing to offer for investment will have a positive outcome.