What It Is, How It Works, & 5 Tips for Landing It

Raising startup funding is one of the most exciting and challenging times for a company.

Searching for investors, loans, grants, and other forms of funding is a big step toward business growth. It can give your startup the capital you need to keep building products or offering customers new features.

Global venture funding fluctuates wildly depending on what is happening in the world. Startups worldwide raised a total of $415.1 billion from investors in 2022, down 35% from 2021’s all-time high.

So, how do you get the funding you need? This post explains the essentials of startup funding. Keep reading or jump ahead to a section to learn:

The number and types of funding options can be overwhelming for a new startup. Understanding the types of startup funding can help you understand what’s out there and how it aligns with your company’s goals, so let’s cover that next.

Types of Startup Funding for Business

1. Self-Funding
2. Crowdfunding
3. Loans
4. Grants
5. Private Equity Firms
6. Incubators and Accelerators

1. Self-Funding

39% of business founders fund startups with personal funds. Self-funding means that you independently provide the funding you need for your startup. This might mean personal savings, starting your business with a long timeline, or running on a tight budget.

These are some other self-funding strategies:

Bootstrapping

Bootstrapping isn’t just using personal funds to start a business. Bootstrapped businesses also use early startup revenue to continue running the business rather than seeking outside funding.

Bootstrapping is a hotly-debated topic. It helps founders keep control of their businesses — instead of giving equity to investors — and avoid interest payments from taking out loans. The downside? If the startup fails, the founder loses their savings or that of their family and friends.

Credit cards

Credit cards can help you get the resources you need to grow your startup and offer backup cash flow when things don’t go as expected.

17% of businesses use credit cards as a source of startup funding. That said, keep a close eye on interest rates, penalties, and payments to make sure that your credit doesn’t suffer as you grow your business.

Barter

Bartering can be a useful way to finance big purchases like furniture, phones, or advertising for your startup. Startups that use bartering offer a useful product or service in return. This can save operating funds and expand your network.

Customer Commitment

Some startups begin with a commitment from an early customer who believes in their value. In this situation, the customer’s payments alone can fund the startup at the beginning.

2. Crowdfunding

Crowdfunding is a way to raise money online through online platforms. While some sites have a built-in audience, many need you to build your own following with your own promotional strategy. It’s a low-commitment way for you to get support and build early interest in your startup.

Small businesses can use crowdfunding sites to quickly access cash. These gains may mean giving up equity in the business or offering rewards. It’s also important to be transparent about your company’s health throughout the process.

Friends and Family

Many startups begin with funds from close friends and family. If you’re not sure about asking for a loan, crowdfunding can be a simple way to ask your community to support your new venture.

Interested? Get your next business or product off the ground with the help of these crowdfunding sites.

3. Loans

You can also fund your startup with loans. You can use the money to build, repair, enhance, or re-open a business. What you’ll need to qualify for a loan will vary depending on the lender, amount, and type of loan you borrow.

These are some popular loan choices for startups:

SBA Microloan

The U.S. Small Business Administration offers programs, such as SBA microloans, to provide companies with up to $50,000 of working capital.

Microlenders

Another option is microlending. These organizations lend small amounts of money, usually between $5,000-$50,000 to entrepreneurs.

This choice is great for founders who may not qualify for standard business loans. This type of capital can help a founder build their credit score so they can access more funding in the future.

Microlenders may be more responsive to business plans that might seem risky to another lender. These loans can also have more flexible loan and repayment terms.

Friends and Family

According to 2021 Guidant research, 10% of startups receive loans from family and friends.

If you plan to go this route, create a clear plan for how you’ll present the idea to your people. This overview should talk about the risks involved, set the terms of the loan, and share potential mutual benefits.

Friends and family loans often help startups in the pre-seed or seed funding stages.

Personal Business Loans

If you have a strong credit score and personal finances, you can also take out a personal business loan. This type of loan may have a lower interest rate and a quicker approval time. At the same time, do your research before you borrow. Some lenders have restrictions about taking out a loan for startup funding.

Learn more about financing your startup in this post.

4. Grants

A grant is a financial award for a business from a government, corporate, or nonprofit entity. Grants are gifts, so they don’t need to be repaid.

These mission-driven investments are often quite competitive. For many grants, to qualify for funding your startup goals and values need to align with those of the organization you’re applying to.

Small Business Grants

The Small Business Administration offers some small business grants to states and community organizations. This is where many startups begin their search for funding.

But don’t stop there. There are many other resources to begin your search for small business grants.

Featured resources:

5. Private Equity Firms

High-growth companies are enticing for venture capitalists. Unlike other forms of startup funding, there’s significant risk involved.

If a company fails, the investors won’t see a return on their contributed capital. But if a company succeeds, the payout can be in the millions.

Investors hope the companies they invest in do one of three things:

• Go public
• Get acquired
• Pay back their investment with interest

Private equity firms often sit on the board of a startup or act as advisors. They have a stake in the business and will do what they can to help it succeed.

Venture Capital

These are usually large investments. This startup funding is for a startup that’s prepared to use a large investment and grow quickly. That said, micro VCs can work for startups that don’t need as much financing.

Venture capitalist funding is difficult to get and often takes time and preparation.

Success can also mean that you will lose some control over your startup. Changes like staffing or spending often mean conversations with investors. Instead of quick decisions, all parties must come to an agreement.

Angel Investors

Angel investors, private investors, and silent partners are other options for startup funds. These are individuals who fund startups, often with their own money. This investment may be in exchange for equity or partial ownership of the business.

6. Incubators and Accelerators

Startup funding once focused on a small, elite group of founders. But the industry has been shifting to support founders who haven’t had access to private equity, loans, or grants.

Sustainable funding resources are essential for equitable entrepreneurship. These programs also support funding for people with marginalized identities, such as:

• People of color
• Veterans
• Women
• The LGBTQI+ community
• People with disabilities

Incubators and accelerators are essential programs for startup founders, especially those starting a business for the first time. They offer capital, mentorship, and networking. There’s a slight difference between the two, which you need to know if you’re considering this type of startup funding.

Incubators help entrepreneurs build their businesses. They focus on developing a business plan, name, website, and minimum viable product (MVP). If a company already has an MVP, an accelerator expedites growth. Here, founders receive mentorship, funding, and networking connections. Incubators also run on a flexible schedule.

Accelerators are competitive mentor-based programs. They offer guidance, support, and limited funding in exchange for equity. These programs often run on a shorter schedule than incubator programs.

Ultimately, every founder needs to figure out which type of funding is right for their startup. But how does startup funding work? Let’s walk through a typical funding process.

How Startup Funding Works

Now that you understand the different types of funding, let’s walk through the typical funding process.

Let’s say you’re a startup founder. Your business is growing and you want to hire more employees to manufacture your product prototype. But you need funding to make it happen. You decide to search for investors.

Investors want to support startups they believe in. They also want to make a return on their investments. That’s why almost all deals with angel investors, venture capitalists, or private equity firms include equity.

That way, when the company begins to earn a profit, the investors will get their money back — plus an extra slice of equity for taking a chance.

Companies looking for outside funding usually begin with a seed round. Then, some will continue on to Series A, B, and C rounds.

But before any rounds begin, a company valuation must take place. This can impact investor interest in the company and how much new capital a startup can bring in.

A valuation considers:

• The startup’s maturity
• Management
• Market size
• Track record
• Profit
• Risk

Once the valuation is complete, startups can begin a funding round. The timeline and process vary by company. Some founders search for investors for months, while others close a round in a matter of weeks.

And while certain startups move slowly through each funding round, others build capital much faster. It’s not uncommon for an innovative startup to raise a few million in one to two rounds, while another company raises $25 million in the same number of rounds.

This video by The Rest of Us gives a detailed explanation of the funding process.

Startup Funding Rounds

The startup funding that gets the most news involves raising money through outside investment. In those cases, investors exchange capital for equity — or partial ownership — of the company.

The investment process is broken up into funding rounds. Funding rounds can be confusing. Let’s look at each phase in the process and what it means for founders, companies, and investors.

Pre-Seed Funding

Pre-seed funding takes place as founders are getting their companies off the ground.

It’s the earliest stage of funding a company. Pre-seed funding usually involves an investment from:

• The founder’s personal savings
• Family
• Friends
• Supporters
• A network of other founders

This round can go on for years as a company develops. Or, if a company proves itself, it can happen rather quickly.

Seed Funding

Seed funding is the first official funding a company raises, and it’s often tied to equity.

This capital helps a startup finance early steps, like:

• Conducting product research
• Launching a product
• Marketing to a target audience
• Building an audience

Think of this stage as the “seed” by which the rest of the company is able to grow and flourish. Without it, a founder wouldn’t be able to hire a team or test their idea in the market.

Seed funding can come from family, friends, angel investors, incubators, or private equity firms. But the amount varies widely — some companies raise $10,000, while others raise $2 million.

Funding for this round varies. It usually depends on what resources the business needs to grow and what investors feel is worth their time and financial investment.

Series A Funding

Once a business uses its seed funding to develop a product and build a customer base, it’s time for the next step. A Series A funding round can help to:

• Expand a company’s product offerings
• Bring in more customers
• Develop a long-term plan for growth

Startups in this funding round often attract investors from traditional private equity firms.

The average U.S. Series A for funding in the first half of 2022 was $20.4 million. Valuations in the tech industry vary and this impacts the average funding amounts.

Series B Funding

Series B rounds are about business development and how to reach the next level of growth. The capital raised in this round often supports:

• Hiring new talent
• Boosting sales
• Marketing
• Tech development
• Customer service

Average Series B round funding was $50 million in 2022, up from $35 million in 2020.

This funding round can attract both traditional private equity and later-stage investment firms.

Series C Funding

Series C funding rounds are for successful startups that need extra funding to:

• Create new products
• Acquire other companies
• Expand into new markets
• Hire an exceptional leadership team
• Boost numbers before an initial public offering (IPO)

The capital should help scale the company’s efforts so it can grow as quickly as possible. Series C funding averages range from $88 to $89.5 million in 2022.

Because these startups are already successful, this round of investment can be less risky. With that in mind, there are often more investors getting involved at this level.

Series C investors can include:

• Private equity firms
• Hedge funds
• Secondary market groups
• Investment banks

Series D and Beyond

Few companies extend beyond Series C into Series D or E rounds. Businesses seeking this funding are often looking for a final influx of capital to achieve their goals.

A company at this stage of funding should have an established customer base, revenue streams, a track record of growth, and a solid plan for how it will use new capital.

How to Get Startup Funding

1. Calculate your funding needs.
2. Create a business plan.
3. Check your financial health.
4. Research funding options.
5. Make a repayment plan.

Startup funding depends on your business idea, experience, and access to financing. There are many factors that can influence funding and following these steps can help improve your chances.

1. Calculate your funding needs.

Before contacting investors or applying for a loan, you need to know how much money you need to achieve your business goals.

Looking for a small, one-time sum? A business loan or grant might be the right fit.

Need a larger contribution? An angel investor may make more sense.

Understanding your funding needs lets you take the best approach. This calculator can help you figure out your startup costs.

More resources:

2. Create a business plan.

A business plan can help you build confidence with investors, lenders, and family members who can help fund your startup.

Your business plan should outline your vision. It should highlight the opportunity, target market, and industry you want to impact. It should also include:

• Marketing plans
• Timelines
• Competitive analysis

This business plan template makes it easy to create a detailed business plan so you can start pitching your idea.

Featured resource: Business plan template

3. Check your financial health.

You can’t figure out what type of funding you need if you don’t know your current financial status. Gather the documents you need to make an assessment including:

• Business and personal tax returns
• Bank statements
• Cash flow
• Projected expenses

Then, create a profit and loss statement and revenue projections. These can help you (and investors) understand how much funding you have on hand — and how much you still need.

4. Research funding options.

Reading this post may have opened your eyes to the types of available funding. Before you make any choices, do an extensive amount of research to see if it’s right for your business. There are hundreds of resources available online about approaching investors, your debt-to-equity ratio, and distributing equity.

More resources:

5. Make a repayment plan.

Accepting capital is no small gesture, especially if it’s millions of dollars. Most founders only need a few thousand dollars to get started, but it’s still wise to create a plan for paying back the money you borrow.

You can use a business loan calculator to estimate payments and work them into your budget. If you can’t make the payment, don’t take the funding.

Find the Right Startup Funding for Your Business

Some businesses need a massive amount of capital to bring their ideas to life. Others need a small loan to push them toward higher revenue and financial freedom.

Whatever the case may be for your business, it’s best to figure out your current finances and funding options before choosing a path. Look to similar businesses in your industry, look at loans, or find inspiration for a crowdfunding campaign.

Use this starting point to find the funding you need to bring your business to life. Then, go out and get that money.

Editor’s note: This post was originally published in February 2022 and has been updated for comprehensiveness.