Starting a world-changing business is hard. Finding the money to fund your world-changing business can feel even harder. It’s a well-known fact that 90% of businesses fail, and not having enough capital is one of the biggest reasons why.
Successfully raising capital for your startup starts with understanding why it’s so crucial and how to raise the funds. Then, learn how to calculate the money you need and find the best funding sources for your business stage and unique idea.
As an angel investor, I’ve seen it all, from the biggest successes to the biggest mistakes in fundraising. In MacDonald Ventures’ complete guide to raising capital for your startup, I’m sharing everything you should know before you start fundraising so you can learn from the big wins and avoid the hard losses.
How To Raise Capital For Your Startup
Raising funds for your startup comes in many shapes and sizes (and from many sources). Many startups use funding from a combination of sources. This might look like using an initial investment from friends and family followed by an incubator, an angel investor, and finally, a venture capital firm. It’s different for every startup and every founder.
For example, Michael Dell of Dell Computers famously financed his company by having customers pre-pay for the build of the computers on a credit card. Dell received these payments in 30 days but designated 120 days to build and ship the computers out, giving him up to 90 days of working capital without needing to source the funds from outside investors.
Similarly, I followed this model in growing myMatrixx by negotiating 20-day payment terms with customers and 30-day payment windows for vendors, allowing me to operate and scale without requiring outside capital.
While your funding journey is entirely your own, get familiar with the six major ways to raise capital for your startup to determine which method aligns with your goals and current and future needs.
Bootstrapping is a common fundraising method used by startups in their most nascent stages. This involves using personal funds that you’ve saved up or receiving gifted or loaned money from friends and family. Bootstrapping is also known as self-funding.
The pros of bootstrapping include easily accessible funds with little to no obstacles in the way, plus flexible interest rates (or none at all, depending on investors). But bootstrapping won’t take you from an idea to a thriving business. It’s most helpful for small-scale enterprises or businesses in their earliest pre-seed stage.
Crowdfunding involves creating a campaign page on an online platform where individuals will evaluate their ideas and decide whether to pledge their support and donate funds. Crowdfunding eliminates the boundaries of who can and can’t invest. Anyone who sees the public listing has the opportunity to invest in your idea.
Crowdfunding can be a great way to generate public interest in your business and gain some free marketing. It also places more power on the individual to contribute but has the potential to attract larger investors as well.
But with so much competition on crowdfunding sites, it can be hard to get noticed and raise the funding you’re after.
Bank loans are a possible funding option for businesses that approach their bank lender with a strong pitch and business plan. This plan needs to spell out the company’s profit forecast, estimated time of maturity, and other important details to instill trust.
Getting bank funding means there’s a real possibility of accessing large amounts of capital, which can then speed up your business’ generation of income. But you’re at a high risk of collateral loss, which is often an important requirement for bank loans.
Accelerators or Incubators
Startup accelerators and incubators can provide funding while also offering support in other ways to help a startup get its footing and begin to scale. An incubator essentially nurtures these businesses, while accelerators do just that: fast-track the business.
These can be good options if you are also looking to gain mentorship and insight from your investors or are looking to make broader connections with other startups and entrepreneurs in your area. Programs only last about 4-8 months, so you’ll need to sustain your growth once this period is over.
Angel investors are individuals with a large amount of investable capital that are typically more willing to invest in edgy, innovative, and disruptive ideas among earlier-stage businesses. Many angel investors offer far more than just capital. They also bring their own entrepreneurship experience; industry insights; a vast network of other potential investors, vendors, and potential customers; and mentorship to increase their investment’s chances of success.
Angel investors are more likely to take bigger risks with their investments, but they anticipate heavy returns. Compared to venture capital firms, angel investments may seem small, but they can go a long way in helping an early-stage startup scale.
Venture Capital Firms
Finally, venture capital funds aggregate funds from various people and are managed by professionals who act in their investors’ best interests. VC funds typically seek out larger startups that are past the early stages and keep a close eye on their startups’ progress to ensure sustainable growth.
They may also provide some mentorship and expertise. But with VC firms, you’re more likely to give up a larger part of your business to investors, and their funding terms won’t be as flexible as with some other options, like angel investors. Learn more about angel investors vs venture capitalists.
What is the Purpose of Raising Capital?
The point of raising capital may seem obvious on the surface, but there’s a lot more value to funds raised than just their dollar amount. Finding the right investors for your startup also helps you scale faster, boosts your reputation and credibility, opens doors to more resources, and creates opportunities for more favorable funding terms.
To Scale Quickly
Small, bootstrapped amounts will slowly contribute to a launch, but raising money from investors is a much faster financing option that can provide a larger infusion of cash upfront to scale more quickly. The faster you can scale and launch, the more likely you’ll beat the competitors to it.
To Gain Credibility
While some people mistakenly assume asking money equates to weakness, it’s quite the opposite in the entrepreneurial space. When an investor offers a substantial amount of capital to find your business, it’s tangible proof they see you as a strong startup with high chances of success. This visible stamp of approval instantly helps you build credibility among current and future stakeholders.
To Access Non-Capital Resources
With the right investor relationships and business funding, you’ll also gain access to extensive resources and advantages such as an instantly larger network and mentorship from someone with niche experience.
The connections you make through the right funding partners can introduce you to further investment opportunities, potential customers, or new talent to add to your team. For example, if you find an angel who specializes in cannabusiness funding, they can offer years of experience, connection and insight.
Certain investors, such as angel investors like myself, are also personally invested in your business beyond just capital. I take a hands-on approach with my investments, sharing what I’ve learned from decades of mistakes and successes to their benefit.
To Enjoy More Flexible Funding Terms
Raising your own capital also brings benefits when it’s time to pay the money back. Typical funds raised don’t require monthly repayments the way bank loans do. They often include extended repayment terms that allow you to utilize the capital toward building your business. You also won’t be using any of your personal assets as collateral for any loans you would otherwise take out if you didn’t raise the money on your own.
How Much Money Do You Need To Raise For A Startup?
When trying to determine how much capital a startup should raise, it can be tempting to rely on common adages like raising “12-18 months worth” of funding needed. But these generalized strategies don’t consider the nuances within the great wide world of startups.
Most businesses will require a more detailed needs-based and milestone-led approach to land more accurately on cash targets for your next fundraising round. The three main considerations to establish your fundraising goal should be your milestones, your cash burn rate, and your valuation.
Milestones are organized achievements that, when put together, help accomplish an overarching goal. Start by creating a realistic timeline using financial projections and predetermined milestones, detailing the essential assets (people, equipment, etc.), time, and capital needed to fund your next milestone. Then, aim for a bit of additional funding as a buffer.
The amount of funding needed will also be impacted by your burn rate, or how fast you’re going through the capital you currently have. You want to raise enough funding to sustain this burn rate plus additional projected costs. For a general figure of funds needed, multiply this amount by the number of months you’ll need to reach the next milestone. If you intend to grow faster than you have been, this accelerated growth rate may increase your burn rate and boost the total funds needed.
Your company valuation will help determine how much money you should be asking for. With a higher company valuation, you’ll be able to raise more money or hold on to more equity in your company.
What are the Best Ways To Raise Capital For A Startup?
There are more than a few options to raise the money your startup needs to scale and succeed, but three stand out as the most common and best ways to raise startup capital depending on the stage your business is in.
Bootstrapping is a good first fundraising step that involves your friends and family as well as your own bank account. When companies are in their earliest stages, it may be hard to convince bigger investors to take such a large risk, so seeking our support from those closest to you can help you make some progress before taking your pitch to bigger investors.
An angel investor is the best next step to take when bootstrapped funds have run out. Angels will provide capital funding in exchange for equity in your business, and they tend to be more closely involved in business development. Angel investors are a great asset during cash-intensive early growth stages and can combine their cash and personal contributions to create the best outcomes.
Venture Capital Firms
Venture capital funds are often the best option in the later stages of a startup’s life when it’s getting closer to going public or becoming acquired by another company. VC firms want to see startups with a strong market opportunity, skilled leadership team, and promise of steady returns.
With venture capital investments comes a greater loss of equity, so founders need to weigh the urgency to scale and exit with the loss of control that these kinds of funds entail.
Your Unique Fundraising Strategy
Once you start building your own business, funding your idea should become a top priority, and it should remain a priority as you scale. As a founder, it’s part of the job description. But raising capital for your startup isn’t a one-size-fits-all approach. There are many different ways you can raise funding to accomplish your goals, with each method offering unique benefits and drawbacks.
Learn More About How the Friends and Family Funding Round Works
Understanding how each method works and how to calculate the money you need will help when it’s time to start fundraising. For larger, more established startups, venture capital firms can be great sources of funding. However, early-stage startups should consider funding from an angel investor to gain additional benefits of mentorship, network access, and more with flexible funding terms.
If what you need is the right angel investor who believes in your world-changing tech idea and can help you turn it into a successful, thriving business, reach out to Steve MacDonald of MacDonald Ventures.
Learn more about Best Angel Investors for Startups.