A Guide to Early-Stage Startup Funding

Find all the funding sources available to startups, and which ones work best based on the stage and growth rate.

After completing the fundamental and creative tasks needed to ideate a startup, the founders are faced with their first big hurdle: Funding. Although some startups are bootstrapped and have internal sources of funding, most startups require external funding to grow their business at a fast pace.

Choosing the venture capital path

Raising capital from professional investors is not the only path but it is definitely the most common one if you want to create a multi-billion dollar company. Money comes at a cost, usually a 15-25% dilution in every funding round and huge expectations, which if it is not followed by fast growth, can mean the death of the company.

On top of money, professional investors can help the company professionalize certain areas of the company like reporting and finance, bring new opportunities through their extensive network or advising on tough decisions.

If you choose the professional investor path, you will need:

  • Ambitious team: investors know only 10% of the startups will survive, so when they invest in a company they are looking for outliers in the form of good teams able to create a multi-billion dollar company.
  • Big market: unicorns are built in big markets, and the market size is one of the most common discussion points in early stage companies. Ambitious teams tend to attack big opportunities.
  • Pitch deck: investors will ask for a pitch deck, or a short presentation highlighting some key topics of your company, team, market and financials. There are several templates available like the Sequoia one.
  • Clean cap table: investors pay a lot of attention to the cap table, looking for red flags like too many small shareholders or a former founder holding too many shares.
  • Shareholders' Agreement: professional investors will definitely ask for a Shareholders’ agreement to reflect new obligations, and usually creating new share classes to protect their investment.

What are the various rounds of startup funding?

Shareholders’ agreements are quite simple and straightforward, but new clauses and provisions are added when professional investors are involved. Find the most typical clauses which are covered by such agreements below:

  • Pre-seed: companies just incorporated start at this stage, where the main objective is to test out if their value proposition has interest from the market, also known as finding product-market fit. This pool of funds is also used to hire key personnel, which is essential for a small business to expand. The amount raised is usually the minimum to validate the idea and then raise the next funding round to operationalise the go-to market.
  • Seed: fundamentally, this round of funding provides companies with the capital to convert their vision into an operating business. This allows the company to conduct further market research, hire more people to allow founders to focus on growth, and start automating and setting up processes. At this stage, the company should find a specific target customer and master a way to market their product or service.
  • Series A: this stage is all about finding new ways to keep growing, either by expanding to new geographies, verticals or adding features. Ideally, a business seeking Series A funding should have strong traction in revenue, a predictable sales process and a good team to execute on the vision. At this stage, the business should be focusing on quick paced growth while increasing their capacity and human capital. To attract valuable investors, it is important that the business shows real in-market data and future forecasts that look promising to the potential investors.
  • Post Series A: beyond series A, startups start converting into an enterprise, with dozens of employees and stable but growing revenue. They are usually recognizable in the market and funding required beyond this is usually to sustain growth, work towards becoming a market leader or in some cases to expand to new markets or verticals.

What are the sources of funding?

  • Bootstrapping: this refers to starting off a company using personal savings, borrowed funds from close friends and family, and small income from initial sales reinvested into the business. Essentially, this method involves not relying on external sources to kickstart a business and doing so self-sufficiently.
  • Friends, Family, and “Fools”: although friends and family are self-explanatory, fools are described as early individual investors who take a punt on a startup with aspirations of the initial investment multiplying and yielding very high returns. This is usually the very first source of funding a startup receives.
  • Crowdfunding: using popular platforms such as Kickstarter, Indiegogo and CircleUp, startups can gain funding through a large sum of people who usually invest small amounts. Investors using crowdfunding can receive returns on their investment in the based-on equity or rewards. This is also an effective method to spread the word about the startup, especially if the business is B2C and values promotion. Moreover, a successful crowdfunding campaign is very attractive to employees and can increase their loyalty towards the company.
  • Loans and Government grants: this route is usually a harder one to take, since banks are hesitant to lend money to startups as it is generally seen as a risky investment and receiving a bank loan heavily depends on the strength of the company’s UpToDate financials and projections, and the business model. In some cases, governments have specialized funding projects for startups, commonly referred to as venture debt. Startups can also hire specialized loan/grant management companies who work in exchange of a success fee. This is a good way to receive additional financing without the distractions that come with it.
  • Angel investors: an individual usually with an existing portfolio of investments and startups who backs early-stage startups with funds in exchange of equity. They also tend to take on an advisory role and act as mentors to the founders and help navigate their way into making a successful business. Find the most suitable one for your business by checking their investment track record and the connections you have in common on Linkedin.
  • Venture capital: VC’s usually look for high growth and technology related businesses, often expecting high returns when a company goes public. However, it is important that while seeking VC investment, the founders do research on the profile of the potential investor to see if they have experience or expertise in the relevant industry. VC firms usually have a very specific thesis in terms of stage (pre-seed…), market (B2B, B2C), industry (travel, marketplaces, SaaS…) as well as technologies. Before reaching out to all of them, take your time to study their portfolio and investment criteria.
  • Incubators and accelerators: this can be very valuable for startups as they provide founders with the necessary resources and support in the form of working spaces, exposure to other investors, learning workshops and networking events. They also have tie-ups with services such as lawyers and accountants and can provide them for discounted rates. In return, they typically take equity as a return on their investment, but also provide options of debt financing or other methods of risk and reward. This varies between incubators, locally and globally.
  • Non-dilutive loans: this method of financing is very attractive to startup founders as it allows them to not give up equity in the company. Interest rates are usually around 6%, and repayment may be directly deducted from your revenues. There are two main types of non-dilutive loans for startups:
    • Based on recurring revenue: companies like Capchase will provide operating capital to companies with at least 8,000$ in monthly recurring revenues and a healthy growth. Ideal for SaaS companies.
    • Based on marketing ROI: financing institutions will analyze your performance marketing efficiency and lend money to be used to fund your inventory, scale the marketing investment or grow the catalog. It works well with scale-up e-commerce companies.
  • Venture debt: if a startup has advanced through the early stages of funding, but faces a cash flow issue to cope with rapid growth then venture debt is an attractive source of raising funds. This can be done through specialized banks and even Non Banking FInancial Services. Venture debt usually has a 15-25% equity kicker and a 1% fee when the loan is approved. The interest rates vary depending on the yield curve and the prevalent rates in the national market during the time of fundraising, but they usually range between 8% and 12%.
  • Private equity: private equity firms invest in well established and predictable companies, usually profitable and with positive cash flow. Private equity is known for acquiring several companies in an industry and merging them to benefit from economies of scale.

The best funding options by stage

Startup stage Funding sources Funding amount
Pre-seed
  • Bootstrapping
  • Friends, family and fools
  • Loans and Government Grants
  • Angel investors
  • Incubators and Accelerators
$50,000 - $250,000
Seed
  • Venture Capital
  • Non-Dilutive loans
  • Loans and Government Grants
  • Angel investors
  • Crowdfunding
$1,000,000 - $3,000,000
Series A
  • Venture Capital
  • Non-Dilutive loans
  • Loans and Government Grants
  • Venture Debt
  • Angel investors
  • Crowdfunding
$5,000,000 - $20,000,000
Post Series A
  • Venture Capital
  • Non-Dilutive loans
  • Venture Debt
  • Private Equity
>$20,000,000
MAKE YOUR COMPANY FUNDING-READY

Create your cap table in minutes

Start
Trusted by:
Jeff
Miistico
Bejao
Nuclio
Scoolinary
Seedrocket