Your Ultimate Guide To Startup Funding

May 2, 2022
Updated:
5 min

Tatsiana Kerimova

CEO & Co-founder

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The mobile app market is expanding at a blistering pace and giving rise to dozens of new startups. The global mobile market is predicted to reach $180+ billion by 2027. 

Source: Grand View Research

Regardless of how amazing your app idea is, it’s not enough to get on top of the market. Building a successful mobile app is a multistage process involving lots of expertise and funds. But what if there isn’t enough money to make the app thrive? 

Five Ways to Fund a Startup 

Starting a new business is a multistep process, involving drafting a business plan, analyzing the market, creating a product, and finding the right people to work with. However, finding the necessary funds to launch your business is the first step. After all, you cannot launch without the capital you need. 

Bank loans are probably the first thing entrepreneurs consider when looking for extra funding. On the one hand, approving bank loans for startup funding is hard-won. And on the other, banks have crippling interest rates that can be hard to pay off. However, there are more ways to get the necessary funding for your business. 

Self-funding

Self-funding is also called bootstrapping.  A vast majority of entrepreneurs launch their businesses by financing on their own without external investments. 

Bootstrapping has several benefits, such as no monthly payments and no high-interest rates. However, it’s great for those who don’t need a lot of initial investment. There are a few companies that bootstrapped for a while and then took investments like AirBnB and MailChimp.

Small business loans 

A large number of lenders offer loans for small businesses. The following loans can help your business grow, fund development or further research, expand your services or products, hire new people, etc. 

There are different types of business loans based on your needs like equipment loans, SBA loans with low-interest rates, term loans, working capital loans, etc. Like any other banking product, small business loans also have monthly payments and interest rates. 

Crowdfunding

Crowdfunding is one of the modern ways to raise funding via popular crowdfunding websites or social media. It can help companies not only gather funds but also promote its product. Anyone can pledge to your project. 

There are tons of companies that aim for raising funds via crowdfunding, so you’ll need to generate lots of buzz to stand out from the crowd. Also, crowdfunding sites can take a cut from your funds or require a fee. Big brands can also start from crowdfunding. For example, Oculus Rift, a VR system, started crowdfunding in 2012 and raised $2.4+ million on Kickstarter

Grants for small business

There are particular organizations like The Small Business Administration or government agencies that offer grants to small business owners. It’s easier to get a small business grant if your business is run by women, veterans, or minorities.

Before accepting the grant check out the conditions. Some grants don’t require paying back all the funds and have no stipulations. It’s better to know everything before accepting the grant. 

Investors 

Investors are good options for startup funding since they provide more favorable and flexible funding terms. Moreover, they can offer mentoring as well as valuable contacts and help your startup take off. 

There are more options beyond these traditional funding methods, and they may be right for you. At ODG, we believe that investors are one of the best options for funding a tech startup for a number of reasons, including free business advice and consulting, splitting up financial risks, more outside motivation, networking, and PR (when listed on the sites of investment funds like Y Combinator).

Key Types of Investors

Before jumping to investor categorization, it’s better to understand what an investor means. An investor is a business/ financial entity or an individual that allocates capital with the expectation of getting a financial return (profit) in the future. There are also investors who put their money into a business in exchange for a minority stake (10%-25%). The main goal of any investor is to maximize return and minimize risks. 

There are a few classifications of investors based on their type, funding rounds, the sum of investment, investment goals, and involvement levels. Let’s focus on each classification. 

FFF (family, friends, and fools)

If traditional investors aren’t yet an option, a family and friends loan can help you at the early stages. The following loans may come out with no or little interest.

Angel investors 

Angel investors are individuals with a net worth of more than $1 million. In most cases, angel investors invest in an early startup in exchange for shares.  While the money helps, angel investors can also offer mentoring support, and access to valuable contacts. 

Investment funds

Investment funds are large financial vehicles looking for promising startups and companies. 

Corporate investors 

In most cases, corporate investors fund startups or companies that can help enhance their businesses in the future and build a strategic partnership. 

Startup accelerators 

Startup accelerators support early-stage startup and growth-driven companies through financing, mentorship, and education. They can accelerate the development of startups and compress years of learning and development into a few months. 

Venture capital 

As a rule, venture capitalists invest in high-growth companies since the risks are minimized. The following investors are interested in seats on the boards of directors or an ownership stake,  and a return on their investment, of course. 

Funding rounds

Understanding startup funding rounds will give you an advantage over competitors that simply look for any investment passing by. Startup funding rounds are divided into the following stages:

  • Pre-seed 
  • Seed
  • Series A
  • Series B/ C/ D

Investment amount

Depending on how much you're going to raise, your friends and family are on the table, as well as angel investors or venture capitalists. The investment amount can vary from thousands of dollars to billions. Let's have a closer look at the funding sum.

> $50 000

In most cases, these are your friends and family who can support your startup at its initial stage. But it can also be individual investors (angel investors). 

> $100 000

It’s usually individual investors (angel investors) who invest in startups and expect to get a return on their investment. Angel investors can invest in a business idea or in an early-stage startup.

$100 000 - $1 million

Seed investment funds are ready to spend $1 million+, but they won’t invest in a startup if there is no team, business plan, or MVP. Before making a decision, seed funds analyze your business plan as well as the market.  

$500 000 - $5 million

When it comes to $5-million investments, venture capital funds enter the game. Venture capital funds make late-stage investments to support companies that moved from a start-up phase and rapidly growing sales. 

$10 million - 50 million

Direct investment funds can invest up to $50 million in exchange for the company’s shares. In most cases, the following funds get a control block of shares. 

$1 million - $1 billion 

When it comes to large investments, these are companies or individual investors that are interested in a strategic partnership. 

Investment goals

Understanding the different goals of investors will equip you with the information on how you can engage them to invest in your startup. You should have a clear pathway to what each of you will get out of the exchange.

  • Receive dividends 
  • Capitalize on the company’s growth 
  • Get shares 
  • Build a strategic partnership 
  • Support rising startup  

Involvement levels

Now let’s delve deeper into different levels of investors involvement.

Funds only 

The following type of investors are interested in investments in exchange for future profits. 

Funds and development help 

The following investment plan is also called SmartMoney. In most cases investors or investment funds know all the ins and outs of the industry and can share the knowledge as well as contacts with you.

Strategic partnership 

A strategic partnership is a win-win for both your startup and your investor.  An investor can benefit from your services or expertise to enhance their businesses. And you’ll be able to further develop your product. 

Some investors can offer more than just money for your commercial success. They can also help you with other business issues. Hence, we can also divide investors into three categories depending on what they can offer:

  • Funds only 
  • Funds and networking
  • SmartMoney (funds, networking, and business expertise) 

How Does Funding Work?

Let’s imagine that a startup is a pie. And every time you get investments you give up a piece of your pie (equity). Everyone you give it becomes a co-owner of your company. When you just started your company, it’s a small, one-bite pie. With outside investments and your company growth, the pie becomes bigger and bigger. Your slice of that increased pie will be larger than your one-bite pie. 

Did you know that Google founders had only 16% of the pie when Google went public? But that 16% was a slice of a really big pie. And if there were no investments, would Google have reached the same heights? 

Investments give an entrepreneur a chance to start and turn an app idea into reality, allowing your business to grow as well as its profitability. With each funding stage, your business becomes bigger. 

Eight Startup Funding Stages

Here are the key phases a tech startup goes through in order to raise necessary funds and grow its business. 

Pre-seed funding stage 

It’s the very beginning of a startup. In a vast majority of scenarios, most of the business funding comes from family, friends, and own savings. While preparing your business for the pre-seed funding stage, you need to answer the following questions:

  • Is your idea unique?
  • Are there any counterparts on the market? 
  • How much does it cost to launch your startup?
  • What business model are you going to use?
  • How are you going to start?

Example: Bob has an idea for a 3D modeling app. He studies the market, finds similar products, tests the viability of his idea, estimates the budget, and decides on a suitable business model. 

Seed funding stage 

When it comes to the seed funding stage, your business is growing and has a solid user base. At this stage, investors invest in your business in exchange for company equity. The funds raised at the seed funding stage can be used to cover:

  • The launch of your product 
  • Marketing 
  • New hires 
  • Product fixes and development 

Example: Bob uses the funds raised to enhance his product, expand demographics, solidify its market positions, and hire more employees as the product grows and requires more hands.  

Series A funding 

The series A funding means the beginning of venture capitalist investments. As a rule, venture capitalists invest in startups in exchange for shares. At this stage, you can use the raised funds to:

  • Optimize your business workflows
  • Set off financial losses 
  • Develop your product 
  • Create a detailed plan for further growth 

Example: Bob proved that his 3D Modeling App is great. Now he wants to show investors that he has a scalable blueprint for further growth. He wants to enter a new market and make it a professional tool. The more he shows the ability to grow and generate income, the more funds he’ll raise. 

Series B funding 

Startups have solid user bases and steady revenue streams. At this stage, you’ve proven that your business model works and you can further scale your idea. Investments can help you to:

  • Increase your market presence 
  • Fortify your marketing strategy
  • Expand your product or services

Example: Bob’s app is growing at a blistering pace. He has got lots of active users and several steady revenue streams. Bob uses the series B investments to hire an in-house PR team and more employees as the product grows. 

Series C funding 

The series C funding is about the companies that are going to expand worldwide. It’s much easier to find investors at this stage since they can trust more in its further success. Funds can be used to:

  • Acquire startups in the same niche 
  • Enter new markets 
  • Build new supporting products or services 

Example: Bob gets the series C funds and starts the development of supporting apps and his 3D Modeling App becomes a professional tool for designers used worldwide. 

Series D+ funding 

There is no set limit to how many funding rounds there should be. A startup may complete as many series as needed.

Example: Bob planned to go public with his company in March. But his competitor decided to come up for sale in January. He decides to take another round of funding and purchase the competitors instead of going public.

Bridge loans & mezzanine funding 

As a rule, it’s an intermediary phase between the last fundraising round and the IPO. These loans are suitable for mature businesses evaluated at $100+ million. A mezzanine loan is a mix of debt and equity while bridge loans are short-time loans that can last up to 12 months and get paid back right after the IPO.

Example: Bob needs extra funds to add more powerful features to his app and increase his market share by buying a competitor before the IPO. 

IPO 

Going public is a dream for most startups. An IPO means offering shares for public purchase. It’s used to generate funds for further growth. Some of the startup owners use an IPO to cash out their remaining shares for personal income. 

Example: Bob is ready to sell his shares and the IPO is his cash-out day. 

Summing up 

Understanding the ins and outs of raising the capital can help you better understand the investors and evaluate your entrepreneurial prospects. Starting a business is easier than getting it to the IPO round. Building a tech company without investments is a bumpy road, especially when your resources are quite limited. A wide majority of large companies took advantage of investments to grow their business and enter multiple markets, including Google, AirBnB, Facebook, etc. 

ODG may become your technology partner and breathe tech into your app ideas. We can cover a full development cycle from analysis to app maintenance. Thanks to years of experience with startups, we know how to get ready for the fundraising rounds. Our specialists can take all the technology issues off your hands and assist you while negotiating with investors as your technology partner.

Do you have an app idea? Contact us to discuss how to bring it to life. 

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