MARKETING

Best Fundraising Options for Early Stage Startups

As we look around, we find ourselves in the midst of an ever-growing startup ecosystem. Today, the startup culture is more competitive than ever, filled with stories of success and failure. Putting budding entrepreneurs in a bind and requiring more skill, proficiency, and competency. As upcoming businesses surge, the venture capital industry is also flourishing. There are more VCs, larger funds, and bigger deals. Growing a business at its early stages is crucial. The importance of establishing a solid financial foundation cannot be overstated. Your startup's initial stages are also the riskiest and toughest because they could potentially make or break your business. The initial funding process could be difficult without a proven track record to entice investors. However, early-stage startups can still secure funding through multiple means with the right plan and skillful execution.

An overview of early-stage startup fundraising options is provided in this article. Different startups may have different best options depending on factors such as timelines, target funds, size of business, etc.

Bootstrapping

Bootstrapping is one of the most popular methods for raising funding for small-scale startups and for good reason. The founder uses and purchases resources at his or her own expense, without attracting any external funding during the initial stage. It is one of the most inexpensive methods an entrepreneur can use when raising capital. Bootstrapping has helped a number of businesses reach great heights. Despite its complexity, bootstrapping involves learning to utilize and manage current funds. Historically, bootstrapping has been a popular choice among new entrepreneurs, but has also become increasingly popular among established companies. However, bootstrapping has its own pros and cons, just as it does with every funding source. The following is a quick summary of some of the advantages and disadvantages of this method:

Pros:

  • Compared to other methods such as loans and other borrowed funds, it poses a lower risk. A founder will not be obligated to pay off debts to any outside entity if the business fails.
  • All rights belong to the Bootstrapper, including ideas, products, and development. A successful project will therefore generate high capital and ultimately attract investors.
  • Complete independence from outside opinions (such as investors).
  • Getting external funding can be challenging, time-consuming, and exhaustive.

Cons:

  • Poor financial planning can lead to businesses failing miserably.
  • All downfalls are the founder's responsibility. There are no investors to support the venture.
  • Limited capital can result in unfinished or low-quality projects.
  • The process of bootstrapping can be unpredictable and stressful.


Friends and Family

One of the traditional ways to raise financing is to enlist the help of friends and family. Although banks and investors may be reluctant to take a chance on you and your idea, it's almost always safer to lean on the people you trust. If you are close to them, they may even give you an interest-free loan. Funding from friends and family is a great idea for early-stage startups. From $10,000 to $150,000, the initial round of funding can help you through the initial setup stages quickly. The chances of obtaining large amounts are much greater too, regardless of the solidity or vagueness of your idea. Who better to launch your entrepreneurial journey than those you love and trust?

Angel Investors

If you have exhausted all other options and are still unable to secure funding for your venture, angel investment might be the way to go. An angel investor is a high net-worth individual or company who will provide you with capital to start your business, but not for free. Angel investors invest their money in return for equity shares or convertible debt. Finding an angel investor may be your best option if you are in the early stages. Unlike banks that invest in well-established, profitable businesses, angel investors are willing to take risks and invest in startups whose ideas they support. Besides being a source of capital, angel investors can also add value to your team in terms of mentorship, guidance, connections, and experience.

Accelerators and Incubators

At a high level, accelerators and incubators can help startups succeed. There is a common misconception among new entrepreneurs that accelerators and incubators can be used interchangeably, which is incorrect. This is also understandable since both programs aim to groom and guide new startups. Despite this, they also have key differences. Incubators guide upcoming startups toward the marketplace, whereas accelerators assist with the growth of existing companies with preexisting foundations.

Convertible Notes

Convertible notes have become increasingly popular among upcoming startup founders in the past decade, especially during the seeding stage. The simple definition of convertible notes is that they are loans investors expect to be repaid over time instead of acquiring shares up front. Convertible notes can also be viewed as a hybrid of debt and equity. While it is a popular choice, it is important to assess the risks and pitfalls to determine if this is the right decision for the business. The following is an overview of the pros and cons of using convertible notes for financing.

Pros:

  • Simpler to document from a legal aspect
  • Allows early stage startups to delay determining a valuation
  • Ideally used between larger funding rounds

Cons:

  • Future implications could be disastrous for some
  • Not well accepted by all VCs
  • Lack of control

Crowdfunding

During the late 2000s, crowdfunding became a popular option among new entrepreneurs looking to launch an innovative project. The practice involves recruiting friends, family, and individual investors to help raise large sums of money in a collaborative effort. With crowdfunding platforms, founders have a single platform to showcase their pitch ideas/resources, streamlining traditional methods. Several crowdfunding platforms help entrepreneurs leverage industry networks for greater exposure through their networks.

Grants and competitions

Startup pitch competitions are an unconventional and exciting way for entrepreneurs to acquire initial funding. Most entrepreneurs' bucket lists include this - it's both risky and thrilling at the same time. For some, it may be the only option to kick-start their business. In such competitions, you'll be able to pitch your ideas to investors from all over, receive valuable feedback, and most importantly, gain exposure within your industry.