You already know your startup needs funding in order to succeed. No matter how strong your vision is, without sufficient capital, you won’t be able to bring your idea to life.
What you might not know is which types of startup funding are ideal for your goals and circumstances. This guide will clarify the topic.
The following are five common types of startup funding. As you strategize, consider which you should pursue.
1. Series Funding
Series funding doesn’t refer to the source of capital. It instead refers to the stages at which you secure capital. It’s typically broken down into rounds: Series A, Series B, Series C, Series D, and Series E. Angel investors and venture capital firms (discussed later in this article) usually provide the capital at each stage, although this is not always the case.
Series A represents the initial investment (after seed funding) necessary to turn an idea into a product. Startups pursue Series B funding when the product is ready or has been released, and expansion is now necessary. By the time a startup is ready for Series C funding, it might be expanding to new markets, or developing new products. Although this is often the last stage for many startups, there are instances when Series D and E funding may be necessary. This may happen when a startup that still has the potential for success hasn’t performed according to initial expectations. Series D and E funding allows the company to stay afloat long enough to become profitable.
2. Angel Investments
Angel investors are high net worth individuals who invest in startups they believe will thrive. In exchange for their investments, they usually receive some amount of equity in the company.
Startup founders who receive funding through this method often personally know the angel investors from whom they seek funding. However, if you don’t know any individuals with enough money to provide a sufficient investment, you can attend networking events to meet them.
3. Venture Capital
VCs operate in much the same way as angel investors. They offer funding in exchange for equity. On the one hand, securing funding from VCs can be more difficult than securing funding from angel investors, as VC firms consist of several major decision-makers. They all need to agree your startup is a sound investment.
On the other hand, VCs typically have access to much more capital than individual angel investors. It’s also not uncommon for VCs to provide guidance and mentoring to the startups in whom they invest. After all, your success is key to theirs as well.
There are numerous types of loans you can pursue when funding your startup. These may include Small Business Administration (SBA) loans, credit cards, and short term loans.
It’s important to understand the risk you may be taking on if you accept such a loan. You need to be confident you will be able to pay it off according to the established timeline to avoid major debt. However, if you need capital to get your business idea off the ground, such loans are often very helpful.
5. Support from Friends and Family
It’s possible that your friends and family members may be happy to provide you with some funding in exchange for equity or a lump sum payout in the future. Of course, you don’t want to strain your relationship by accepting a loan from a family member, only for your startup to fail. As always, you need to consider the risks.
Keep in mind that you don’t have to rely on one source of funding when growing a startup. Odds are good you’ll in fact need to use several methods. These are simply five of the most popular options to consider.