Startup Funding: The Founder’s Roadmap

This article was originally published on indinero.com.

Finding startup funding takes a lot of work. You have an incredibly promising idea and the ambition to pursue it, but finding the capital to test and grow your business won’t be easy.

In this article, we’ll outline different types of startup funding and guide you on how to successfully find and pitch investors. 

After working with thousands of startups and SMBs, indinero is uniquely positioned to help founders earn funding. Download our fundraising guide for in-depth coverage of topics covered in this article. 

When it’s time, indinero also provides hands-on fundraising support for startups.  

What Is Startup Captial?

Among finance professionals, startup capital refers to equity financing provided by venture capitalists for an exceptionally specific type of business. 

However, small business owners may use the term to refer to debt and equity financing for a wide range of companies.

Venture Capital (VC) Funded Companies vs. Small Businesses

Venture capital funds invest exclusively in high-risk businesses with hyper-scalability potential.  A typical VC portfolio might include one hundred companies, most of which they expect to fail, hoping that one or two might be something like Airbnb or Uber—success stories that will produce returns capable of paying for their entire book of business. 

In contrast, small businesses operate to compete in local or regional markets rather than on the worldwide scale of Amazon or Facebook. 

Few companies will ever receive VC backing: in 2023, there were ~38,000 such deals distributed across the 33 million businesses operating in the US. 

Debt financing is available to all business types, while only some of the equity financing options we cover below apply to small businesses.

How to Fund a Startup

This is one of the most difficult challenges a business owner or founder will face. 

Not only is it professionally taxing, but since founders can be emotionally attached to their ideas, it’s easy to take rejection personally. As you move through the following stages, try to see rejection as an opportunity to improve rather than a reason to give up.

Step Zero: Bootstrapping

It might seem paradoxical to focus on bootstrapping in an article about getting funding for a startup, but laying the groundwork is an important step.

Remember that no matter what stage your business is in, investors are looking to answer many of the same questions:

• How risky is this investment?
• When will I earn my money back?
• Why is your idea better than the competition?
• Why should we invest in you as a founder?

Entrepreneurs are generalists and visionaries. Since they can’t have all the specialized expertise necessary to run their businesses, success and failure often hinge on their ability to recruit, lead, and accomplish goals with others. If you spend your own capital to create a small website or app, you’ll demonstrate the resourcefulness investors are looking for in your character. 

A founder with revenue will always appear less risky than someone with an untested idea. In the early days, you don’t need much—just a few sales can demonstrate proof of concept.

Market research, including well-constructed financial projections and margin estimates, demonstrates profit potential and that you’ve thought deeply about the business before pitching.

The more progress you make while you bootstrap, the better your odds of success.

Make Contact With Potential Investors

A warm introduction is the best way to start a relationship with investors. 

You may be tempted to start with a cold email, but the truth is you’ll spend considerable time and effort to be ignored by prospects. 

Instead, focus on networking events where you can connect with other founders, loan officers, and industry experts who can offer valuable connections.

Where to Network

Silicon Valley isn’t the only place with a startup ecosystem. Every major city is home to organizations dedicated to supporting entrepreneurship. Many of these organizations may not have much of a web presence, so networking is important; begin with one or two events and then work through the person-to-person grapevine afterward. 

Here are some places you can look to find networking opportunities in your area: 

• Business accelerators and incubators
• Chambers of commerce
• Local economic development organizations 
• Pitch competitions 
• Networking groups
• Co-working spaces
• University entrepreneurship centers
• Professional associations related to your industry

How to Network

Keep in mind that you’re not necessarily looking to meet investors directly. You’re looking to meet people who can provide valuable introductions.

For instance, a Chase loan officer from a Chamber of Commerce event could introduce you to a startup founder who introduces you to one of their Angel investors.  

Make your asks directly, and when people agree, provide them with your elevator pitch or even a brief PowerPoint deck describing your idea. This saves your connection time and provides potential investors with plenty of information before meeting face-to-face.   

Pitching Investors

Now that you’ve networked and practiced your elevator pitch many times, you’re finally being introduced to investors. 

Keep your emails brief with the goal of an in-person or Zoom meeting, saving the details for then.

A good pitch deck will include the following:

• Who you are
• The problem you solve
• Evidence that there’s a market
• How you’re different from the competition
• Your accomplishments and milestones
• Who else has already invested
• Specifics on how much funding you’re seeking and how you will spend it

It’s important to describe the problem succinctly, including the pain points you expect, but don’t get caught up describing the features of your product. Investors are more interested in benefits and long-term outcomes. 

Finally, don’t worry too much about non-disclosure agreements. Established investors might hear hundreds of pitches in a year. Demanding an NDA could be a barrier to securing a face-to-face meeting. 

Keep In Touch

Investment sales cycles can take many months, so following up diligently with people you’ve pitched is important. 

If you’re wondering what to say in follow-up messages, try your own variations of the following:

1. Start with a simple email and thank you message. “It was great meeting with you! I’m looking forward to your feedback. If you have any questions, here’s a link to my Calendly.”
2. If you haven’t heard back in a week, add something new. Maybe it’s news related to your industry or an update on your fundraising: “We just brought on a new investor! We’re nearing our fundraising goal and would be delighted to have you join them. If you have questions, you can reach me at…”
3. After another week or two, the lead is cold. Send one more email, letting them know you are still interested and guiding them on how to reach you. Then, you may want to put this lead on ice for a few weeks and check in again later to see if they are more available. 

What if They Say No?

Rejections are part of the pitching process, so don’t let a no throw you off course. “Failed” pitches can still be valuable opportunities to ask for feedback or even lead to introductions to investors who are a better fit for your business.

What if They Say Yes?

Celebrate! Then, prepare for a negotiation, sign legal documents, and finally put your hard-earned funds to work.

Startup Funding Types: Debt vs Equity Financing

Once you’ve decided to take your business idea beyond the bootstrapping phase, you can pursue two types of funding: debt or equity. 

Equity Funding

Equity funding means raising business capital by selling ownership shares (equity) to investors in exchange for funding. Investors become partial company owners and share in profits and losses.

Pros:

• No obligation to repay funds
• Access to expertise and network of investors
• Incentive alignment between investor and business owner

Cons:

• Dilution of ownership and control
• Complex negotiation and legal processes
• High expectations from investors

Debt Financing

Debt financing is a method of raising capital for a business by borrowing from lenders or creditors, which must be repaid with interest over a specified period of time.

Pros:

• No dilution of ownership
• Predictable repayment schedule
• Tax-deductible interest payments

Cons:

• Interest payments increase the overall cost of capital
• Requires a good credit score and collateral
• Risk of default, potential loss of assets, and personal liability

Crowdfunding

Crowdfunding is a less common option for funding a startup. 

The process is unique compared to traditional debt vs equity avenues, but since backers are often rewarded with exclusive products and access to the founders rather than interest payments or formal stakes in the company, it’s a worthwhile option to pursue.

This method isn’t easy to implement. For guidance, read our in-depth Guide to Crowdfunding.

Startup Funding: Sources and Amounts

Startup capital is precious, and equity funding is especially attractive to founders; it allows them to pursue opportunities without risking their own money. 

Depending on your stage of business, there are seven sources of capital you might consider.

Remember that smaller businesses are less likely to be considered as funding levels increase. Series A funding (and beyond) is nearly exclusively for hyper-scalable companies. 

Friends and Family

Sometimes, bootstrapping everything isn’t feasible. You might need quick capital for inventory, a professional website, or software solutions. In the early days, it’s common for founders to reach out to their networks and ask for small investments and loans. 

These deals are incredibly flexible. It’s best to arrange terms in writing beforehand, but friends are more forgiving than banks when you can’t pay them back promptly. Be careful, though. It’s easy to burn bridges if the business doesn’t work out.

Angel Investment

An “angel” investor is an individual who provides startup funding in exchange for equity or debt. They’re typically experienced entrepreneurs themselves and, in addition to money, provide access to their network to provide all manner of support. 

This round doesn’t have many financial reporting requirements, but angels will expect you to have revenue and a solid business plan.

Seed Funding Round

A seed round is the first substantial round of funding a startup might pursue. The funds can come from a cohort of angels or a firm that specializes in companies of your size and niche.

Seed investors want companies to grow as quickly as possible and spend only on the necessities, such as developing a minimum viable product (MVP), market research, and building a core team.

Series Seed Round

A series seed is a “bridge” round of financing larger than a seed round but not quite on par with a “Series A.” 

Series A Round

The Series A is the first round of institutional funding a startup might pursue. The term “Series A” indicates that it’s the first round of preferred stock offered to outside investors and is followed alphabetically by a “Series B,” “Series C,” and so on.

By now, founders are pitching name-brand VCs in their industry, and those investors will expect to see Generally Accepted Accounting Principales (GAAP) compliance at their board meetings.

Related: How GAAP Accounting Helps Businesses With Series A Funding.

Series B+ Funding Round

After Series A, rounds continue until a company succeeds and goes public or fails to achieve profitability. The amount of financing increases from round to round.

Debt Financing

Startups can also access funds beyond what they receive from investors with traditional bank loans, lines of credit, Small Business Administration (SBA) loans, credit cards, peer-to-peer lending, and crowdfunding.

For more information, read our guide to SBA loans. Much of what the Small Business Administration will expect from your application also applies to other lenders.

Does My Startup Need Professional Financial Consulting? 

When you’re bootstrapping or asking friends and family for help, you may be fine without any help. A bookkeeping software subscription to help you track business expenses could be plenty.

As you progress through funding rounds, investors will expect quality financial reporting and, eventually, full GAAP compliance. 

We understand that resources are limited, and startups sometimes need affordable, hands-on help. Ask about our fractional CFO offering, which includes direct fundraising support services. 

Conclusion

Earning startup funding demands a lot from founders. Engaging with potential investors requires understanding the startup landscape, perseverance, and effective networking. Indinero is here to help. 

We wrote an e-book featuring advice from successful entrepreneurs and notable VCs to help you with startup funding. Additionally, we understand that resources are limited but that some startups need affordable hands-on help. Ask about our fractional CFO services, offering expert insights without the full-time price tag.