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How Startup Funding Works?
Startups are an excellent way for businesses owners and companies to leverage their skills and ideas and transform them into a profitable product. However, having an idea alone is usually not enough and it is likely that your startup will fail. Startup funding is one of the primary reasons why many startups fail to succeed. Having insufficient funds is a guaranteed way to get your business into the ground.
To ensure that your startup stays alive until it can cover its expenses via its revenue, you need ensure proper funding. There are a number of different ways to fund a startup. This guide focuses on seed funding and equity crowdfunding, e.g. Reg CF, Reg A, Reg D.
Equity crowdfunding is a relatively new concept where companies sign up on crowdfunding platforms like Wefunder, Republic, StartEngine, etc. and sell equity in their company to retail investors in order to raise funds. It’s amazing because companies that might not be able to get funding from venture capital can get it from retail investors, and those investors get the opportunity to invest in startups. For a very long time, equity crowdfunding was only an option for elites but now after new crowdfunding rules it is available to virtually everyone.
Types of Equity Raises
At the moment, there are three primary types of equity raises:
Reg CF is generally for smaller companies. It allows them to raise a maximum of $5M annually in their equity crowdfunding raises. Companies that are somewhere below a valuation of 30m or those that are in their first raise are generally in the Reg CF category. If you are an investor, then the only thing you need to know about these is that you will have to hold them for over a year. This is the law, not a choice. After a year, you have the option to do whatever you wish with these shares.
These are generally more established companies that want to raise a lot of money. They can raise up to $75M on their site annually, and these are used to fund multiple campaigns after the first or second raise. These can be sold instantly after purchase. That’s why all of the StartEngine Secondary companies are from this category. Once their campaigns conclude, they are instantly able to sell them.
Reg D crowdfunding allows companies to use an online platform to sell equity in their ventures to accreted investors. Accredited investors are the ones who have at least $1M net worth or have made at least $200,000 each of the past three years. With Reg D, you can raise the capital without any limits. Before the JOBS Act of 2012, Reg D was the only type of equity crowdfunding available and only accredited investors could access it. This is not the case anymore.
Startup Funding Rounds
There are many different rounds or stages of startup funding that you can take, depending on the goals and growth stage of your company. These include the following:
This is the earliest funding round when the company is still at its initial stage of growth, commonly referred to as “seed”. Once you have your idea and business model, it’s generally the right time to raise seed capital. Seed funding is generally used for market research, hiring staff, product development, and other key business operations to get the product of the company ready to launch. Seed funding may come from crowdfunding campaigns, angel investors, or personal/professional networks of the business owner. Seed funding round may range from $10,000 to $2M.
Most companies don’t need any extra startup funding after the seed round because they usually raise enough capital to get their company up to scale and reach their goals. Series A is the first round of venture capital funding. With this round, the amount of money invested as well as the company’s goals start to get bigger. Series A funding is generally used for refining business model and further product development for profitability and growth.
This round of funding is about helping a successful company grow by expanding its reach – expanding to reach growing demand, new talent acquisition, new markets, new product development, etc. The average Series B stage is $32M of capital.
This is the biggest round of venture capital funding and it is suitable for the companies that are the most successful. The goals of Series C funding are to help prepare the company for an Initial Public Offering (IPO), acquire other companies, or expand into new markets.
How to Find Investors for Your Startup
Getting investors for your company is similar to finding customers for your business. While customers want to know what your product can do for them, investors are interested in learning how much potential your company has and how much money it can make for them.
As mentioned before, you can sign up on popular crowdfunding platforms, e.g. StartEngine, Wefunder, etc. to get started. If your idea is compelling, catchy, and clear, it might go viral on social media. Be sure to give your investors something in exchange for their money, e.g. a free membership to your platform or service or a free sample of the product.
Keep in mind that crowdfunding is generally a more casual, informal relationship than a typical venture capital firm or angel investor. People who contribute to your startup funding don’t expect to receive an equity stake in your company. But even though its online-driven and casual, crowdfunding can still be a great way to test the waters for your business idea.
The ultimate goal of startup funding is to help investors and entrepreneurs make money. If you believe in your business idea and have a strategy in place, then signing up on a startup crowdfunding platform is a good idea as capital raised via this method will help you grow your business faster than you ever could have done by bootstrapping alone.
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