Types of Funding for Startups

Navigating the world of startup funding can be both exciting and overwhelming. With a multitude of funding options - each accompanied by unique opportunities and challenges. You might wonder, “What are the types of funding options for startups? In general, but especially for SAAS businesses.” 

This article will unveil the various funding options, their advantages and disadvantages, and how to match them with your startup’s stage of growth - Early Stage (inc. Idea/MVP Stage), Growth Stage or Late Stage. Let’s dive in! 

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• Understanding funding options: To explore startup funding options, researching the advantages and disadvantages of each source will help to determine which best meets your business’s needs and also assess which options may be available to your business?
• Finding the right funding type: Matching the appropriate funding type with your startup’s stage is essential for its success. Options range from bootstrapping to angel investment in iade to early stages, venture capital and debt financing in growth stages, and non-dilutive or debt financing in late stages.
• Finding and engaging with investor and fund networks: Finding and engaging with investor networks through understanding the market, researching your target investor, warm introductions, compelling pitches, and presentations can increase your chances of success when seeking funds for your startup.    

Content

• Intro
• Why Should People and Investors Give You Money? 
• Exploring Startup Funding Options
  
  • Bootstrapping, Friends & Family
  • Incubator and Accelerator Programs
  • Private Investors and Funds
  • What is pre-seed and seed funding?
  • Angel Investors
    
    • Characteristics of Angel Investors
    • Engaging with Angel Investor Networks
  • Venture Capital (VC)
    
    • The Role of Venture Capitalists
    • Navigating the VC Landscape 
  • Corporate Investors
  • Other Private or Public Funds
  • Crowdfunding
    
    • Rewards- Based Crowdfunding
    • Equity Crowdfunding
  • Other Options for SAAS Businesses (e.g. AppSumo)
  • Debt Financing and Loans
    
    • Revenue- Based Financing
    • Small Business Loans
    • Venture Debt
• Matching Funding Types with Startup Stages
• Early Stage Funding
• Growth Stage Funding
• Late Stage Funding
• One Big Tip to Pursue Investors and Funds
• Frequently Asked Questions

When it comes to funding for startups in the US, there are many options available and that is one of the reasons why we recommend founders to incorporate their companies in the U.S. - you can read about it our article “Why should a SAAS/PAAS business start a company in the U.S. (or Not)?”. 

Each type of funding comes with its own pros and cons, and it's important for entrepreneurs to understand these options to choose the best fit for their business and should carefully evaluate their business needs before deciding on the best funding route to pursue. 

Please don’t let the title mislead you, this is not about your pitch deck or business. It is more about the motivations of different types of people, investors, institutions to invest in or give their money to you. Understanding these motivations will help you choose the right type of funding option for your business.

Below is a summary of motivations as to why people may give you money, we did not further explain these as they are quite self explanatory. 

• Get a return on investment (ROI)  - higher than traditional investment options

• On-going dividend
•  Exit and cash out
• Create spin-offs (separate different businesses and sell them independently) or divest some parts of the business for immediate cash.
• Financial institutions make money from interest income.

• Complement their other investments and potentially improve their overall ROI (again)

• Consolidate customer and vendor bases, overheads, etc.
• Merge with other companies to create a bigger value (2+2=5)
• Leverage IP / Technology
• Leverage people, teams, built-in experience, and available processes
• There may be a few other hidden reasons as to why they may want to invest in you.

• Giving back to community and society

• Public funds and economic plans of governments and local authorities
• Private initiatives, usually supporting certain groups or trying to give back to society.

• Like the founders and the idea! Yes, it really does exist, read through…

… and there may be a few other potential reasons.

Venture Capital (VC), Private Equity (PE) and even an angel investor are likely to give you money to get a good return on their investment (ROI). They would not care about ongoing dividend income or benefits to the environment or society (unless it is a great marketing point to sell more) - they just want an exit with a great multiplier. They will not invest in you because they like you as the founders, but they will like you if and because you will make big money for them.

Where as a public initiative, governmental or local authorities (e.g. Ministry of Energy) or private interest groups (e.g. Society for Female Leaders), will not give you money because your business is highly profitable and will make them millions in return, unless your business meets their objectives such as reducing carbon foot print or empowering women leaders (for which many VC’s and PE’s couldn’t care less).

There are people who will give you money because they like you or your idea - and maybe have a little ROI potential. We will cover this later in crowdfunding options.

We have listed different startup funding options in an order based on the stage of the startup. You will find this startup funding option listed as very comprehensive.

For MVP/idea stage or early stage startups, these may be the first go-to option. Having resources and funding from these resources also gives confidence to later stage investors where they perceive the founders and people close to them believe in the idea or product.

• Bootstrapping

What is bootstrapping? Bootstrapping is the process of self-funding your startup using only your own money and the resources available to you, allowing you to maintain control and avoid debt. This funding option is ideal for idea and early-stage startups that don't require large sums of capital to get their business off the ground. 

A shortcoming of bootstrapping is that it could limit your startup’s growth potential, especially if you need equity funding from external sources. After you’ve bootstrapped your startup and moved to the growth stage, other funding sources such as bank loans, venture capital financing, or private equity may become better options to raise money.

Advantages: You keep control of the business (ownership and direction / decisions), no debt, can keep the business in the family, feel a great self accomplishment and also a mandatory motivation to succeed (your time, your money, not somebody else). 

Disadvantages: May risk survival and limit growth, limited or no external / high level help and the need for great self discipline to stay on track as there is no one around you to guide or monitor you.

• Friends and Family

Friends and family funding is another MVP/idea or early-stage financing option that involves soliciting loans or investments from your personal connections. While this funding source can provide crucial early-stage capital, it requires professional communication and clear agreements to avoid personal conflicts.

Some of the potential drawbacks of this funding option include navigating the balance between personal relationships and business affairs and limitations on growth potential—as your options for 'investors' are limited to individuals you know.

• Equity: They invest in your business
• Loans: They may lend you money with flexible terms

Advantages and disadvantages: They are similar to bootstrapping and add to this the fine balance between personal and business relationships.

Incubators and accelerators provide valuable support, mentorship, and seed funding opportunities for early-stage startups, helping them grow and succeed in today’s competitive business landscape. 

• Incubator Programs 

Incubator programs offer low-cost office space and collaboration opportunities for MVP/idea and early-stage startups, providing a supportive environment for entrepreneurs to develop their ideas and grow their businesses. 

While these programs do not typically provide direct funding, they can help startups save on operational costs and foster valuable connections with other innovators in their industry.

By leveraging the resources and support provided by incubator programs, startups can focus on refining their business ideas and laying the groundwork for future growth.  

This option also benefits startups by helping them curate a community feeling for their team, save on office expenses, and gain a stamp of approval from a potentially well-reputed incubator program.

• Accelerator Programs 

Accelerator programs provide mentorship, seed investment, and networking opportunities for startups, helping them prepare for further funding rounds and scale their businesses rapidly. 

These programs typically last a few months and conclude with a 'demo day'—where startups present their progress to potential investors and partners.

If you're looking for access to capital, one-on-one mentorship, a global network and a customized program for early stage entrepreneurs, consider exploring these top programs: Techstars, Y Combinator and 500 Startups.

There are many other accelerator programs worldwide and depending on your location, line of business and access, you may explore your options.

By participating in accelerator programs, startups can gain access to expert guidance, and have the opportunity to present to their next big investor. 

We will talk about seed and pre-seed funding, angel investors, Venture Capital (VC), corporate investors and public/private funds provided for certain initiatives and purposes.

Private investors and funds are mostly commercial establishments and they solely focus on return on their investment (ROI). This means that you must be planning an exit (selling your company or going public with an IPO). If you are thinking of a family business or a business with no plans to exit but just to give dividends, these may not be your best options. 

What is pre-seed and seed funding?

Before diving into private investors and funds, let’s first talk about seed funding and talk about what pre-seed and seed funding is. Seed stage and pre-seed funding are early stages of investment that startups go through to raise capital for their business ventures. Here's a breakdown of each;

Pre-seed funding is the earliest stage of investment and is used to validate the idea, conduct initial market research, and develop a proof of concept or prototype. It helps the founders take their idea from a concept to a business. 

Typically, pre-seed funding comes from the founders' personal savings, friends & family, or angel investors who believe in the idea's potential.

Seed funding comes after pre-seed funding and represents the next stage of a startup's growth. At this point, the business has a functional prototype, a minimum viable product (MVP), or some early traction in the market.

Seed funding is used to scale the business, develop products or services, and expand marketing efforts. These funding rounds usually come from venture capital firms, angel investors, or early-stage venture capitalists who see potential in the startup and want to take it to the next level.

Depending on your stage, different private investor and fund options are available. 

Angel Investors

Angel investors are high-net-worth individuals who invest in startups during their early stages (and rarely in MVP/idea stage), providing pre seed funding, seed funding, mentorship, and networking opportunities. While angel investment offers many advantages, such as more flexible terms than venture capital and valuable guidance, it often requires selling an equity stake in the startup at an early stage.

To maximize the benefits of angel investment, startups should ensure they share the same values and objectives as their investors, preventing potential misalignments in the vision and strategy of their business. 

• Characteristics of Angel Investors

Angel investors are typically experienced entrepreneurs or business professionals who invest in promising startups—offering funds, expertise, and connections. They generally invest smaller amounts than venture capitalists, typically ranging from a few thousand to a million dollars and yes, a million dollars is a small amount for VC’s and PE’s.

Connecting with angel investor networks can greatly increase a startup’s chances of securing funding and valuable connections. These networks consist of groups of affluent individuals who pool their resources to invest in startups, offering access to capital, mentorship, and networking opportunities.

Angel investors may act as individuals or as groups. These groups may be institutional or they may be like clubs of wealthy people getting together. 

Venture Capital (VC)

When it comes to high-growth startups, venture capital (VC) funds often take center stage. A venture capital firm provides substantial funds to startups with the potential for rapid growth and high returns. A venture capital (VC) firm typically gets involved during the series A, series B funding, or series C funding rounds when companies have made significant progress toward achieving their goals but still need more capital to scale up operations. However, this funding type comes with its own list of cons—the biggest being the loss of equity and control.

On the positive side, venture capitalists can help startups gain more exposure and provide support so you don't have to manage risk on your own.

Venture capitalists (VCs) are individuals or mostly organizations that provide capital to early-stage, high-growth startups in exchange for equity. VCs typically invest in businesses with the potential for substantial returns, often through an acquisition (exit) or an initial public offering.

The benefits of partnering with VCs include access to larger funding amounts, experienced guidance, and valuable networks. Other advantages include no payback requirements, no personal guarantees, and they provide assistance in hiring and building teams, creating publicity and finding the next rounds of investment and funding.

The drawback of parking with VCs is that they often require significant equity stakes and a seat on the company’s board of directors, making it crucial for startups to think about how much control of their business they'd be willing to part with before entering into one of these partnerships. This also creates far bigger performance pressure for the whole team.

Understanding the venture capital landscape is crucial for startups seeking venture capital funding. This landscape consists of venture capital firms, angel investors, venture debt lenders, incubators, accelerators, crowdfunding platforms, and other stakeholders.

 Before entering a relationship with a VC, startups with high growth potential must conduct thorough research, network with potential investors, and develop strong pitches that showcase their value and potential for success.

Corporate Investors     

For some reason, this is the least explored option among the founders, who wait for these corporate investors to come to them (by mere coincidence) versus actively searching for them and knocking on their doors. We think that this is a big missed opportunity by many startups.

Corporate investors are, as the name suggests, relatively big corporations and companies like Microsoft, Google, Amazon, GE, Nvida, Intel, etc… You may add thousands of companies like these ones to your potential investors list.

These companies invest in start-ups and small businesses for many reasons:

• Startups may have patents and IPs of interest or a readily developed technology
• They may consider the startup as a competition and want to take control earlier rather than later
• Startups may have incremental customers or vendors that are of value
• Startups may have great talent
• They want to keep an eye on the startup and maybe consider acquiring it later
• … and you may add other reasons to the list.

A medical equipment company (say GE Medical) may invest in a small medical robotics company or a digital pathalogy company.

Banks may invest in new fintech startups with niche and creative products.

Each startup can assess their segment and may target big corporations as their investors and even future buyers (an agreed exit).

Other Private or Public Funds, Usually for Certain Initiatives and Purposes

Many governments and local authorities, such as states or municipalities, have funds to achieve certain objectives such as reducing carbon emission, increasing farm land efficiency, urban pollution reduction, empowering women, etc… I am sure that you can count many more initiatives launched by public authorities.

These public authorities provide funds to the private sector, and often many times, to startups to achieve their objectives. 

The great news is, these funds are usually free.

The same applies to many private organizations who have donors or supporters to invest in certain initiatives or causes such as empowering women, supporting potato growth efficiency, etc. Exploring these organizations relevant to your segment may open the doors for your next funding and may even be the first one.

Crowdfunding and equity crowdfunding have emerged as popular alternative funding methods for startups, offering a unique blend of benefits and challenges. Crowdfunding platforms such as Kickstarter and IndieGoGo allow startups to raise funds from the public by offering products, services, or other rewards, while equity crowdfunding involves selling equity in the startup to a large number of investors.

Although these funding methods can help validate a startup’s business idea and generate enthusiasm for the product or service, they also require careful management of expectations and fulfillment of promises to ensure a successful campaign. 

Rewards-Based Crowdfunding

Rewards-based crowdfunding allows startups to raise funds by offering products or services to backers in exchange for their support and a low cost to have their products or services. This funding method is particularly well-suited for consumer-oriented businesses, as it enables startups to validate their business ideas and generate enthusiasm for their products or services among potential customers. 

Rewards-based crowdfunding requires careful planning and execution, as well as a well-defined strategy for utilizing the funds raised and fulfilling the promised rewards to backers.

Kickstarter and IndieGoGo are the most popular platforms to launch mostly product-based businesses. 

The biggest advantage of these platforms and type of funding is that it allows the founders to test the product at the idea stage, even without a physical product or production design. The founders set a target for the minimum fund needed and the campaign will be effective, the funds disbursed only when that minimum target is hit, enabling the founders to have the funds to design the product in full, set the production plan, procure raw materials and then deliver.

The biggest disadvantage is the barrier to entry where there is big competition and a great marketing campaign is needed (thus resources to make it) to make it a success. 

Equity Crowdfunding

Equity crowdfunding offers an alternative funding source for early-stage companies by allowing startups to sell equity in their business to a large number of investors for small value each - an individual may invest just $50 for a very small, immaterial share. This funding method provides startups with access to capital while also giving investors the opportunity to participate in the startup’s success.

An important consideration is that equity crowdfunding comes with its own set of challenges—such as managing investor expectations and ensuring compliance with legal regulations (for example, fraud).

 Some good examples of equity crowdfunding platforms are Wefunder, Microventures, and Startengine. There are also many other global and local platforms to support founders.

What you will notice when working with these platforms is that they or their backers prefer to invest in a company in a country with a solid and known framework, such as the U.S. Please read our article on “Why should a SAAS business should start a company in the U.S.”

Other Options for SAAS Businesses

 Another option for an early stage SAAS company is to launch its product on a platform like Appsumo.

Appsumo is a platform where businesses and agencies buy early stage products (mostly SAAS) with a Lifetime Deel (LTD) at a very low cost. These buyers risk their money as the product or its support team is not fully tested and these buyers help the founders by providing valuable user experience, insights, bug-finding and feature requests that also help with prioritization.

Believe it or not but Intercom, Shopify, Droplr, Zapier, Hopin, Lemlist and many more were launched in Appsumo and all became billion dollar companies.

The downside is that founders are bound by their commitment to these initial buyers to provide lifetime access and service, with nearly all new feature additions to come over the many years.

In the dynamic world of startups, securing the right funding can be a game-changer. In these difficult fundraising times, more startups than ever are looking for alternative funding solutions. 

Debt financing options (also known as loans), such as small business loans and venture debt, provide startups with funding, but with the requirement of repayment obligations for the loan and its interest - which carry potential risks. While debt financing can offer a more traditional funding source, it’s important for startups to carefully evaluate their ability to repay the loans and manage the associated risks.

Debt financing may be a viable solution from some companies. It may be a permanent fix to their cash requirements, or it may be used to bridge the time gap until they find a permanent equity investment.

These avenues offer businesses and individuals more flexible and diverse options compared to conventional equity investment methods but it also has its own risks and costs (the interest).

Some debt financing options may require personal guarantees and/or liens on company shares.

Revenue-Based Financing

Revenue-based financing allows startups to promise a portion of their future revenue to their creditors, in exchange for their funding - namely the loan capital and the interest. This is a great convenience and easy to get funding especially for SAAS businesses with recurring subscription income.

The creditor usually makes an assessment (a credit analysis) by linking to recurring subscription revenue sources of the startup, such as Stripe, Charegebee, Xero, etc… Then defines credit limit and payback methodology.

 This option is great for startups in growth-stage who aren't able to obtain more traditional means of funding and need this to bridge the cashflow gap until they find a more permanent solution.

Founderpath provides a unique financial solution designed specifically for SaaS businesses, offering non-dilutive financing. Moving away from traditional methods, they assist founders in converting their monthly subscriptions into immediate cash. How? Companies simply link their subscription system to Founderpath's platform. After assessing their recurring revenue and past churn rates, an offer is generated for founders within minutes—free from warranties, interest rates, upfront fees, tight payback period and equity stakes. 

Capchase is also a revenue-based financing platform offering swift access to funding for global SaaS companies, leveraging future recurring revenue. It is one of rapid funding solution for companies with recurring revenue. They assess your financial data and growth metrics to provide you with an initial offer that scales along with your company's growth.

Another option, Stripe Capital is part of the Stripe payment platform, offering businesses a fast and straightforward way to get funding. Your eligibility depends on some factors such as your payment volume and history with Stripe. The repayment process is automated, adjusting to your daily sales.

Lastly, PayPal Capital is another funding option, provided you meet certain eligibility criteria, such as having a PayPal Business or Premier account for at least 90 days. With either of the options mentioned above, you can secure funding quickly based on your needs.

Small Business Loans

 Small business loans offer an established funding source for U.S. startups, providing a predetermined sum of money with an associated interest rate. Loans can be obtained from numerous sources, such as banks or the Small Business Administration (SBA).

The downside of traditional business loans? Small business loans often require good credit and may come with high interest rates, making this option only available to those who are able to repay these loans on the agreed-upon terms. 

Venture Debt

Venture debt provides short-term financing for startups with higher interest rates than traditional debt funding. This type of financing is often provided by venture capitalists or specialized lenders who offer industry connections and guidance in addition to the funds.

While venture debt can provide startups with the necessary capital to support their growth, it’s important to carefully evaluate the terms and conditions of the loan to ensure it's a good match for your business's goals.

MVP/idea or early-stage startups may benefit from bootstrapping, friends and family, crowdfunding, or angel investors, while growth-stage businesses might consider venture capital, debt financing, or revenue-based financing. 

Late-stage startups may explore non-dilutive funding sources like revenue-based financing or debt funding as they prepare for an exit or initial public offer (IPO).

It's also important to consider the characteristics of your funding source—are they life-long investors, or are they more likely to invest to exit? Are they more hands-on or hands-off when it comes to the strategy of running your business?  

It's important to find investor(s) who are not only a good match for the stage your startup is in, but also for who you are as a business owner, and the values important to your business.

By carefully evaluating the various funding types and matching them with your startup’s stage of growth, you can secure the most appropriate financing to support your business’s development and long-term success.

MVP/Idea and Early Stage Funding

Early-stage startups have a range of funding options to choose from, depending on their needs and goals. During this stage, a minimal viable product (MVP) is established and the startup is working hard to enter the market with the help of pre-seed or seed funding. 

These options are also matched well with startups who have started selling their product and/or have started seeing some consistent, initial sales. 

• Bootstrapping allows founders to maintain control of their business and avoid debt but may limit growth potential, as it relies on only one source of income.
• Friends and family can be a foundational source of financing for your business, offering loans or investments based on personal trust and relationships.
• Crowdfunding offers an opportunity to validate a startup’s business idea and generate enthusiasm for its product or service among potential customers.
• Angel investors provide early-stage capital, mentorship, and networking opportunities in exchange for equity stakes in the startup.
• Incubation and accelerator programs offer essential mentorship, office space, network, guidance, and initial funding avenues for supporting growth of startups.
• Public and Private Funds for specific initiatives or purposes may also support early stage startups if they are serving the required initiative or purpose.

Growth Stage Funding

Growth-stage startups typically require larger funding amounts to support their rapid expansion. During the growth stage, startups have established a solid base and are more sustainable than 'early-stage' startups.  

This is the most crucial stage in a startup's lifecycle, and also when a new business is most prone to failure. 

• Venture capital firms can provide significant funds and invaluable connections, but may require relinquishing equity and control.
• Debt financing, such as small business loans or venture debt, provides the necessary funds to support growth but comes with repayment obligations and potential risks.
• Revenue-based financing allows startups to sell a percentage of future revenue to investors, offering a more flexible funding option. 

Late Stage Funding

Late-stage startups have several funding options to consider as they prepare for an exit or IPO.

Non-dilutive funding sources like revenue-based financing or debt funding can provide the necessary capital without sacrificing equity. These funding options allow startups to maintain control of their business while securing the funds needed to continue to improve on their cash flow.

Navigating Startup Funding with Tukel Accounting 

Navigating the landscape of funding options can be overwhelming for entrepreneurs.

Startup funding is a crucial aspect of turning a business idea into a reality. It provides the necessary capital to fuel growth, innovation, and operational expenses. 

One of the main problems entrepreneurs face when raising seed funding from investors is the challenge of effectively communicating their business's value proposition and growth potential. 

Many startups struggle to convey their unique selling points, market opportunities, and their plan for generating returns on investment. This can lead to missed funding opportunities.

Having an outsourced CFO advisor can play a crucial role in solving this problem by providing strategic financial guidance and support to the entrepreneurs during the fundraising process. 

I founded Tukel Accounting with the mission of providing entrepreneurs and small business owners with access to CFO services typically reserved for larger corporations.

As the CFO of Pepsico subsidiaries for 20+ years I managed financial planning teams, highly scaled accounting, cash flow and profitability projects. 

Tukel Accounting can help you get expert guidance on valuation, term sheets, and negotiation strategies for each funding round and guide you through this process - no matter what stage your startup is at, we partner with reputable law firms to plan and structure your deals.

Schedule a free discovery call with our team today to see how we can help!

Tracking investors and funding options is a project of its own. The startup first has to identify the options, contact the identified targets, follow up, send required documents and information, etc…

Over time, founders tend to forget who they have reached out to, what was discussed or replied back (if any), what was sent, etc. 

To track your investors and funding projects, we strongly recommend using a CRM system and capturing all the contacts, correspondence, past and future activities. This will bring both visibility and discipline to your fundraising project. 

We will cover this in more detail in our future article and please do subscribe to be informed. 

• What are the different ways to fund a startup?

There are multiple options to fund a startup, such as getting a loan, finding an investor, accessing grant programs, crowdfunding, and using your own personal savings. Each option offers advantages depending on the individual needs and the lifecycle stage of the business.

• What are the top 4 methods of funding?

The four most popular methods for raising capital for funding a new business are:

• Personal funds
• Loans and credit
• Debt capital
• Equity capital

Personal funds involve using one’s own savings or assets, while loans and credit are taken from banks, credit unions, or online lenders. Companies can also raise capital through retained earnings, borrowing from lenders, or issuing corporate debt.

• What is the difference between an incubator and an accelerator?

Incubators are mostly for early stage startups and provide office space and collaboration, while accelerators are usually for growth stage startups and offer mentorship, investment, and networking. 

• How does equity crowdfunding differ from rewards-based crowdfunding?

Equity crowdfunding involves selling equity in a startup to investors, while rewards-based crowdfunding provides backers with products or services in return for their initial investment. 

• What are the benefits and drawbacks of obtaining funding from angel investors?

Obtaining funding from angel investors can provide early-stage funding, mentorship, and networking opportunities, but requires selling equity and may cause misalignment in vision and strategy.

Angel investors can provide a great opportunity for early-stage companies, but it is important to consider the potential misalignments that can arise from selling equity. For instance, if the angel investor envisions a different strategic direction for the company than the founders, there will be bigger conflict to solve.