Founders who understand how startup funding works are more likely to get the funds necessary to drive growth. Knowing how to access startup funds at the right times can make or break a new business, but identifying funding opportunities that match your business stage isn’t easy. Startup owners who understand funding from a strategic perspective succeed more often in securing funding.
Key Takeaways:
- To secure funding for your startup, you must demonstrate a product-market fit.
- Entrepreneurs rely on pre-seed funds and bootstrapping to reach a stage viable for growth funding.
- Startups that solve customer problems more effectively will attract greater numbers of investors to fund growth.
How Funding Works for B2B Startups
Founders typically must work to earn startup funding. Once you can clearly demonstrate a market demand for your solution, you then make your case to potential investors:
- Explain the problem you’re solving for buyers
- Provide evidence of demand in the market
- Use your unique value proposition (UVP) to demonstrate your competitive advantage
Different Types of Startup Funding
Each type of startup funding aligns with a different stage of growth. As a business matures from the discovery and validation phases to the efficiency phase, certain types of funding will more closely align with a growing need for resources and personnel.
Pre-seed funding
Entrepreneurs use pre-seed funding to develop, test, and market a product to early adopters. Pre-seed funding includes personal savings from the founder and co-founders, grants, loans from friends and family, and small bank loans. According to a poll from the Wells Fargo Small Business Index, the average small business requires $10,000 in startup capital.
Angel investors or seed funding
Startups need seed funding to launch and sustain basic operations. Seed funding enables you to execute early-stage customer prospecting, build a marketing and sales tech stack, and establish a business location.
This type of funding can include personal investments, early profits, support from family and friends, and even early funds from an angel investor. Angel investors will invest money in a startup in exchange for a percentage of ownership in the business. A typical seed investment ranges from $100,000 to $500,000.
Series A, B, and C funding
After a business can prove revenue and profit growth at scale, you can start a discussion about more advanced funding with venture capitalists. At this point, there’s a lot more money involved, as well as more risk — you’ll give up more equity to investors in exchange for funding.
This type of funding is divided into three rounds.
- Series A funding is also known as early-stage funding. The business has revenue and shows profit potential but doesn’t have enough cash to scale, so it turns to venture capitalists for funds. If you can scale successfully after series A funding, you may not need to pursue additional rounds of funding.
- Series B funding covers the costs of scaling a business like expanding your team and building a marketing program. Investors will consider your profit forecast, competitive landscape, and intellectual property.
- Series C funding applies to advanced scaling for mature businesses with proven profitability. Companies may seek series C funding to develop a new product, acquire another company, or expand into a new market.
How Do You Know When to Look for Outside Funding?
You don’t necessarily need outside funding in the earliest stages of your startup. Most founders use their own money to fund their startup initially, and very few seek outside funding within the first year.
According to survey data from SCORE’s 2019 Megaphone of Main Street data report:
- 66.3 percent of entrepreneurs used their personal savings to start their business, and 27.6 percent used income from another job.
- Within the first year, only 22 percent sought outside funding.
- Of those who sought outside funding, 77 percent received a loan from friends or family, and 58 percent took out a loan from the bank.
- Almost half had more than $10,000 in the bank when they began operations, and nearly a quarter had over $50,000.
Your business needs to demonstrate a product-market fit before investors will likely get involved. Equity investors typically intend to earn a return on their investments. You can convince them with a viable product and effective business model.
- Have you already established strategic partnerships?
- Do you have everything you need to scale: technology, team, and strategy?
- Have you already established a solid customer base?
- Investors will want to hear more about your customer base: How many customers do you have? How well do they recognize and trust your brand? How many return to give you additional business?
Many founders feel anxious about using personal and pre-seed funds to finance a startup. When your startup gains traction, establishes a customer base, and gathers the tools necessary to scale, you can stop bootstrapping the business and seek out serious funding.