Launching a startup takes dedication and perseverance, and if you’ve already reached a point where you have a profitable business, you can pat yourself on the back. According to the U.S. Bureau of Labor Statistics, 20% of all small businesses launched in the United States fail within the first year. Within five years 50% of small businesses shutter. Early on, the odds are stacked against you. And in an e-commerce industry where anyone can set up a website and sell their products within an hour, competition is more fierce than ever.
Naturally, finances can mean the difference between a startup success or another failed statistic. Having the funds to continue and/or grow your business can make or break it. However, as a startup, raising money isn’t easy. Although there are several options to choose from, each of them requires careful consideration and hard work. With that in mind, here a few steps to guide you:
Create Your Business Plan
If you want to raise money, a business plan is a crucial first step. Not only is it a sign of professionalism, but it’s essential for investors to decide whether your startup is worth investing in. The more detailed and accurate your business plan is, the better chance you have of connecting with potential investors. No bank would even consider investing in your startup without a business plan.
Your business plan should properly convey what your business does, how it does it better than other businesses, and who does it. Even more importantly, it should have the financial and market data to support your growth claims. Lenders are particularly interested in understanding how long it will take for your business to turn a profit, so it’s important that the components of your business plan illustrate this. Take a look at startup business plan templates to guide you.
Approach Family & Friends
There are several benefits of raising money from accredited investors and lenders, but it’s no secret that the “investor” route comes with plenty of strings attached. The benefit of raising money from friends and family is that they’ll expect a lot less from you in return, as they’re less likely to be involved in key decision-making.
Of course, there are a few caveats. Taking money from family and friends can damage your relationships if the investment goes sour. To prevent this, always be transparent about the potential risks involved, don’t ask for money you can’t afford to lose, and always cement your agreement with a contract. Treat them like real investors and keep them posted with regards to their investment and payback.
Join an Incubator
Startup incubators offer startups small loans in exchange for a certain amount of equity. While you certainly won’t get as much capital from an incubator as you might from a bank or investor, there are other invaluable things an incubator could offer you. For instance, in addition to some startup cash, incubators offer mentorship, guidance, and crucial networking opportunities. Most incubators culminate with a “Demo Day” where startup founders have the opportunity to pitch to dozens of investors at once—a rare opportunity for any startup.
Apply for Bank Loans
Depending on where you’re at with your company, a bank loan might be a viable option for you. One of the most important differences between a bank loan and an investor loan is that banks tend to look at startups through a historical lens while investors are more concerned with how much you could make than how much you’ve already made. Banks could be a good option if you have strong sales, a good track record, and solid business credit.
Meet With Investors
During your early stages, you’ll most likely be starting your seed round funding and meeting with angel investors or venture capitalists. If successful, later on you’ll move on to Series funding. For now, it’s important to understand the differences and similarities between angel investors and venture capitalists.
Angel investments vary significantly. According to Upcounsel, a typical investment is between $15,000 and $250,000, and according to Patriot Software, the average investment amount is $330,000. According to Statista, the median investment for venture capitalists was $9.9 million in 2020.
Now that you understand how much they invest, it’s important to understand how they invest and when. Angel investors typically invest their own money into companies of interest, while VCs invest using pooled money from investment firms and other sources. Furthermore, angel investors are more likely to invest in companies that are just starting out—but have positive traction and potential—while venture capitalists lend money to startups that are more established and less likely to become a financial risk or liability.
The common denominator lies in pitching. Whether you’re pitching an angel investor or a VC, your pitch and your business plan have to be as perfect as possible. You have to have the market and numbers memorized, because landing a meeting with either of these investor types will result in plenty of questions. Any hesitancy on your part will make you look ill-prepared and uninformed. A few places you can find investors include AngelList, Seed Invest, and On Startups.