A startup is always more than just an idea, it’s also a lot of time and effort, dedication,

focus, and of course – funding.

Over 60% of all startups need external investments. For example, the average cost of
developing a platform in the US reaches $75 000, which is not affordable for most
startup owners. Raising the money, you have to understand the difference between
different funding rounds, as well as investor types. 

Startup funding rounds

First of all, you can’t just get plenty of cash or a business loan and feel set and happy
for good, although it sounds attractive, right?

You have to go through a number of funding rounds and prove that your idea
deserves the money, meeting different goals and challenges every time. Each round is
designed to raise enough capital to grow further and can take as long as a year.
However, many entrepreneurs rush things down to a 6 or even 3 months timeframe.

Based on the raising purpose, startup funding rounds are divided into the following
stages:

 pre-seed/seed;
 series A, B, & C;
 and IPO.

Seed stage funding

Pre-seed funding is when founders are trying to give their idea the initial push and
often invest their own money.

It is followed by the Seed stage, where founders attract so-called angel investors.

These people provide funds for further research, testing market needs, hiring a team,
and production start.

At the seed stage, tech startups can aim at anywhere between $500K and $2

million investments, depending on their needs and presentation. Investors are ready to
take risks, and typically invest in a number of startups. Those that go through then
receive additional capital.
Some of the well-known companies considered for this stage are Y Combinator, 500
startups, SV Angel, and Techstars.

Series A

Next comes round A. It is focused mainly on the startups that have a proven business
model, decent customer base, and are already generating profit.

The investments at this stage can start from $3 million and require a specific strategy
to reach higher ROI. Typical investors here are venture capital firms that ask startups
to show real data and progress received from previous investments. They want to see
the startup turning into a valuable money-making machine ready to scale and get to
the next level.

Series B

Round B helps startups turn into enterprises.

At this point, they’ve already matured, have a large user base, and are looking for VC-
level participation. Investments at this stage can range anywhere around $10
million and up (Mixpanel raised $65 million series B). This stage is all about scaling
up the team and exploring new markets.

Some of the biggest investors here are Accel, Insight Venture Capitals, and Sequoia
Capital.

Series C

Moving to round C implies an even higher level of expansion.

The companies are already successful, value $100+ million, and are aiming to receive
equal funding (again, Magic Leap has raised almost $1 billion). As one of the last
funding stages, round C includes not only extending current project capabilities but
creating new products. So, prepare to work with the largest VC firms and corporate-
level investors that are far more demanding.

Companies at this stage are getting their exit strategies ready to smoothly approach
IPO.
IPO

The final stage of a startups’ existence, initial public offering (IPO) is the process of
opening a private company’s shares to the public.

This unlocks a vast amount of funding available on the public market along with a
new level of transparency. However, it also means additional complexity because now
you have to deal with shareholders in addition to investors. Such relationships require
a lot of effort and you can expect it to be challenging and expensive.

Fundraising for a startup requires a lot of time and a good strategy to reach the goal.
Understanding each of the rounds will give you an advantage over competitors that
simply look for any investment passing by.

Startup funding sources

As a startup founder or CEO, you should have a clear idea about the investment types
before actually raising the money.

In this regard, there are 7 main options: 

#1 Bootstrapping 

Also known as self-funding. Perfect for early stages when you are just getting started
and have enough money to cover the current needs: that is developing a business plan
and creating a proof concept. These two elements become your main assets for
acquiring future investments and the expenses are comparably small to cover from
your own pocket.

The advantage of bootstrapping is that you get tied to the business spending your own
money which is appreciated by investors in later stages. However, this is not an option
for the startups that need money from day one or large businesses.

#2 Crowdfunding

Internet capabilities are unlimited. Crowdfunding has become a popular way of

raising money as it doesn’t need much to get going. The opposite of a traditional
business route, here people “pre-order” your product before you even started building
it. You then use the money raised for the actual product development. 
Small investments from a number of people on Kickstarter or Indiegogo can make a
good starting point for your startup. All you need is to convince people with your
business plan, a prototype, or a video where you describe your goals, timelines, and
milestones. While there is always a risk of your idea getting stolen, this is still a great
way to market your product.

#3 Incubators and accelerators

Accelerators and incubators can be a great option for early-stage startups. Run by
VCs, government firms, and universities, they can be found in most big cities, helping
hundreds of small businesses every year. They aim at supporting a startup in its early
stages through infrastructure, networking, marketing, and financial assistance.

Often used interchangeably, the two terms do differ in functions: incubators bring up
startups like children from the very start to becoming a solid business, and
accelerators help them scale up. Such programs have strong competition among
applicants and take about half a year to help build good connections with mentors,
investors, and other startups. 

#4 Angel investors

Angel investors are individuals or groups of people that provide funds to promising
startups in the early stages. Angel Investors are looking out for potential IT unicorns
like Google and Alibaba and can mentor your business for good equity to compensate
the risk (usually up to 30%).

These guys evaluate whether the product fits the market, as well as the technical team
and the initial customers. Catching an angel investor and proving your startup’s
potential is not easy: you have to prepare a rocking pitch, a flawless business plan,
and a proof of concept before contacting AngelList investors in your product’s niche.

#5 Venture capital firms

This is where founders can make big bets. Venture capitals are professionally
managed funds that invest in startups with huge potential and scalability. Their
expertise and mentorship can lift growing small businesses that are already generating
profits. However, VC investors usually plan to return their money within 3-5 years. So
they would not be interested in startups that need more time to get to the market.
VCs look for companies with a good plan and a dedicated team that need strong
mentorship and control. If that doesn’t seem comfortable to you, it may be not the best
option for you.

#6 Bank loans 

A bank loan is the most obvious funding option. Banks provide different kinds of
loans to give entrepreneurs complete control over their business and help finance
short-term operations. At that, bank loans require a lot of documentation, track record,
and strict standards in addition to a detailed business plan. When considering this
option, check the interest rates and collateral you can give in return.

As an alternative, you can consider getting a business card or applying for an SBA
loan supported by the government. They work directly with banks to fund small
entrepreneurs. A business loan can reach $50 000 which is usually enough for the pre-
seed funding stage.

#7 Government programs 

Compared to business loans, you don’t have to pay back for small federal grants that
are primarily open to startups in science, technology, or health spheres. If your
business involves any research, scientific, or environmental initiatives, government
programs can cover some of your expenses (if not all).

There are also good chances of winning fundraising contests for startups in other
fields. Not only does it encourage more entrepreneurs to set up their own businesses,
but also provides media coverage for the contest winners, fueling publicity. 

Crowdfunding and SBA microloans leave you more control over your business. If
you aim at a greater amount of money, your needs can be met by angel investors,
venture capitalists, and private firms. Almost all startups start from pre-seed and seed
stages sponsored on their own. To raise more money, you have to give investors more
than just an idea – a video presentation or an inspirational speech.

This “something” should be based on a convincing design prototype, a business plan,

a proof of concept, or an MVP with the results of your work and prospects for future
investments. These things are difficult to be handled on one’s own. so many startups
opt for hiring either an in-house team or outsourced resources, depending on their
needs. A development team enters the startup at the first stages and becomes a reliable
partner helping to take the concept from a prototype design to a release-ready
product. 
Closing the deal
Now that you know whom to contact at each startup funding stage, it’s time to think
about ways to convince investors to give you money.

Keep in mind that finding investors is a time-consuming process that requires your
constant attention and daily follow-ups. Therefore, attend conferences, meetings,
email, and call potentially interested investors, build relationships, and repeat.

In practice, you usually have but one shot to get your idea through to an investor. So,
it is crucial to perfect your sales pitch.

Pitch deck

A pitch is… well, your pitch. It’s going to be the face of your idea which investors
see, so make sure to create a good first impression.

Therefore:

 Keep it within 20 minutes;

 Create a presentation with up to 10 slides;
 Describe your goals in the first 30 seconds (start with the broad objective and
move to details and steps of delivery);
 Stick to three bullets on each slide, each one should be concise and include
specific details such as graphics, financial outlook, and future growth;
 Use storytelling and provide real-life testimonials;
 End presentation with a call to action;
 Leave some time for Q&As.

If the startup idea is great and your pitch nailed it, you are just one step away from
success.

Negotiation

Even though your concept, pitch, and metrics really define a startup’s potential, at the
end of the day investors give money to people, not ideas. So, the final step to you
getting the funding is convincing the sponsors and negotiating the deal on mutually
beenficial terms.
Here’s how you should approach it:

Preparation

Explain how investors can benefit from your idea. Provide exact numbers, graphics,
and a clear business strategy. As people are usually not interested in giving money to
startups with no potential, focus on your growth opportunities and plans.

Feedback

Listen to the investors’ concerns and explicitely answer their questions. Be transparent
and clear when talking about potential business relationship and roles.

Compromise

If you are looking for large investments, you may have to give up some control over
your business: prepare to sacrifice something to reach the goal.

Timeline

Make clear deadlines regarding your plans, from pitching to closing the deal. It will
create a sense of urgency and help you get the investments faster. 

On average, it can take you anywhere aroud three to six months from the initial pitch
to the money landing in your bank account.

This process can be influenced by several factors: time of the year, market trends,
your location, the strength of your data, your pitch and relationships with investors,
the time a particular investor needs to make a decision, etc.

If you’ve spent over a year fundraising unsuccessfully, you are probably doing
something wrong.

Common mistakes
There are five common mistakes startup owners do when raising funds:
Not filling the market need

If your idea is great, but you have no potential users that may need this product,
investors will not consider it a good choice. Make sure you have some early users that
prove the market need.

Forgetting about the product

If you and your co-founder spend all your time going to meetings with investors, you
leave your product and team not progressing. So when you finally reach the investor
you will have nothing to show up. Remember about perfecting your product while
fundraising and divide responsibilities with your partners.

Changing your mind

Reacting to every piece of feedback from investors and changing your strategy
according to their preferences, you may end up with nothing. For example, one
investor may like the idea of a marketplace while another one thinks that mobile users
are the future. You never know what is best, so just stick to what you think is right
for your business and work around it.

Contacting investors indirectly

Always try to talk with investors, not their associates. Your mission is to give the
impression that the train is leaving the station, it is accelerating and investors can
either jump on it or miss it forever;

Jumping the gun

The biggest mistake startup owners make is celebrating the raised funds once the
investor said yes. You can’t consider fundraising to be over until the money is in your
bank account, no matter how many yes you received. If you don’t follow up investors
every single day reminding about the deal, it may take ages until you get the money,
if you get it at all.

Final word
Establishing a startup is always a risk. Focusing on the right investors, finding
the right words for your sales pitch, and presenting a proof of concept created by
the right team will help you go through different funding rounds and become a
startup that not only survived but succeeded in a sea of competition