Startup funding is one of the most difficult tasks founders face. Without a reliable funding source in place, startups struggle to achieve significant traction, develop next-generation products or services, hire top-tier talent, and more. And, if you're like most startup founders, it's difficult to know which types of funding sources you should absolutely prioritize.
"There is money out there, of course — there always is — but you have to know where to find it," says Martin Zwilling, contributor at Forbes. "You also need a sense of the strings that come with each flavor of capital."
Startup Funding 101: Top 5 Sources Founders Must Prioritize
In this article, we've highlighted the top funding sources for startup founders and included a few rules of thumb for each. Use these expert insights to guide your startup funding strategy.
1. Crowdfunding
Crowdfunding is a method for raising capital through communities including customers or a collection of individual investors. Typically, crowdfunding campaigns are initiated through popular crowdfunding sites including Kickstarter, GoFundMe, Indiegogo, and others. Experts estimate that the crowdfunding industry will grow to over $300 billion by the year 2025.
There are three types of crowdfunding including:
- Donation-Based Crowdfunding: There is no financial return to the investors or contributors. Typically, disaster relief efforts, charities, and nonprofits leverage the power of donation-based crowdfunding activities.
- Rewards-Based Crowdfunding: There is a "reward" in exchange for financial contribution, typically in the form of a product or service. A rewards-based crowdfunding initiative is popular among early-stage startups eager to develop and market rapid prototypes.
- Equity-Based Crowdfunding: There is company ownership in exchange for financial contribution. As equity owners, contributors receive a financial return on their investment and a share of the company's profits.
Related: Is Crowdfunding a Viable Fundraising Option for Your Tech Startup?
2. Business Accelerator
A business accelerator supports growth-oriented startups through education, mentorship, and financing. Typically, accelerator programs are fixed-term, cohort-based programs that include investment opportunities, connections to high-value mentors, educational programs, and culminates in a public pitch or demo day. While a handful of accelerators have been very successful in helping industry-leading startups — Airbnb, Stripe, Reddit, Uber — achieve considerable traction, success isn't always guaranteed.
Related: Should Your Tech Startup Join an Accelerator?
3. Angel Investor
An angel investor funds early-stage startup companies in exchange for equity ownership. Typically, angel investors contribute $25,000 to $100,000 to a company, but can go much higher. Raising funds through an angel investor always takes longer than you might expect — you need to find the right investor, prepare a pitch deck, negotiate investment terms, and more. Additionally, equity requirements may dissuade you from seeking angel funding:
"You could be giving away anywhere from 10 to more than 50 percent of your business," reports Entrepreneur. "On top of that, there's always the risk that your investors will decide that you are the business's greatest obstacle to success, and you could get fired from the company you created."
Related: How to Find Qualified Tech Startup Investors
4. Private Equity Firm
A private equity firm is an investment management company. Typically, a private equity firm will raise pools of capital or private equity funds that supply these investments. For some startup founders, funding through a private equity firm is ideal in that firms will often bring in operating partners with expertise in that startup's industry. In this scenario, the private equity firm will increase the startup's opportunity to create next-generation products/services while simultaneously protecting their investment through expert oversight.
Related: Private Investment vs. Crowdfunding: Which is Best for Startups?
5. Government Programs
Finally, government programs and loans through the Small Business Administration (SBA), U.S. Department of Agriculture (USDA), and the Small Business Lending Fund (SBLF) make it easy for startups to acquire funding fast. Banks and lending organizations that participate in these programs provide loans guaranteed by the federal government. To apply, visit: https://www.use.gov/funding-options
Unlock Startup Funding Faster
As you can see, there are plenty of startup funding sources to consider as you forge your path towards startup success. However, there's one proven method to help you unlock startup funding faster: RocketSpace's Startup Services.
Reducing the fundraising timeline by raising capital from strategically aligned investors is the single largest competitive advantage a startup can have. RocketSpace's Startup Services team leverages extensive investor relationships to accelerate your fundraising journey. The three-month, three-phase program is designed to provide high-quality, hands-on, and customized coaching to lead you to the right investor. RocketSpace's Startup Services is the premier program for top-tier startups seeking fast and smart capital.
"After meeting RocketSpace, [KIT] moved onto their campus and quickly refined our business model into a more fundable entity," says Michael Perry, CEO at KIT. "As we gained traction, RocketSpace introduced us to investors who ultimately closed our seed round. This turned out to be the only round of funding needed before selling to Shopify."
