Most startups require more than just an idea and a prototype to get off the ground. They also need money to cover operational costs until they can reach profitability. That’s why startup funding is one of the most important stages in any startup journey.
Investors write checks when they are convinced that the founding team can deliver on its vision and opportunity, that the business has reached or is approaching an inflection point, and that the investment will provide a reasonable return. Founders should choose investors carefully, particularly the lead investor, as this person will have an influence on how a new round of funding is structured.
Venture capital, private equity, and angel investors are the most common sources of startup funding. These types of investors typically offer early-stage funding in exchange for a stake in the company. In exchange for their capital, they want to see a return on their investment through an exit event, such as an acquisition or an IPO.
Other startup funding options include seed and pre-seed financing, which are often offered by dedicated VC funds or individual angel investors. Seed funding allows a startup to find product-market fit and hire early employees. Over the past few years, a new funding stage called “pre-seed” has emerged, with many startups raising money from these dedicated pre-seed funds.
Founders can also self-fund their startups by using personal savings, cash from liquidated assets such as an IRA or 401(k), or loans from family and friends. However, taking this approach can be risky and may dilute the company’s ownership stake.