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Everything You Need to Know About Funding for Startups

Last updated: August 22, 2022
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Most startups fail within the first five years. In fact, 10% of startups fail within the first year and 70% of startups fail between years two and four. Unfortunately, many startups fail because of funding problems. When startups don’t have access to funding opportunities, it’s hard for the company to pay employees, perform market research, and more. Therefore, it’s important to understand the types of funding that are available for startups.


The good news is that venture funding and angel funding have been at all-time highs. In fact, the industry has grown by nearly $100 billion and startups have already raised more than $600 billion as of quarter three in 2022.


We’re going to take you through everything you need to know about funding for startups. You’ll learn about the types of funding and when each type of funding is useful.


Read on to learn more below.


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    What are the Types of Funding for Startups?

    There are dozens of funding options for startups. However, some are better than others, so we’re keeping them off our list.


    The types of funding are listed below.

    • Small Business Loans
    • Angel investors
    • Venture capitalists
    • Crowdfunding
    • Incubators and accelerators
    • Bootstrapping
    • Angel networks

    Small Business Loans

    Small business loans are one of the best options for startup funding. Nobody likes taking on debt but personal loans are effective and affordable with good business credit. With small business loans you also don’t have to worry about investors drawing money out early.


    A small business loan is also great because you have options. You can shop around and secure the best offer from your favorite bank. Additionally, many small business loans are easy to find through organizations like the Small Business Administration (SBA).


    Once you secure a loan, you have access to the full amount of funding. These loans are useful for hiring staff, buying real estate, and obtaining resources. Keep in mind that you need to pay back small business loans to maintain your credit score and reduce the risk of bankruptcy.


    Angel Investors

    Angel investors also provide funding for startups. These investors are different from venture capitalists because they don’t work with a firm. Still, some angel investors will pool their money together to invest in new startups.


    When an angel investor invests in a startup, it’s typically during the seed round phases (pre-seed round and seed round). Angel investors are more active in these funding rounds because the return on investment is greater.


    When considering angel investors, there are a few things you need to remember. First and foremost, always look into an investor’s history to ensure they’re legitimate. Then, come to an arrangement that makes sense for you and your startup.


    To make finding angel investors a breeze, AngelMatch has an expansive database of vetted investors.


    Venture Capitalists

    Venture capitalists also provide funding for startups. Like angel investors, venture capitalists (VCs) will pool resources together to make larger investments. What makes VCs different from angel investors is that venture capitalists are affiliated with venture capital firms. Also, some corporations will have venture capitalists and seed funds for startups.


    For startup funding, venture capitalists are one of the best places to get funding. In exchange for equity in the company, venture capitalists are known for investing a lot of capital in new companies. Most venture capitalists begin to invest during the seed round, Series A round, and Series B round.


    Unfortunately, connecting with venture capitalists is even harder than finding angel investors. The good news is that AngelMatch has an expansive database that contains the best firms in each region.


    Crowdfunding

    Crowdfunding is one of the most common methods startups use to raise capital. There are four types of crowdfunding and each type has a different structure and benefit for investors. The four types of crowdfunding are listed below.

    • Rewards
    • Donations
    • Debt
    • Equity

    Rewards

    Reward-based crowdfunding is a popular option for modern startups because it gives investors a unique reward. Rewards are gifts, stake in the company, and more. This type of crowdfunding is similar to donations but investors are incentivised to make contributions for company-focused rewards.


    For reward-based crowdfunding, many startups use tiers. So, some investors invest more money to earn better rewards. With this type of crowdfunding the money doesn’t need to be sent back or repaid.


    Equity

    Equity-based crowdfunding is another common crowdfunding method. Like other crowdfunding approaches, equity-based crowdfunding relies on many small contributions from many people. In some cases, angel investors and venture capitalists will participate in equity-based crowdfunding.


    At its core, this type of crowdfunding is similar to receiving money from angel investors or venture capitalists. When an investor contributes they get some type of equity. In most cases, it’s shares or stake in the company.


    Debt

    Debt-based crowdfunding is a version of person-to-person lending. Unlike other crowdfunding methods, the money that startups receive needs to be repaid. Typically, there’s also an interest rate attached to the loan.


    While paying the money back isn’t always the safest move for a startup, it’s a good alternative for small business loans. Plus, more than one lender will offer money.


    Donations

    The last type of crowdfunding to cover is donation-based crowdfunding. This type of crowdfunding is simple and earns startups a lot of money. Donations are made through platforms like GoFundMe, which allow people to donate money to families and startups.


    While donation-based crowdfunding works for startups, it’s unreliable and doesn’t always raise a lot of money. Still, it’s not a bad way for startups to raise extra money.


    Incubators and Accelerators

    Incubators and accelerators are programs where startups receive many types of assistance. Business incubators will provide early-stage startups with funding, shared work spaces, mentorship programs, and financial resources.


    Accelerator programs are similar to business incubators but with a few differences. The most notable difference is that accelerators help startups that are further along in development. Instead of helping with business plans and staffing, accelerators focus on mentorship, product development, and market research.


    Bootstrapping

    Bootstrapping is one of the more straightforward startup funding methods. Ultimately, it’s the process of funding a startup without investors or a lot of capital. Many startups use bootstrapping methods in the early stages to get the company up and running.


    While bootstrapping is effective it’s not a reliable source of funding for a startup. Therefore, many entrepreneurs use a combination of bootstrapping and funding from investors like angel investors and venture capitalists.


    What are the Other Types of Funding for Startups?

    Taking you through the most common funding options for startups is a great place to start. That said, many types of funding exist and startups with certain circumstances may earn unique investment opportunities.


    Some of these investment opportunities are listed below.

    • Grants
    • Personal loans
    • Donations (non crowdfunding)
    • Subsidiary funding
    • Debt
    • Credit cards

    Depending on your startup, it’s best to explore all of your options. Also, feel free to combine investment strategies to raise the most money for your startup.


    What is the Best Type of Funding for Startups?

    Many types of funding are viable for startups but angel investors and venture capitalists offer the most lucrative investments. In fact, we recommend starting with angel investors for early-stage startups because they’re more comfortable with risk than venture capitalists who invest during larger funding rounds.


    Final Thoughts

    The more you learn about funding the more comfortable you’ll be when it’s time to start looking for investors. Plus, finding funding for your startup is fun and exciting once you get the ball rolling. While connecting with investors is challenging, AngelMatch makes the process hassle-free.


    You don’t need a vast network or a lot of money to connect with investors either. So, let AngelMatch do the hard work while you get the funding you need for your startup.