When it comes to funding startups, time is money. It is no secret that money is vital for a business to get up and running. Unfortunately, not everyone has access to a significant saving pot; that’s one of the main reasons why funding is important for startups.
It may not be enough to be passionate about your product or service and dedicate all your time to it; you will likely need the funding to boost your likelihood of success.
Some of the most established companies, such as Amazon, Google and Apple, may not be where they are today if they didn’t have an initial funding round.
We will discuss numerous ways to get funding in this blog today. If you are a keen entrepreneur thinking of starting up a business, then keep reading to see what funding is and why it is so important.
What is Startup Funding?
Essentially, startup funding is raising capital which supports your business venture. This can be done in several ways but usually includes a fundraising round to help your growth.
The most common way you have probably heard of is equity funding. Through equity funding rounds, you exchange shares in your company for capital. Investors or venture capitalists that give you that funding will receive equity in your business, for which they will expect a return on investment.
When giving away parts of your business, it’s essential to know how much is the right amount; fortunately, we’ve got your back in our previous blog.
Alternatives to Equity Funding
Small business loans can be used if you don’t fancy giving away part of your business. However, you may have to start paying the loan back straight away, which usually includes interest. This isn’t great for many small businesses that are just getting off the ground and don’t have the cash flow to fund debt.
One alternative to equity fundraising is called bootstrapping. Bootstrapping is where you either self-fund your business or borrow money from friends and family. You avoid giving investors equity; however, if you fail, you will lose all your or your family’s money.
As you know, the startup game is risky - but with risk, comes reward. And that’s one of the reasons why funding is important for startups.
How Startup Funding Works
You need to understand how startup funding works to see why funding is important for startups.
Running a business costs money, from developing the product to buying office materials and hiring employees. Say you are a founder looking to hire more employees to help build your product; where does the money come from to pay for this?
You need funding. That’s where you start searching for investors and start thinking about putting together a pitch deck.
Now, why would an investor want to part with their hard earn cash? Investors see why funding is important for startups as it helps accelerate a good business idea forward. Investors benefit as a result as they get equity in a business which is on a positive trajectory.
Equity is valuable to investors, as they get ownership in a business without having to run it on a day-by-day basis. If they have selected wisely, they may receive a return on investment when they sell their equity for more than they bought it for. This capital can then be allocated to more startups in the future.
To help with the funding process, startups will typically be given a valuation. This valuation allows investors to calculate how much equity they get for the cash they put in.
Valuation is a factor of many variables, including ARR (annual recurring revenue), revenue growth, marketing size, management, profit and risk.
These metrics will help the investor determine whether making a bet on your startup is the right one. Given 90% of startups fail, investors have the right to complete due diligence to ensure your business has the potential to grow.
In terms of the fundraising round itself, they typically follow set stages of funding as your company ages and grows:
- Pre-seed Funding
- Seed Funding
- Series A Funding
- Series B Funding
- Series C Funding
- Series D Funding and beyond
Where you are as a company will depend on the funding round you go for. Pre-seed or seed funding is the first funding round an early-stage company will raise. In comparison, Series C and D are when a startup is more established and needs a boost of money to expand.
Top 5 Reasons why Funding is Important for Startups
With the continuous growth of the startup industry driving global innovation forward, companies need to learn how to fundraise to ensure the success of their business. That’s why we have put together the top reasons why funding is important for startups.
1. Money for Business or Product Development
The most common reasons startups fail are running out of cash or failing to raise capital.
As such, having the capital to invest in driving the business forward is imperative.
For new companies, that is where the initial funding round comes in. This is used to develop the product or service. Creating the product or service requires resources such as equipment, office space, and development fees.
For example, marketing is needed to help promote the product or service and ultimately acquire customers. Marketing is not cheap. 92% of founders said their website was the most effective digital marketing tool.
To get access to this tool, you will likely need capital!
2. Money as a Barrier to Entry
Money is one of the biggest factors preventing people from starting a business. 50% of UK startups said their greatest barrier is the lack of funds. That’s why funding is important for startups, as it helps to overcome the initial hurdle.
Bootstrapping or taking out loans may not be attractive to startup founders because of the risk associated and the time it may take to get the business off the ground. Therefore, the ability to apply for funding gives businesses a route to enter the market.
3. Grow your Network
Not only does getting funding for your startup help you develop your business, but it also helps to build your network. One tactic to accelerate a business's growth is making lots of noise, networking and associating yourself with successful entrepreneurs to boost credibility.
Say you get in contact with a few investors on your hunt for funding and are only successful with one, it does not mean others don’t want to help you succeed. These connections you make may be precious for the future.
Building a network with companies and individuals who may have synergy with you in the future is extremely powerful. If 85% of jobs are filled through networking, why would it be any less important for startups looking to secure new contracts and clients?
Additionally, if you have contacts in high places, this will help build the credibility of your business as they help push you in the right direction.
4. Expand and Develop
If you want your business to grow and scale, you need funding. If you are fortunate to do this without an investor, then great, but most companies need funding.
Expanding could be anything from increasing the number of products and services offered, moving offices or hiring more employees. These are all factors that need money to be able to scale successfully.
Whatever your next steps are to turn your ambitions into reality, funding will help you to take advantage of all the new opportunities coming your way.
5. Cash Flow
One of the reasons why funding is important for startups, is the cash flow, or “safety net” it gives you.
When starting up your business, there is a high likelihood you won’t be making a profit for a while. All the money you gain from the funding will be used to set up your business, build your product or service and pay your employees.
These are all costs needed to help the business survive and achieve profitability. Your revenue will be low and most likely reinvested into the business. Therefore, funding gives businesses the runway (explained below) to develop and reach profitability.
How To Get Funding For Your Startup
So now we have looked at why funding is important for startups; let’s briefly touch on how to get funding for your startup. Startup funding is not necessarily easy and can be considered an art. Follow our steps to help improve your chances.
- Create a business plan: Think of this as your company's north star. Your business plan will give you direction and help you strategise how you will make your startup a success.
- Calculate the funding you need: Now you have a better understanding of your business direction, now’s time to calculate how much funding you need, if at all! When you know the sum, this will help you evaluate the best option for your business.
- Work out your runway: Your runway is your total funds available, divided by your burn rate (i.e. the amount of cash you spend per month). Knowing your runway will tell you how many months you have to raise capital and deliver on your business plan. You may have already calculated this in step one, but it’s worth double-checking to mitigate risk.
- Funding options: Do your research. You need to work out what funding option is the best for you. Whether this is loans, grants, venture capital investors, angel investors or friends and family. When you decide on the right option, go all in on getting funding. To help, check out our fundraising resources guide that contains over 100 curated resources.
- Create your pitch deck: Your pitch deck will attract and convince potential investors to buy into your business plan. It will outline everything from the target market to the financial summary. To learn more about what you should include in a pitch deck, check out our pitch deck guide.
Conclusion: Why funding is important for startups
There is no one-size-fits-all when it comes to funding. However, one thing we do know is that funding is super important for many startups to succeed.
Some businesses will only need a small push with a loan, while others will need a large amount of VC investment to launch their idea. Finding the right source and understanding the implications is one of the biggest reasons to why funding is important for startups.
We hope this article has helped you understand the importance of funding and how it can help your business boom. If you need extra support, check out our online fundraising course, where we share everything you need to know about fundraising.