What do you think of when you hear the words “startup funding”? Many people might imagine a team of enthusiastic professionals nervously presenting their business plan to a group of investors, waiting with bated breath to see if their ideas will be given a vote of confidence and their dreams come true.
Who are those investors? Often, they are venture capital firms (VCs), which invest in the early stages of companies that they believe will make it big in exchange for an ownership stake. VCs put a lot on the line along with their faith in your business idea, making it incredibly important for your startup team to impress them during the first meeting. Once VCs have invested and have equity tied up in your company, they will hold you accountable in addition to partnering with your startup to oversee its growth.
In May 2022, global venture funding dropped to $39 billion, down from $70 billion in November 2021. It’s not only late-stage investing that’s dropping; early-stage funding is down 22% from its average in 2021. Seed stage investing is still going strong, but since many VCs are starting to hold back and wait for inflation to subside, a lot of startups are assessing their funding options.
For some new businesses, the prospect of involving venture capital firms can feel intimidating, and the recent numbers might be disheartening. However, the startup funding landscape is shifting rapidly, and there are a handful of choices emerging.
To decide on which type of funding is right for you, doing your research is imperative. You will need to know your business like the back of your hand. It will become increasingly important to be honest with yourself and your team about what you are already doing well and what could be improved (or put on the chopping block) before moving forward. If you haven’t already, it’s time for you and all of your employees to perfect that elevator pitch.
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In addition to preaching the gospel of your startup, it would be a good idea to become as financially literate as possible. If you don’t know your company’s valuation, what a convertible bond is, or what EBITDA stands for, it’s time to hit the books.
To jumpstart your research, check out below some of the advantages and disadvantages of VC funding and some alternatives you might want to take into consideration.
4 pros of VC funding
- VC firms can aid you in risk management.
- They come with built-in leaders ready to give you advice and help you network.
- They provide assistance in raising multiple rounds of funding.
- You don’t need to make regular payments, allowing you to have more working capital to focus on daily business operations.
4 cons of VC funding
- It can be tricky to secure funding, especially with so much startup competition and an unstable economy.
- There’s more pressure on the startup to grow as quickly as possible.
- Your company will need to be restructured to accommodate a new board of directors, which means more potentially distracting input.
- The capital comes with strings attached, the extent of which you might not understand until you’re completely entangled.
Options outside of VC firms
- Find an angel investor. Angel investors are financially well-off private investors who use their personal wealth to fund projects they believe in.
- Try crowdfunding. In the internet era, crowdfunding is one of the most popular ways to get small businesses off the ground. If you’re patient and have a captivating story, this could be a great option. Oculus, Exploding Kittens, and 3D printer company Glowforge got their start this way.
- Apply for a federal grant if your company serves a societal or humanitarian need.
- See if you qualify for a small business loan or one of the best credit cards for startups.
- Try self-funding (also called bootstrapping). This allows you to keep more of your own profits, and down the line, even a little of your own money invested at the outset can show future investors that you have faith in your vision. Shopify, Shutterstock, and Mailchimp all took this route.
The bottom line
Your biggest concern when securing funding should be which method best aligns with your company’s culture and your vision for its future, both in the short term and the long term. It takes guts to leave your 9-to-5 job and pursue your ideas with fervor—starting a business from the ground up is not for the faint of heart. If you have made it to the point where you’re seriously seeking funding for your project, you deserve a round of applause.