Best Fundraising Options for Early Stage Startups and Best Practices to Secure These Deals

We look around and find ourselves amid an ever-growing startup ecosystem. Flooded with stories of success and failure, today, the startup culture is more competitive than ever. Putting budding entrepreneurs in a tough spot and requiring more skill, proficiency, and competence. As we witness a surge in upcoming businesses, the world is also witnessing a booming VC industry. With growing VC landscapes, larger fund sizes, and bigger deals.

The early stages of a growing business are the most crucial. The importance of securing a solid monetary foundation can not be exaggerated enough. The initial stages are also the riskiest and toughest stages that could potentially make or break your startup. With no proven track record to reel investors, the initial funding process could be tricky. Still, with the right plan and skillful execution, early-stage startups can secure funding through multiple means.

This article summarizes a range of fundraising options for early-stage startups. The best option may differ from one startup to another based on several factors such as timeline, target fund, size of the business, and so on.

Bootstrapping

When talking about acquiring funding for small-scale startups, Bootstrapping is a name that almost always tops the list and for good reasons. It is the process of using and purchasing resources solely at the founder’s expense, without attracting any external capital, at least during the initial stage.

Ironically, it is one of the most inexpensive methods an entrepreneur can explore when raising capital. Several businesses that kicked off with bootstrapping have now reached soaring heights. Though it sounds complicated, bootstrapping is more about learning to utilize and manage existing finances.

Traditionally, bootstrapping has been a common choice amongst new entrepreneurs, but now also adopted by established businesses.

But as it is with every funding route out there, bootstrapping too has its pros and cons. Below is a quick summary of some of the advantages and disadvantages of this method:

Pros:

• Lower risk as compared to other methods such as loans or other borrowed funds. If the business fails, the founder will not be forced to repay debts to any outside entity.
• The Bootstrapper reserves all rights to the ideas, products, and developments. This means a successful project will result in high capital and eventually attract investors for further funding.
• Complete independence from the opinions of an outsider (e.g. investors).
• Attaining funds from external sources can be challenging, exhaustive, and time-consuming.

Cons:

• Businesses can fail miserably if financial planning is poor.
• The founder takes on complete responsibility for any downfalls that may occur. No investors to back up the venture.
• Capital can be limited, resulting in unfinished or low-quality projects.
• Bootstrapping can be stressful and unpredictable.

With our tool, founders can reduce the risks that come with bootstrapping and have a solid financial foundation, to begin with. The tool is built carefully to help founders track valuations over time and draw up a secure financial plan for a steady foundation of the startups.

Friends and Family

Acquiring funds through friends and family is one of the traditional forms of funding. While banks and investors may hesitate to take a risk with you and your idea, it’s almost always safer to fall back on the people you trust. Regarding the closeness you share, they may even be willing to lend you an interest-free loan.

Friends and family funding is a great idea for early-stage startups. The initial round of funding can range anywhere from $10,000 to $150,000, which can quickly help you through the initial stages of setup. You also stand a much higher chance of acquiring large amounts, no matter how solid or vague your idea may be. And what better way to start your entrepreneurial journey than with the people you love and trust?

Even with a vague plan, it’s always great to draw up a valuation to help your friends and family have a better idea of what they’re getting into. Our tool will help you draw up a fair and reliable valuation to present.

Angel Investors

If you have tried other options and are still in no luck of securing funding for your venture, angel investment might be the way to go.

An angel investor is a high net-worth individual or company willing to provide you with the capital you need to kick start your business, but of course, not for free. They invest their money in exchange for an equity share or convertible debt.

If you are in the early stages, finding an angel investor might be your best bet. Unlike banks looking to invest in well-established and profitable businesses, angel investors are willing to take risks and invest in beginners whose ideas they associate with. Angels are not only a source of cash but can also be a root of added value to your team in terms of mentorship, guidance, connections in the industry, and a whole lot of experience.

The best place to find the right angel investor for your startup is an angel group. An excellent place to start would be the Angel Capital Association ’s (ACA) member directory.

Attract angel investors with an accurate and reliable valuation using our tool.

Accelerators and Incubators

At a high level, both accelerators and incubators are in place to counsel startups and help attain success.

Having said that, a common misconception amongst new entrepreneurs is that the terms accelerators and incubators can be used interchangeably, which is untrue. But is also understandable as both programs aim to groom and guide new startups. However, key differences also exist between the both. While incubators are meant to guide upcoming startups to bring their idea to the marketplace, accelerators assist with the growth of existing companies with a preexisting foundation in place.

Convertible Notes

Over the last decade, convertible notes have become an increasingly popular option amongst upcoming startup founders, especially during the seeding stage. In simple terms, convertible notes are loans investors expect to be paid back over time instead of acquiring shares upfront. It can also be thought of as a hybrid of debt and equity.

Though it is a popular choice, it is crucial that you assess the potential risks and pitfalls to understand if this is the right choice for the business.

Below is a quick summary of the pros and cons of using convertible notes as a funding mechanism.

Pros:

• Simpler to document from a legal aspect
• Allows early stage startups to delay concrete valuation
• Ideal for intermediate stages between larger rounds of funding

Cons:

• Future implications could be disastrous for some
• Not well accepted by all VCs
• Lack of control

Use our tool to estimate the current pre-money valuation of your startup. This will help both startups and investors proceed with fair convertible note terms. They can also use this to estimate the future valuation cap more accurately based on current valuations.

Crowdfunding

In the late 2000s, Crowdfunding grew to become a popular choice amongst new entrepreneurs trying to get something innovative off the ground. It is a well-established way of acquiring funds to raise large amounts of money with the collective effort of friends, family, and individual investors.

Crowdfunding platforms provide founders with a single platform to showcase and share pitch ideas/resources, streamlining the traditional methods. There are several crowdfunding platforms that aim to help entrepreneurs leverage the networks within their industry for greater exposure.

Check out one of the most popular global crowdfunding platform here.
Use our tool to draw up a fair and reliable valuation to showcase and promote your startup on multiple crowdfunding platforms.

Grants and competitions

Many entrepreneurs chose a more unconventional and exciting form of acquiring initial funding, such as startup pitch competitions. It’s a common bucket list item on almost every other entrepreneur’s business journey —risky and thrilling a the same time. But for some, it may be the only option to kick start their business successfully.

Through such competitions, you will get to pitch your ideas to investors from all across, receive valuable feedback, and most importantly, gain exposure within your industry.

Check this link out for a list of some of the most sought-after startup pitch competitions: https://www.growthmentor.com/blog/startup-pitch-competitions/