Wondering how to raise capital for a startup? You're not alone. In the age of SaaS and mobile apps, thousands of aspiring entrepreneurs and business owners are looking for startup venture capital to bring their big ideas to the world.
Access to funding gives a growth advantage to new businesses. Companies with more startup capital can better increase market share in their industry and can afford to penetrate new markets. In comparison, bootstrapped companies short on funds must often make sacrifices that limit innovation and business expansion.
Unfortunately, it’s not always easy to get backing, which forces many founders to reach further into their own pockets and turn to credit lenders to cover costs, increasing their exposure to risk and financial stress.
This article will explore startup capital options to show you how to raise funds without relying on your personal savings.
What is Startup Capital?
Startup capital refers to the money that entrepreneurs raise to meet the costs of starting a business venture. Common sources of startup capital often include angel investors, venture capitalists, and banks.
New companies use startup capital to cover various business expenses such as office space, payroll, research, product development, and marketing. Entrepreneurs typically provide compensation to the investors or institutions who provided the startup capital in the form of equity.
If the business grows in value, so does its equity pricing, providing investors with a significant return on investment. In the best-case scenarios, investors earn a positive return while the startup covers costs and can scale.
Types of Startup Capital
Getting the money together to launch a new business isn’t easy. The good news is that if you seek startup capital for your business, there are several options to choose from:
Self-funding, also known as bootstrapping, is when an entrepreneur uses their own funds to pay for a company's expenses.
If you are the founder, you may need to draw on your savings, sell assets, use credit cards, or even take out a new mortgage on your home. While each self-funded method can help you raise the required money, it means you will be held personally liable, and therefore, includes a higher degree of risk.
Seed money, or seed capital, is money you acquire from close personal contacts—friends, family members, and acquaintances.
As its name suggests, this type of capital "seeds" the beginning stages of the company to cover initial expenses like business plans and prototype development. Seed capital is not ideal as a long-term funding solution, but it can help your startup gain enough momentum to attract more significant investments.
Crowdfunding refers to the practice of raising capital from a large pool of investors. Each investor supplies a smaller sum of money and receives compensation via loan interest or other rewards. With enough micro-investors, you can source a large sum of funds. Kickstarter and GoFundMe are common online crowdfunding platforms.
You can always finance your startup via a business loan. Founders may leverage debt from a bank or start a credit line with suppliers to cover initial business expenses.
Providers of business loans are typically more risk-averse, so if you plan to use traditional loan options to raise money, you should craft a comprehensive and convincing business plan beforehand.
Venture capitalists or angel investors may offer promising startups large sums of cash to accelerate early growth. In the first quarter of 2021, over $288 billion of venturing funding occurred worldwide. Startup venture capital offers you better financial resources early on, but you do reward your investors with equity or profit-sharing that vests after a set period of time.
How to Raise Capital for a Startup
Raising startup capital requires thorough planning and extensive networking. At a minimum, business founders should complete the following steps to protect their business interests and improve the odds of obtaining suitable investment from external backers:
Write a business plan
Profitable companies start with a bright idea or customer solution. But it is challenging to turn an idea into a well-run business. Startup investors understand the barriers that prevent efficient execution and demand that you outline your growth strategy.
To attract the initial capital your startup requires, you need to clearly document the core function of your business, the potential market you serve, and what you plan to do with any startup capital in the form of a business plan.
You should include the following aspects in your business plan:
- Description of the company and what it provides
- Market research (of your customers and competitors)
- Company hierarchy and management structure
- Sales and marketing strategy
Estimate your startup costs
There are three stages to estimating startup costs.
- First, identify the individual expenses you will have, such as office rent, supplies, salary, insurance, and marketing.
- Secondly, calculate the total costs of these expenses.
- Lastly, categorize your expenses as one-time or recurring costs to arrive at the true dollar amount of your funding needs.
You must meet and network with angel investors and venture capitalists as they provide the upfront investments in your business. You can find investors at in-person events such as seminars, meetups, and business conferences. Business owners can also network with investors on online platforms like AngelList or Investor Hunt.
Look for accelerators
Accelerators offer entrepreneurs a fast track to raising startup capital. With an accelerator, founders gain access to vital support for product development, industry networking, technology experts, and startup investors.
For example, MassChallenge offers industry (healthtech, fintech, blue tech etc) or location-specific zero-equity accelerators that allow you to compete for cash and additional prizes in a competition-based environment—without sacrificing ownership in your company.
Opportunities for Startups
It's not easy for early-stage entrepreneurs to locate startup venture capital, expert advice, and business resources for product development, especially without giving up significant assets or equity in return.
But MassChallenge and its global network of innovators create an environment that promotes access to funding, resources, and leadership. For decades, MassChallenge has worked alongside startups through its accelerator program to help launch, grow, and scale their businesses.
We provide you with the right tools to disrupt the status quo in the U.S., Latin America, the Middle East, and Europe. For example, our HealthTech and FinTech industry verticals enable us to connect late-stage startups to industry players to spur innovation. And, our Bridge to MassChallenge program boosts startup ecosystems, local innovation, and corporate innovation.
Partnering with MassChallenge is a unique opportunity for several reasons:
- Inclusivity: MassChallenge does not discriminate based on nationality, geography, or industry. If you want to create a new product, disrupt an inefficient market, or create real change, we want to work with you.
- Access to global contacts: Even if your target market is local, your business resources can come from across the world. Tap into our global network of contacts to launch and scale your startup.
- One-on-one mentorship: It's one thing to attend a speech alongside thousands of others. But receiving one-on-one mentorship and feedback about your startup from industry experts helps you locate inefficiencies and improve business outcomes with effective leadership.
- Industry-leading partnerships: Entrepreneurs often struggle to partner with large organizations within their space. Through MassChallenge, you can form impactful relationships with industry-leading government entities and companies.
- Equity retention: MassChallenge has a zero-equity approach. Startups keep all of their equity and compete to receive financial rewards and other incentives in all of our accelerator programs.
Are you curious about our accelerators? Explore the MassChallenge programs that are helping startup founders ignite their business growth and create meaningful change.