How Startups Really Get Funded
One of the most least-discussed topics amongst entrepreneurs is how they received the initial funding to launch their startup. Despite the mystery around this topic, as a consultancy that talks about funding with startup founders every day, we can share how the majority of startup founders funded their startup upon launch.
Garnering funding for a new venture takes a lot of hard work and time, and is rarely glamorous, but is completely feasible as long as the work needed is put in. Our hope is that this sheds some light on the myths and realities of how the majority of startups get their ventures funded, along with what we do and do not recommend based on our experience.
Customer Acquisition and Bootstrapping
The majority of entrepreneurs focus on perfecting their startup's customer acquisition strategy and business model, while bootstrapping at the same time. This allows the company to save the money needed to make significant hires and investments to scale its business. This is also a sound strategy that helps a company solidify sustainable revenue channels for the business so that they do not have to consistently rely on outside investment for growth. Daymond John has a pretty inspirational story about how he grew FUBU by only buying $1,000 of inventory to launch his company.
Savings / Friends and Family Investment
It's pretty common for entrepreneurs to work a full-time job while they're building their startup on the side. This allows them to tap into their income or savings to help fund the startup while still receiving a paycheck to cover their bills. Asking for angel investment from friends and family members is also a common route if a startup has to purchase inventory in order to bring in its first pool of sales. If one does not have an immediate group of friends and family they can reach out to for investment, entrepreneurs brush up on their networking skills.
Entrepreneurs seeking loans for their business usually refer to the loans offered by the Small Business Association, or look to companies such as Kabbage or Kiva (who has 0% interest loans for US entrepreneurs) for lending opportunities. Although loans are a strong consideration for businesses that require capital to expand its sales reach or to purchase inventory, we generally do not recommend this route for businesses that do not fit this criteria.
Sales verticals are sales channels through which a company is able to generate sales from its target market through a different type of product or service. For example, if an accountant eventually wants to release a digital product such as an online course but does not have the capital, s/he may sell consultations with clients for a few months first to help build the capital to create the online course. In other words, a startup finds another channel to generate revenue and uses the capital garnered from that channel to invest in their desired product/service.
Some startup founders exchange "sweat equity" to individuals who can contribute to the building of their platform, customer acquisition efforts, or bring another desired skill to the table. We're not advocates for "sweat equity" exchanges and generally do not recommend it to startups.
If a startup is accepted into an accelerator program, they are usually provided a seed investment, along with mentorship, education, and access to valuable investment opportunities. Accelerator opportunities vary according to industry (for example, there are accelerators for startups in the medical space, for startups in the food industry, etc.).