Breakdown of Start Ups
There is all this commotion revolving around the evolution of startups and the “startup culture”… but what does that even mean? According to the Small Business Administration, a startup is typically associated with a new business, mainly in a technology related field, that has high growth potential. However, many successful startup founders find this definition incredibly limited in its scope. According to Paul Graham, a successful startup entrepreneur, a startup company can be in any industry, but the common theme between every single startup is the business model that is designed to grow incredibly fast – growth is key in any startup, and every other component of a startup stems from that growth. Plus, in today’s rapidly innovative culture, more and more startups are appearing in every industry, not just the technology field. Most startups are viewed as having an exit strategy, but many successful startups are not leaving the industry simply because their product or service has created a multitude of wealth; what the startup industry is seeing today is the evolving process of constantly innovating. There are six agreed upon stages associated with the startup culture:
- 1. Ideating: This step is what people often associate with the start of Microsoft or Google – sheer entrepreneurial ambition stemming from a creative product or service idea. This is the backbone of American culture: innovation. This step often lacks a structured business plan, and may or may not include all of the necessary skilled people needed to make this idea a reality.
- 2. Concepting: After forming a valuable idea, startups often start to define a doable mission and vision with a basic strategy. This typically involves the initial co-founders that all have skills to contribute that are vital to making the next stage possible.
- 3. Committing: This is a difficult phase for many startups to delve into because it is, well, committing. This stage often involves the startup development of the product or service. Associated with this stage is also the search for enough funding and partners to make this venture possible.
- 4. Validating: Through the validating phase, a startup typically works on testing and perfecting the product or service. The founders also work on initial user growth, revenue, and other investment and loan opportunities.
- 5. Scaling: This phase is often reached when there is success in the startup, and as mentioned above, growth is key for every single startup. Marketing, expanding the business, and significant funding increases are key proponents in this stage.
- 6. Establishing: This is the ultimate goal of any startup. Accomplishing this phase will look different for every startup, depending on the startup culture and values associated with that business. However, most startup businesses find that increased revenues, continuous growth, and popularity of the product or service is considered “establishing”. This is the point when a startup decides to exit the market or continue with the company.
So now that we are all on the same page of what a startup is (and the amount of definitions for startups are constantly changing, but this is a typical basis), evaluating the four essential funding steps associated with startups are incredibly important.
This stage of funding is always the first investment round for a startup business. Establishing seed investment typically helps the founders of a startup to establish direction, goals, and definite ideas of the business. With a seed investment, startups try to achieve at least one, if not all, of the following:
- a) Product Identification: While the cofounders at this stage typically have an idea in mind, once seed funding is obtained, then the definitive aspects of the design of the product are service are typically put in place.
- b) Marketplace Orientation: Through marketplace orientation, a startup would be doing extensive research on the best marketplace; this often involves trying to find the niche area that their product or service would fit best in to reach maximum profits.
- c) Demographic Targeting: If this is the main focus for a startup during seed funding, the most important aspect of this achievement is to find the ideal customer base to be selling and marketing the product or service for.
- d) Team Creation: If a startup needs more employees on board to help with the actual production of the product, then seed funding can be used for this as well.
2. Series A
This step of funding can come after the seed investment stage, but sometimes startups do not need seed funding from investors (due to personal finances, family loans, etc). This can be the first or second round of funding needed in a startup. When investors contribute to a startup in this phase, they are expecting the startup to achieve one, or all, of these goals:
- a) Distribution: This phase of funding often includes a focus on optimizing the way advertising, marketing, and selling the product is done, which in turn can help to lower overall costs, thus increasing sales.
- b) New Markets: If a product or service is successful, many business owners find themselves ready to launch into new markets – but this can be incredibly expensive. During Series A funding cycles is when this is often done.
- c) Stage 2: This is usually the most important step of the second round of funding – taking the startup to the next level. This can look different for every startup, but is often the most vital step in reaching maximum potential.
- d) Shortfall: Series A funding is also used to help with any capital shortfalls. Even if a product is incredibly popular and successful, many businesses experience issues that require immediate capital, therefore depleting profits and requiring more funding.
3. Series B
Series B funding stage is often done after the startup is well on its way to becoming successful and established. The major focus for this round of funding for startups and investors alike is expansion and scalability, which often include:
- a) Team Expansion: With any profitable and successful business comes the need to grow and hire more employees. This is often the most common use for Series B funding. By expanding the business and adding more employees, most startups see increased profits.
- b) Globalization: This step is similar to some of the steps in Series A funding, but on a much larger scale. If a startup is successful in their local regions, expanding across the nation or even globally may be the next step.
- c) Acquisitions: Sometimes successful startup business owners are ready to launch into the next phase of their business – acquiring other businesses! Whether the business being acquired is a competitor or a new startup with an amazing innovation, acquisitions may be beneficial for many successful startups.
3. Series C
This may or may not be applicable to every startup, however many investors and startup business owners are hesitant to have too many rounds of investment. This is often because when investors and startups work together, there is usually equity involved. Each round of investments with different lenders could potentially water down the stakes of the investors already involved in the startup. However, sometimes this may be a necessary step. The amount of investment rounds for a startup will vary, especially if the startup continues into a profitable business with more innovative ideas and products.
What are the Uses of Startup Financing?
- Innovation: Innovation is the backbone of every single startup around today, which is why it is always necessary for funding to help with innovation. Whether a new startup needs funding to help[ cover costs to produce the innovative idea or product, or the startup is already well-established and is looking to bring in the best and brightest new talent to spur innovation, there is always the possibility of obtaining funding to help support this necessity.
- Technology: Startups revolve around technology products, software’s, and services. Even outside of innovative ideas, a tech-based startup must have top of the line technological software’s and programs to help manage day to day operations, increase productivity, and help with many essential functions like marketing and inventory management. There are a variety of loan options to help acquire the necessary technology for any startup.
- Marketing and Social Media: Marketing is the most essential piece of any business, especially startups looking to exploit a particular market and key demographic. In order to reach younger generations in particular, focusing on content marketing and social media campaigns are vital to staying afloat in this highly competitive startup industry.
- Working Capital: Working capital is often the bane of every startups existence! Why? Because startups are often lacking initial capital costs to cover payroll, office space, and even production costs. This is why considering a variety of loan, crowdfunding, and alternative funding options are vital for every single startup.
- Payroll and Hiring New Employees: For most startups, focusing on covering payroll costs for all of the founders is usually all there is in the beginning. As a startup expands and gains momentum, more employees are usually brought on board to help with a variety of essential business functions. Sometimes, miscellaneous expenses and fees come up, which can make covering vital payroll costs difficult. There are always financing options to help with this common struggle.
- Purchasing/Renting New Office Space: This is usually not an immediate priority for most startups at the seed phase, however this can be an incredibly exciting decision when the startup is experiencing increased profits and overall success! Remembering that there are a variety of finance options to help can be important.
Types of Startup Loans
|SBA||6-10%||3-7 years||10-30 days|
|Line of Credit||5-15%||1 – 3 years||7-30 days|
|Stock Loans||5-15%||1-3 years||5-7 days|
SBA Startup Financing
This option is still considered a conventional financing choice, however it is worth mentioning some of the funding options available through the Small Business Administration. There are a variety of requirements associated with SBA loans, however they are much easier to obtain than traditional bank loans. Startup loans from the Small Business Administration are “guaranteed”, which means that the SBA agrees to back a portion of the SBA lender’s losses should the startup default on the loan. The three most common startup loan options (for both seed funding and other funding stages) from the Small Business Administration include:
- 1) Basic 7(a) Loan Program: Through this loan, startups can use the capital to start, acquire, or expand a small business. This is the most basic type of loan offered by the SBA and must be applied for through a participating lender institution.
- 2) Certified Development Company (CDC) 504 Loan Program: This is a loan option for funding in later startup stages. This form of financing provides growing startups with long-term, fixed-rate financing for fixed assets (i.e. buildings).
- 3) Microloan Program: A microloan is a much smaller financing option for startups. Approval for this option is done on a local level, so make sure to contact a local intermediary for more information.
- Rates: 5-10%
- Terms: 1-25 years
Bootstrapping or Friends and Family
This is often a difficult funding option to consider for any business owner; when family emotions come into play, this is often avoided. However, the best option, if it is possible, is to consider “bootstrapping”, or financing the startup yourself, or discussing with friends and family the possibility of financial support. The biggest advantage? You get to keep total control of your startup. Through other forms of financing, such as venture capitalists, most startup owners have to give up a portion of their business equity in order to generate enough financial capital to keep the startup going. Some business owners may be fine with that, while other startup founders would prefer to keep control over every aspect of the startup.
This is an incredibly popular funding choice for many startup owners, often called the lifeblood of early stage startups. Angel investors are individuals with a surplus of capital looking to invest in the best next generation innovative startups. Angel investors have actually played a major financing role in prominent businesses such as Google, Yahoo, and Alibaba. With this funding alternative comes the decision of giving up equity in order to receive large amounts of capital. However, angel investors typically have years of experience in funding startups, allowing many startup founders to have the added benefit of strategic learning and experiences from those investors. Also, most prominent startups and investors would recommend to only deal with angel investors in your area. Listed below are some of the top angel investors in next generation startups, as well as resources to find investors in your area:
- Angel Capital Association: This is a major website designed to help startups connect with a accredited angel investors. Through the Angel Capital Association, there are a variety of ways to find the top angel investors in the country. Also, make sure the search for angel investors in your area.
- AngelList: AngelList is an incredibly popular platform for startups and investors alike. This platform specializes in connecting startups with accredited investors.
- Investors’ Circle: This is a national organization of angel investors which connects startups with investors. Through Investors’ Circle, startups dedicated to improving the environment, education, health, and community are the key focus.
- Spencer Trask: Through Spencer Trask, startups and investors have the ability to search a large database to find options. It is essentially like a match making service for startups and angel investors!
- Tribe of Angels: This angel investing site is specifically for Jewish entrepreneurs, investors, and students. Tribe of Angles allows Jewish startups to connect with researchers, executives, and technical grad students across the world.
- MicroVentures: This is one of the most popular and diverse angel investor databases around today. MicroVentures has a rigorous application process for startups that are given the opportunity to be placed on the website, however it will be well worth it if it can lead to funding!
Venture capital is essentially capital that is given to startups that are expected to have high-growth potential, however venture capitalists predominately focus on technology based startups. This does not mean that venture capitalists will not lend to other types of startups though! Venture capitalists often come with tons of up front funding and plenty of resources to help the startup grow successfully. Unfortunately, venture capitalist funding is often associated with the downside of being difficult to obtain for seed funding, as well as having to give up some equity. Weighing the pros and cons is always advised, but if your startup is interested in venture capital, here are some of the top choices for startups:
- Andreessen Horowitz: This venture capitalist firm was founded by Marc Andreessen and Ben Horowitz. This firm focuses on bold entrepreneurs that are willing to think big and grow fat. They also provide startups with access to business expertise and insights.
- Khosla Ventures: This venture capital firm focuses on technology solution startups in the United States, specifically with innovative and unusual technology approaches.
- SV Angle: SV Angle is a San Francisco based capital firm that allows startups access to business development, financing, M&A, and other important business advice.
- Accel: Once again, Accel focuses on technology based startups. They have a strong startup culture that revolves around openness, innovation, and communication at all levels of startup businesses.
- New Enterprise Associates: This major venture capitalist firm works on a global scale, but specializes in startups in the technology and healthcare sector.
- Sequoia: Sequoia is often a popular option for seed funding; they strongly believe in connecting with the startups they fund immediately in order to help streamline the business process from day one.
- Venrock: This is also another popular venture capitalist firm for startups. Venrock is known for their success in many sectors due to their unique approach to massive markets.
- First Round: First Rock is the proud funder of Blue Apron and Uber, among other big startups. They work with seed funding and prefer to work with startups from day one.
- Spark Capital: Most venture capital firms focus mainly on technology startups, but Spark Capital is proud to support startups who make products and services for consumers and other businesses across many sectors.
- Triangle Peak Partners: This is a great option for any technology and energy based startups. Triangle Peak Partners focuses on growth equity and venture capital.
Crowdfunding is a relatively new fad that has allowed many startups to receive lots of funding. There are endless amounts of crowdfunding sites available to the startup world today, however, once again, this is usually catering towards technology startups. There is also a ton of work involved with crowdfunding that can sometimes result in zero funding. The process of crowdfunding consists of creating a crowdfunding campaign – a detailed business description, goals of the business, future financial strategies to increase profits, why the startup needs funding, and what will be done with that funding. Crowdfunding sites are equity based, reward based, or donation based. Here are the most popular crowdfunding options for startups today:
Crowdfunding for all Industries, including but not limited to startups:
- Kickstarter: This is one of the top crowdfunding sites for all businesses. Kickstarter allows businesses and startups across all industries to enter the crowdfunding world.
- IndieGoGo: IndieGoGo is up there in popularity with Kickstarter, however it is mainly donation based, as opposed to Kickstarter’s rewards based crowdfunding platform.
- Fundly: The benefits of Fundly as a top crowdfunding site is that it has a major social media component, which should already be a top priority for all new businesses.
Crowdfunding Specifically for Startups:
- WeFunder: Through WeFunder, startups have access to a variety of crowdfunding opportunities. WeFunder focuses specifically on making sure everyone has the ability to invest in the new, cutting edge startups in the country.
- FundRazr: This crowdfunding site takes pride in being incredibly easy, yet highly effective. There are no fees and penalties associated with FundRazr.
- Bank to the Future: This is a crowdfunding site dedicated to startups in the financial and technological innovation industries.
Startup Incubator or Accelerator
Incubators and accelerators for startups are becoming an increasingly popular option for seed funding. They are both very similar in what they do, however there is a major difference. Both accelerators and incubators work on helping the startup through various tools, training, networks, and support systems; where incubators are typically used for slow growth and initial stages of startups, accelerators are usually used to help startups experience giant leaps of growth in a short period of time. Both are incredibly valuable funding resources. Here are some of the most popular:
- Y Combinator: This is the top incubator and accelerator in the country today. Y Combinator has funded major startups such as Airbnb and Dropbox.
- TechStars: TechStars is a smaller firm that is well known for helping other incubators. They believe in staying smaller to be more personal and involved with the startups they fund.
- DreamIt Ventures: This company has locations in Philadelphia, New York, and Israel. They focus on providing startups with access to top investors, as well as many important business resources.
- AngelPad: AngelPad focuses on seed stage investing, and is a prominent accelerator program in New York and San Francisco.
- Launchpad LA: If your startup is based near Los Angeles, then consider reaching out to this popular firm. Launchpad LA offers funding, free office space in Santa Monica, access to a large business network, and so much more.
- Excelerate Labs: Excelerate Labs focuses on creating the ultimate successful entrepreneur through a variety of funding and resources.
- Transmedia Capital: This company is an early-stage venture fund. Transmedia Capital provides funding, domain expertise, operating experience, and relationships to startups in the technology field.
- 500 Startups: This company focuses on investing in a variety of startups, however 500 Startup’s prefers to focus on: consumer commerce, family tech and education, design, SMB productivity and cloud services, food tech, and a few other key areas.
- TechNexus: TechNexus works with startups as investors, corporate innovators, catalysts, and collaboration partners.
- Tech Wildcatters: Tech Wildcatters launched in 2009, and by 2012 became one of the top 15 accelerators in the world.
Grants are another great option for any round of funding for startups, however most grants are either incredibly difficult to come by, or incredibly difficult to obtain. Grants often have a lengthy application process that most businesses want to avoid, however with grants, there is no equity being sold. This allows businesses to be solely owned and managed by the startup founders. While this may not be the best option for every startup, it is still a valuable resource for those startup owners willing to put in the extra legwork.
- gov: This is always a great first place to start when researching grants. Through this website, there is a database of all the possible grants available to startups and small businesses. Make sure to filter the results on the left side of the page to avoid non-related grants!
- Federal Grants: This site provides a database of a variety of federal grants in many different categories.
- Amazon Web Services Startup Challenge: While this is not a grant, it is still worth mentioning because it is still essentially “free money” with no strings attached. Amazon Web Services Startup Challenge is an annual contest that provides rewards of $50,000 plus $50,000 AWS credits to businesses each year.