It’s time to get your company off the ground, but to turn a concept into reality or reach a new level of growth, you need that critical business propeller: capital. The question is: how do you get your hands on capital?

Fortunately, there are numerous avenues for business fundraising and financing. To leverage them, however, you must approach this undertaking with a highly informed, strategic mindset. 

Investors are looking for the next great opportunity, and banks are available to finance business initiatives that meet their criteria. If you’re an innovative company with the potential for success, you have a myriad of fundraising opportunities at your disposal.

The trick is understanding which of these options is best for your unique situation and what’s required to secure the capital you need. 

As you navigate this complex aspect of entrepreneurship, the most important action you can take is to educate yourself and utilize expert support.

This page was written to help explain the seven common types of fundraising and finance options for your startup business and to provide insight into each option and its respective pros and cons. 

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#3: Angel Investors

The business world is graced by a number of affluent individuals with “wings on their back.”  Angel investors have the means to provide start-up capital in exchange for convertible debt or ownership equity, and you should take every opportunity to tap into this resource if your financial state necessitates it.

With a strong business concept, a solid pitch, and some self-initiated luck, you could garner tens to hundreds of thousands in start-up funds from an angel investor.

Many angel investors are professionals in a particular field interested in supporting businesses in the same area. If they are experienced, they may have significant value beyond their monetary contributions. They could provide beneficial guidance and expert insight. Some will want to have a heavier hand in your business operation, while others will be more removed. The type of Angel Investors out there are as varied as individual personalities.

Acquiring capital from an angel investor will hinge on your proficiency in two specific arts: The art of storytelling and the art of negotiation.

Remember, these investors are putting their own money on the line, and they're not going to do so lightly. If you've ever watched a television episode of Shark Tank, you've seen first-hand the kind of preparedness, authenticity, persuasion, and skill that goes into winning over the favor of an angel investor.

The best way to contact an angel investor is through a shared connection, like a colleague or friend. If you don't have any in your personal network, you'll need to rely on other methods. Some investors like to remain anonymous, which can make it particularly challenging to identify them.

To aid your efforts, consult local angel networks, reach out to venture capital firms, and sift through established online resources.

#4. Private Equity 

Companies have the option to sell shares in their business without being listed on the public stock exchange. Via private equity firms, capital is acquired from institutional investors or high-net-worth individuals and invested directly into a private company (among a portfolio of other private companies). This is a significant aspect of the United States economy, as statistics indicate that there are significantly fewer public companies than in previous years.

The Financial Times reported that “In the 1980s, the US averaged more than 200 IPOs per year, and during the dotcom boom-- (when the focus was going public quickly on a prospectus of enthusiasm and ideas rather than a record of success), US markets saw 547 listings in 1999 and 439 in 2000. Now, companies seem to delay going public indefinitely than listing too soon”. 

Through venture and some of the capital and private equity are both non-public forms of funding, there are fundamental differences. Venture capital is more frequently aligned with less mature companies, still building their market, management team, and sales engine. Therefore, there’s more risk involved.

On the other hand, private equity firms are often interested in buying more mature companies. Some of the more active investors want to be engaged on an operational level to identify more significant profitability opportunities.

#5. Venture Capital 

Facebook, the social media giant born from a 19-year-old Harvard student’s determined efforts in the mid-aughts, is now worth over half a trillion dollars. The truth is, Facebook would not be the booming success it is today without the intervention of venture capitalists like Peter Theil and Jim Breyer.

These investors saw the incredible growth potential Facebook exuded and risked large sums of money in hopes of seeing significant returns (which they achieved in spades). Facebook is just one of many success stories that illustrate the power of venture capital.

Venture capitalists and venture capital firms aggregate funds by managing investors looking for private equity stakes in businesses poised for growth. They're tasked with raising money from Individual partners and diversifying risk.

Capital is pulled from resources like pension plans, foundations, and angel investments, generally with the intent of garnering returns in the 15% range.

Not surprisingly, venture capitalists seek opportunities with the most efficient returns because they accrue compensation in the form of a percentage (usually around 20%). Some are professionals in specific industries like the medical field or the technology arena. 

They often bring a great deal of knowledge and experience to the table, supplying business capital, expertise, and valuable connections in the industry.  The significant majority of venture capitalists reside on the west coast, the hub of the technology sector, where opportunities for emerging growth companies are more prevalent. 

While venture capital is most commonly afforded to established businesses, there are opportunities to utilize this avenue for early start-up funds. To minimize risk, venture capitalists will sometimes break down their investments and paying intervals (otherwise known as “tranches”) tied to business milestones. Such conditions are particularly frequent in the life sciences field, where investors want to see progress in research and development before handing over additional funds. 

If you move forward with an investment opportunity from a venture capitalist, expect to sell preferred stock and accrue dividends. Be careful about what you promise because every time you raise money, you forfeit more of your business’s ownership.

#6. Private Equity 

Companies have the option to sell shares in their business without being listed on the public stock exchange. Via private equity firms, capital is acquired from institutional investors or high-net-worth individuals and invested directly into a private company (among a portfolio of other private companies). This is a significant aspect of the United States economy, as statistics indicate that there are significantly fewer public companies than in previous years. 

The Financial Times reported that “In the 1980s, the US averaged more than 200 IPOs per year, and during the dotcom boom-- (when the focus was going public quickly on a prospectus of enthusiasm and ideas rather than a record of success), US markets saw 547 listings in 1999 and 439 in 2000. Now, companies seem to delay going public indefinitely than listing too soon”. 

Through venture and some of the capital and private equity are both non-public forms of funding, there are fundamental differences. Venture capital is more frequently aligned with less mature companies, still building their market, management team, and sales engine. Therefore, there’s more risk involved.

On the other hand, private equity firms are often interested in buying more mature companies. Some of the more active investors want to be engaged on an operational level to identify more significant profitability opportunities.

#7. Bank Financing

The primary benefit to bank financing is that you don’t have to dilute your business ownership to the extent you typically would with venture capital or private equity. The caveat is that you have to repay the bank. There are two basic types of banks that offer business financing: venture banks and commercial banks.
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#8. Mezzanine Funds 

When multiple funding sources are utilized to accrue business capital, there’s a tiered structure for repayment. Your senior debtors are the top priority, while your equity (or that of friends and family) resides at the bottom. In between these tiers is the mezzanine level.

Because the terms of mezzanine loans make them subordinate to senior debt, mezzanine financing options are typically more expensive. As explained by Investopedia, “Mezzanine loans are a combination of debt and equity financing, most commonly utilized in the expansion of established companies rather than as a start-up or early-phase financing.

This type of funding is similar to debt capital in that it provides the lending party the right to adjust terms to access ownership or equity interest in the company if the loan is not paid back fully and on a timely basis. 

These loans are made available in a short time frame and usually require only minimal collateral from the borrower. Mezzanine loans command significantly higher interest rates, typically within the range of 20-30%. 

#9. Simple Agreement for Future Equity (SAFE) 

One type of funding option that has become popular in Silicon Valley but remains rare in other parts of the country is the SAFE agreement. These are often utilized in crowdfunding scenarios.

A bulletin from the U.S. Securities and Exchange Commission (SEC) describes SAFE as an “investment between the investor and the company, in which the company generally promises to give the investor a future equity stake in the company if certain trigger events occur.”

Such events could include when the company next raises investment capital, is acquired, or has an IPO).” Not all SAFEs are the same, and terms of governing the transfer of equity may vary.

Pt. 2: How to Develop a Fundraising Strategy

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Fully comprehending your funding strategies is only the first part of the equation. Next, you need to do the work of identifying and attracting fundraising opportunities and begin working on your pitch. 

It’s also critical to begin forming (or cultivating) relationships that support your financial needs. Understand that this isn’t a leisurely pursuit. It requires research, practice, and the right skills to engage the right people. The following tips will help you get on the right path.

Be Prepared 

Before you run out to sell your pitch, take a step back. It’s never a bright idea to get in front of potential investors too early. Doing so could significantly hurt your chances of raising capital. The first aspect of preparation is deciding which funding options best suit your business’s needs. Early-stage companies, for example, should be talking to seed investors (i.e., friends and family, angel investors, or venture banks). A more mature business interested in growing will want to focus on growth equity investors or commercial banks. Be thorough in your research, and consider speaking with an expert financial professional to identify the most suitable funding types before jumping to action. 

Don’t forget: you only get one chance at a first impression. Do everything in your power to make sure you’re completely ready when you go for it. That means developing an engaging presentation, equipping yourself with all relevant information, and practicing your pitch until you’re confident in your ability to deliver.

The Top 10 Traits Investors Look for when Funding a Company 

To convince a prospect that investing in your business is a smart move, you have to know which traits will attract investors to your company, what excites them, and what makes them feel safe. 

Secure Key Introductions

A warm introduction can be essential to getting in front of the right investor. In fact, a portion of investors will only entertain the idea of an emerging growth company if it is introduced to them by a trusted friend or colleague. Many tune out cold calls and unsolicited pitches, so your investment search’s introduction aspect is fundamental. 

This is where the importance of networking shines. You won’t secure investor introductions if you don’t build and utilize a network of connections to those investors. This network can span from friends, family, and former colleagues to fellow entrepreneurs. Keep these contacts sacred and organized.

Sometimes, landing an investment opportunity is a game of numbers. The more introductions you get and pitches you make, the better your odds of securing an investor. 

Tell a Good Story 

Investors want to be romanced. They have to feel compelled to believe in your business. If they don’t connect with you, they’re not going to put their money in your coffers. Your pitch presentation must be able to draw people into a compelling story. 

Telling this story begins with a solid deck, perhaps the single most important tool you have when raising capital and appealing to investors. It should be designed to showcase your business mission, your long-term goals and incremental milestones, how you intend to use the funding, and your future vision.

Take the time to assemble this deck with experienced advisors’ assistance, including all the necessary talking points. 

Even if you come prepared with a strong presentation, you have to talk about your business without it. You must be flexible enough to pivot and abandon the deck to connect with your audience and engage in a robust back-and-forth conversation. You’ll need to answer investor questions and validate their concerns.

Survive the Inevitable ‘No’

The road to business success can be a long one and is often riddled with potholes and roadblocks along the way. You’re likely to face a few closed doors and sharp rejections in grades to investments and financing options, but that doesn’t mean you don’t have a valuable business concept on your hands. 

Even if you don’t receive the funding you’re seeking, there’s an opportunity to realize your business dream. Airbnb is an excellent example of powering through rejection.

Airbnb, now valued at approximately $71 billion, had difficulty attracting investors as a startup, so its founders raised money by selling cereal. They repackaged bulk cereal into handmade, political-themed boxes and earned over $30,000 in two months. While such a pivot is unconventional at best, it aptly demonstrates that a single ‘no’ doesn’t always signal the end of your story.

"I have not failed 10,000 times, I have not failed once. I have succeeded in proving that those 10,000 ways will not work. When I have eliminated the ways that will not work, I will find the way that will work" 

-Thomas Edison

Even when you get turned down, use the experience to learn something helpful and preserve the connection you’ve made during the exchange. Instead of accepting rejection and walking away empty-handed, find out why your pitch wasn’t a success and use that knowledge to improve your investment acquisition efforts in future meetings.

You must also acknowledge that not all investors will be right about your business and be suitable for your business. Some may feel that it’s too early in the process- which is why maintaining contact is critical. You may land funding later down the road. 

Stay focused on the long term. Building a successful, viable company is not like flipping a house. You can’t expect to see a significant return on your efforts and investments unless you remain focused on building a solid business over time. That is where your mind should be, and that’s how you make the intelligent business decisions that eventually garner the financial outcomes you desire. 

If you have a strong business idea but need help finding financial support and navigating the funding process, we’re here to help. For professional guidance or sell-side advisory, consult our experienced team.