Funding Startups- The Next Big Thing In Funding A Small Business

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Uncover hidden strategies for attracting investors and funding your startup. Explore various avenues to finance your startup business & MVP with ease.
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Nerdheadz
Published
4/12/24

Introduction: 

In an era fueled by innovation and entrepreneurial spirit, small businesses and no-code startups are the lifeblood of economic growth and job creation.

However, one of the most significant hurdles faced by aspiring entrepreneurs is securing adequate funding to transform their innovative ideas into successful ventures. 

Startups, with their potential for exponential growth and disruptive ideas, attract investors seeking high-risk, high-reward opportunities, 

We’ll delve into the captivating world of funding these startups and explore why it has become the next big thing in financing small businesses. 

What Is Startup Funding

Startup funding refers to the financial resources and investments obtained by early-stage companies or startups to finance their operations, growth, and development.

It is the process of acquiring capital or funds from various sources to support, establish, launch, and expand a new business venture.

5 Sources of Startup Funding

A picture showing the best 5 ways to fund your startup
5 Ways To Fund Your Startup

Funding a startup can be divided into multiple broad categories in writing, however, in practice, these categories often overlap and a single business can utilize multiple sources of funding.

Moreover,  the availability and suitability of these funding categories vary based on factors such as 

  • The industry, 
  • Stage of the startup,
  • Location of business or central operation, and
  • The specific business model.

It's advisable for entrepreneurs to thoroughly research and evaluate the options below that align with their goals, needs, and most importantly, their target market.

Source 1: Personal Funds & Savings 

This refers to a situation where you use your personal savings or you utilize your personal resources to fund a startup. 

It involves investing the entrepreneur’s own money into the business without seeking external funding and includes:

1. Self-Investment: 

Popularly known as Bootstrapping, entrepreneurs may invest their personal savings directly into their startup as initial capital. 

According to a study by Fundable, 77% of small business owners used personal funds to start their businesses.

In a survey conducted by Guidant Financial and LendingClub, it was found that 82% of small business owners relied on personal savings for startup capital.

A popular example of a bootstrapped business is, Spanx, the popular women's shapewear company, founded by Sara Blakely in 2000, who used her personal savings of $5,000 to start the business. 

Today, Spanx is a billion-dollar brand.

2. Side Hustles and Part-Time Work:

A picture showing a study on 25% of small business owners who kept their jobs while starting a startup
25% of Small Business Owners Kept Their Jobs While Launching Their Startups

It is popular to find entrepreneurs who maintain a side hustle or work part-time while using the income they generate from their side hustles to fund their startups. 

This allows them to save money specifically for the startup.

A study conducted by LinkedIn and Intuit found that 25% of small business owners kept their day jobs while launching their startups.

A classic example was Airbnb, the renowned home-sharing platform tested with a no-code MVP, which was initially funded by its founders, Brian Chesky and Joe Gebbia, who rented out air mattresses in their apartment to generate income while developing the platform 

3. Cost Optimization and Frugality: 

To fund your startup, you can adopt a frugal approach by cutting personal expenses and reallocating those savings to fund your startup. 

This includes minimizing personal spending, downsizing, and living within a tight budget.

68% of startups are self-financed by their founders, indicating the significance of personal savings and cost optimization -according to a survey by the Kauffman Foundation,

Jeff Bezos, the founder of Amazon, famously started the company by operating from his garage, adopting a frugal approach and re-investing the initial revenue back into the business.

4. Retirement Funds: 

While some entrepreneurs use their side income, a few other entrepreneurs explore options like a Rollover for Business Startups (ROBS), which allows them to use funds from their retirement accounts, such as a 401(k), to finance their startups without incurring early withdrawal penalties.

The Small Business Administration (SBA) reports that approximately 10% of entrepreneurs use retirement funds to finance their startups.

Ben & Jerry's, the renowned ice cream company, was initially funded by Ben Cohen and Jerry Greenfield, who each contributed $4,000 from their combined life savings and borrowed $4,000 more to start their first ice cream shop.

5. Personal Loans and Credit: 

To fund your startup, you can also take out personal loans, use a credit card, or establish lines of credit to access additional funds for your startup. 

This approach involves leveraging personal creditworthiness to secure financing.

Approximately 45% of small business owners used personal credit cards to finance their businesses, according to a survey by the Federal Reserve, 

For example, Under Armour, the athletic apparel brand, founded by Kevin Plank, was initially funded using personal credit cards, invariably accumulating debt while the business was being built. 

Currently, Under Armour is a globally recognized sporting apparel brand.

Other bootstrapping methods include

Bartering- where you partner or collaborate with other businesses to share resources as a way to lower business costs, and 

Requesting commitments- or prelaunch purchases from the earliest customers of your brand. This can also be a great way to raise startup funds depending on what industry your product serves.

Source 2: Government Grants & Programs.

A picture showing a survey conducted by GEM about government funding for startups
A Survey Conducted By The Global Entrepreneurship Monitor (GEM

Governments at various levels may provide grants, subsidies, or funding programs to support innovative startups.

These programs are typically designed to foster economic growth, technological advancement, and job creation in specific sectors or regions, some examples include:

1. SBIR- Small Business Innovation Research and Small Business Technology Transfer (STTR) Program:

  • These programs provide funding to small businesses engaged in research and development (R&D) with the potential for commercialization.
  • The SBIR program sets aside a portion of federal research and development funds for small businesses, while the STTR program encourages partnerships between small businesses and research institutions.
  • A good beneficiary of this program is 23andMe, a leading genetic testing company, which received an SBIR grant from the National Institutes of Health (NIH) early in its development in 2010, which helped propel the company's growth and innovation.

2. SBA- Small Business Administration Grants and Loans:

  • The SBA offers various grants and loan programs to support small businesses, including the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs mentioned earlier.
  • The SBA's Office of Women's Business Ownership also provides grants to organizations that assist women entrepreneurs.
  • Stonyfield Farm, an organic yoghurt company, received an SBA-backed loan in its early stages, which helped fuel its growth into a successful and widely recognized brand.

3. EDA Grants- Economic Development:

  • The EDA offers grants to support economic development initiatives and job creation in specific regions or communities.
  • These grants focus on promoting innovation, entrepreneurship, and infrastructure development.
  • In 2016, the EDA provided a grant to the Illinois Manufacturing Excellence Center (IMEC), a nonprofit organization that assists manufacturers in improving their productivity and competitiveness. 
  • This grant helped IMEC expand its reach and impact, benefiting numerous small businesses in Illinois, USA.

4. NSF- National Science Foundation Grants:

  • The NSF provides funding through various grant programs to support scientific and technological innovation, with an emphasis on fundamental research.
  • The Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs within NSF are particularly relevant for startups (including no-code).
  • Alphabet (Google's parent company) received early-stage funding from an NSF grant, which contributed to the development of its innovative search engine technology.

5. Department of Energy (DOE) Grants and Loan Programs:

  • The DOE offers grants, loan guarantees, and other funding opportunities to support clean energy, advanced manufacturing, and technology development initiatives.
  • These programs aim to accelerate the deployment of innovative solutions and support startups in the energy sector.
  • Tesla, the electric vehicle and clean energy company, secured a loan from the DOE's Advanced Technology Vehicles Manufacturing program, which played a significant role in its early growth and development.

Source 3: Crowdfunding

A picture showing 8 processes involved in crowdfunding a startup
The 8 Steps Involved In Crowdfunding A Startup

The availability of crowdfunding platforms enables entrepreneurs and their startups to raise funds from a large pool of individuals, or communities who contribute smaller amounts to the startup capital. 

It often involves showcasing your startup's idea, product, or service to attract support and financial contributions.

Crowdfunding also offers you a way to validate market demand, gain early adopters, and generate funding without relying on traditional investors.

Ways to approach crowdfunding for your startup include

1. Rewards-Based Crowdfunding: 

With this method, you can offer rewards or pre-sales benefits of your products or services to backers who contribute funds to your startup campaign. 

This approach allows you to validate market demand and generate capital upfront to scale your business

According to Statista, global crowdfunding revenue amounted to approximately $13.98 billion in 2020.

An example of a company that utilized this method of crowdfunding was Glowforge, a 3D laser printer startup that allows users to create intricate designs and products with ease. 

The company raised a record-breaking $27.9 million through a crowdfunding campaign on Kickstarter, which helped them bring their innovative no-code 3D printing technology to market.

2. Equity-Based Crowdfunding

This is often the most common choice for entrepreneurs, where an entrepreneur offers shares or equity in their company to investors who contribute funds.

This approach allows these backers to become shareholders and potentially receive financial returns if the startup succeeds.

In 2020, the global equity crowdfunding market was valued at $11.4 billion, as reported by Crowdfunding Insider.

Pillowbux, a no-code mobile app that enables users to earn money by completing simple tasks, such as taking surveys or watching videos raised over $250,000 through an equity crowdfunding campaign on Republic. 

This funding allowed them to expand their user base and further enhance the mobile app's features.

3.  Donation-Based Crowdfunding

In this form of crowdfunding, you seek donations from individuals or organizations who believe in your startup’s vision or cause. 

This approach is, however, often used by startups with a strong social or environmental mission.

The crowdfunding platform, GoFundMe reported that its users raised over $10 billion from more than 120 million donations as of 2020.

A good example of a project that succeeded with this crowdfunding approach was Thunkable

This no-code mobile app development platform raised over $300,000 through a donation-based crowdfunding campaign on Kickstarter. 

4. Peer-to-Peer Lending & Crowdfunding

Some crowdfunding platforms allow you as an entrepreneur to access loans from individual lenders who are willing to provide funds at competitive interest rates. 

This allows startups to obtain financing while bypassing traditional financial institutions.

The global peer-to-peer lending market was valued at $67.93 billion in 2020, as reported by Grand View Research.

A popular beneficiary of this form of crowdfunding was BubbleIQ, a no-code automation platform, that raised $1.1 million through a peer-to-peer lending campaign on Wefunder.

BubbleIQ scaled its operations and enhanced its product offerings through the funds raised.

Source 4: Private Equity Investments 

A picture showing Private Equity Investments as a source for funding startups
Funding Startups with Private Equity Investments

Private equity investments have been instrumental in fueling the growth of numerous no-code startups.

These investments provide capital and bring valuable expertise and support, enabling many startups to scale their operations and realize their potential.

1. Angel Investors: 

Angel investors are individuals or groups of people who provide capital in exchange for equity or convertible debt for your early-stage startup. 

They often bring valuable expertise, industry connections, and mentorship to the table along with funding.

Angel investors in the United States provided approximately $25 billion in funding to startups in 2020 

Which data points to an estimate of 65,000 beneficiary companies in the same year according to the Center for Venture Research. 

Webflow, a no-code website builder-also used by Nerdheadz for its clients- received angel investments from various notable investors, including Tim Draper and Vlad Magdalin.

These investments supported Webflow's growth and positioned them as a leading player in the no-code app-building industry.

2. (VC) Venture Capital Funding: 

Venture capital firms invest in startups with high growth potential in exchange for equity. 

VCs typically target companies with scalable business models and the potential for significant returns on their investment. 

This category of funding for your startup can bring substantial financial resources and expertise but often involves giving up a portion of ownership.

Source 5: Startup Accelerator & Incubator Programs 

Startup incubators and accelerator programs play vital roles in supporting the growth and development of many startups with the United States seeing $156 billion invested across 11,632 deals by venture capitalists in 2021 according to PwC's MoneyTree Report. 

For example, Softr, a popular no-code web app builder, participated in the Y Combinator accelerator program

The program provided them with valuable mentorship, access to investors, and connections within the startup ecosystem.

Incubator and accelerator programs are initiatives designed to support the growth and development of early-stage startups. 

While both programs provide resources and guidance to startups, they differ in terms of their duration, focus, and objectives.

1. Incubator Programs:

Incubator programs are typically long-term initiatives that provide a supportive environment for startups in their early stages.

  • The main goal of incubators is to nurture and assist your startup and develop your business model, refine your products or services, and establish a solid foundation for growth.
  • Incubators offer a range of resources such as mentorship, access to workspace, infrastructure, networking opportunities, and sometimes seed funding.
  • Incubator programs may be run by universities, government organizations, private entities, or a combination of these institutions.
  • Startups in incubator programs generally have more flexibility and time to iterate their ideas and build their businesses at a pace that suits their needs.

2. Accelerator Programs:

Adalo, a no-code app builder, went through the Techstars accelerator program.

Accelerator programs are typically short-term, intensive initiatives focused on accelerating the growth of startups within a specified timeframe, often ranging from a few months to several months.

  • The primary objective of accelerator programs is to fast-track the growth and development of startups, helping them reach key milestones, such as product-market fit, customer acquisition, or securing follow-on funding.
  • They offer structured curriculums, mentorship from experienced entrepreneurs and industry experts, access to a network of investors, and sometimes seed funding in exchange for equity in your startup.
  • Accelerators usually culminate in a demo day or investor pitch event, where startups present their progress to potential investors.
  • They are also often associated with a cohort-based model, where a group of selected startups goes through the program simultaneously, allowing for peer learning and collaboration.

What Startup Funding Rounds Mean

Startup funding rounds refer to the stages at which a startup seeks external funding from investors to finance its growth and operations.

Each funding round represents a specific phase in a startup's development and is typically associated with different goals, funding amounts, and investor expectations. 

Here are some common startup funding rounds:

1. Pre-seed or Seed Round: 

This is the earliest funding stage, where startups often raise funds from founders, friends, family, or angel investors. 

The funds are typically used to validate the business concept, develop a minimum viable product (MVP), and conduct initial market research.

2. Series A: 

A picture with an estimate of 47% as the spendings for Series A startups
How Much Series A Startups Spend Per Month

The Series A round occurs when a startup has made significant progress, has a working product or service, and needs capital to scale its operations. 

This round often involves venture capital (VC) firms or institutional investors who provide substantial funding in exchange for equity in the company.

3. Series B, C, D and Beyond: 

These subsequent funding rounds follow the Series A round and are aimed at further scaling the startup's operations, expanding into new markets, or developing new products or services. 

Each subsequent round typically involves higher funding amounts as the company progresses.

And finally, the

4. IPO- Initial Public Offering: 

An IPO is the process of a private company going public by offering its shares to the general public on a stock exchange. 

This provides the startup with access to a wider pool of investors and additional capital for growth.

3 Popular Startup Valuations Methods 

Startup valuation refers to the process of determining the economic value or worth of a startup company. 

It is an assessment of how much your business is worth at a particular point in time. 

Valuation is a critical factor to consider when attracting investors, raising funds, negotiating equity stakes, or making strategic decisions for your startup's growth.

Startup valuation is often a complex process and involves a combination of different methods, taking into account various factors such as 

  • The current stage of your startup,
  • The dynamics of your Industry, 
  • Your businesses’ competitive landscape, and
  • The Investor preferences. 

Your startup’s valuation often depends on the specific circumstances and assumptions made during your business’ assessment.

For example, a popular startup valuation method, TAM (Total Addressable Market) Valuation is a specific approach that focuses on the market size and the potential of your startup's target market. 

It assesses the revenue potential of capturing a portion of the total market share. 

TAM valuation, as described, involves determining the size of your market, estimating your startup's potential market share, and applying a suitable valuation multiple or revenue multiple to arrive at your business’s valuation.

Other methods for the valuation of a startup include:

1. Comparable Company Analysis (CCA):

This involves assessing the value of your startup by comparing it to similar companies that have already been valued or have gone through funding rounds.

Key factors considered by investors in CCA include your industry, growth potential, financial performance, market size, and comparable transactions.

By analyzing the valuations of similar companies, a reasonable estimate of the startup's value can be determined.

2. Discounted Cash Flow (DCF) Analysis:

This method estimates the present value of your startup by projecting its future cash flows and discounting them back to their present value.

This method requires forecasting the startup's cash flows, determining an appropriate discount rate (which considers risk and opportunity cost), and calculating the net present value.

DCF analysis allows for a more in-depth assessment of the startup's potential profitability and future cash generation.

3. Venture Capital Method (VC Method):

The VC method is commonly used by venture capitalists to value startups.

It involves estimating a startup's future value at the time of an exit event, such as an acquisition or initial public offering (IPO).

The VC method takes into account the desired return on investment (ROI) for the investor(s) and the expected exit time frame.

It calculates a startup's current valuation based on the expected future value and the required returns on investment.

3 Expert Advice On Getting Startup Fund For Your Business/Idea.

Before seeking to raise funds for your startup, it's important to take several steps to prepare yourself and increase your chances of success. 

Here are three advised steps to consider:

1. Develop a Solid Business Plan:

  • A well-thought-out business plan is essential for attracting investors and demonstrating the viability and potential of your business.
  • Outline your business model, target market, competitive analysis, marketing strategy, financial projections, and growth plans.
  • Clearly articulate your value proposition, unique selling points, and how your business addresses a market need.
  • A comprehensive business plan shows potential investors that you have a clear vision for your business and have carefully considered its growth trajectory.

2. Validate Your Concept and Build a Minimum Viable Product (MVP):

  • Before seeking funding, it's important to validate your business concept and gather evidence of market demand for your product or service.
  • Conduct market research, gather customer feedback, and test your market concept to ensure a genuine need and interest.
  • Develop a minimum viable product (MVP) that showcases the core features and value proposition of your offering.
  • Validating your concept. Also, having an MVP helps build investor build confidence as it demonstrates that you have a viable product with market potential.

Related: 6 Steps To Kickstart Your Idea With A No-Code MVP

3. Build a Network and Seek Mentors:

  • Building a strong network and seeking guidance from experienced mentors can significantly benefit your fundraising efforts.
  • Attend industry events, join entrepreneurship communities, and engage with potential investors to expand your network.
  • Connect with successful entrepreneurs, industry experts, and advisors who can provide valuable insights, advice, and introductions.
  • Mentors and advisors can guide you through the fundraising process, offer strategic advice, and potentially provide introductions to investors.

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Conclusion:

In conclusion, the landscape of startup funding has experienced a significant shift with the rise of crowdfunding platforms, angel investors, and venture capitalists. 

These innovative approaches have provided alternative financing avenues for you to bring your ideas to life. The benefits of which are twofold, benefiting both you and the investors alike.

In this article, we explored the fundamental principles behind innovative funding approaches, highlighting how they have revolutionized the startup funding landscape. 

We also examined various types of startup funding, ranging from bootstrapping to equity crowdfunding, and evaluated their respective advantages and disadvantages.

Following the steps highlighted in this article and understanding the diverse funding options available provides your startup with the means to turn visionary ideas into reality by helping you make informed decisions about the best path to finance your venture thus giving your ideas the opportunity to shape the future of industries.

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