There are three main types of startup funding:
Bootstrapping
Startup uses its own money, credit cards and other forms of personal finance to fund the business. This is often done by entrepreneurs who believe in their idea and want to make it work without needing external help. It can also be done by those with no choice but to self-fund due to lack of outside investment options. When a business is bootstrapped, owners need to ensure that they break even as fast as possible and reinvest any profits into the business until there is enough revenue and profit available for expansion and marketing purposes.
Hey! So this section here should describe the 3 main types of funds you can get as a startup or entrepreneur – what each type entails, what they are for, when to use them etc.
There is also another type of funding called zero-equity or sweat-equity in which the founders give up their time and expertise in exchange for money. This term isn’t used all that often but can be an effective way to reduce costs associated with funding your business.
Venture Capital
Venture capital (VC) firms invest in startup businesses that could potentially offer high returns on investment at some point in the future. VCs make these investments due to their large funds and reach across different industries, allowing them to find opportunities where other financing companies might not be able to do so easily. Businesses funded via venture capital must present a clear towards profitability and revenue growth over the long-term.
Angel or Seed Funding
This is typically early stage financing that takes place before a startup begins trading and/or has even fully developed their business idea. It can also be used for startups that are looking to re-launch (and the investors will help them with this process). As such, angel funding often comes from personal networks and connections of the founders themselves as opposed to professional investors.
These individuals so commonly known as angel investors can be relatives, friends or industry professionals who believe in your ability to make your vision a reality and want to see you succeed.
They will give you money without expecting any equity in return and they generally only invest small quantities relative to those offered by VCs – meaning that they may not know what they’re doing.
Debt Funding
A debt funding is an agreement in which the startup or business makes arrangements with creditors to borrow money that they will pay back at a later date with interest added on top of the original sum borrowed. This type of funding is popular among small businesses and new startups as it does not require equity and can be paid back whenever you like (if and when your business succeeds).
