Every startup needs fuel to grow, and in most cases, that fuel is capital. Whether you are building your minimum viable product (MVP), expanding your team, or entering new markets, raising your capital is an essential milestone to scaling your startup.

Securing funding can feel unfamiliar and challenging for first-time founders, but once you lay a solid financial foundation, achieving your startup’s key milestones becomes much more manageable.

The benefits of raising capital include not just financial backing but also the strategic insights and partnerships that come with it. Many startups begin with personal funds, loans, or angel investors, but as your business matures, structured capital raises become essential.

That is where FB Ventures comes in. We help founders like you connect with investors and streamline the fundraising process.

In this guide, we will breakdown the various funding options to raise capital and give you the step-by-step playbook for before you start to consider attracting investors.

‍What is capital raising?

Capital raising is when a startup seeks the funding it needs to take the next big step. By reaching out to investors either through debt or equity, the business secures the financial resources necessary for growth. Startups often need this capital to cover early-stage expenses like developing products, researching markets, building a team, and expanding operations. With the right backing, these ventures can therefore reach their potential.

The funding stages of a startup: Series Breakdown

At each stage of development, the fundraising needs of a startups require a tailored approach to securing capital. Here is a breakdown of how funding needs shift as a startup matures:

Pre-seed and seed funding

At the earliest stages, startups often lack the resources to bring their ideas to life. Seed funding is used to cover essential activities and creating a minimum viable product (MVP). This capital also helps hire key initial team members and shape the business model. These funds assist the validation of the startup’s concept and further establishes the groundwork for future growth.

Series A funding

Once a startup has launched its MVP and gained some traction, typically shown by user growth or revenue as key factors, the Series A funding is beneficial as it takes the startup to the next level. At this stage, the focus is on scaling the business. The funds are used to refine the product, expand the customer base, and ramp up marketing efforts, moving from a validated idea to a scalable business.

Series B funding

Series B marks the stage where growth accelerates. Startups use this round of funding to significantly expand their market presence, invest in new talent, and enhance technology or infrastructure. It supports aggressive growth strategies, including market expansion and staying ahead of competitors, positioning the company for leadership in its industry.

Series C funding and beyond

By the time a startup reaches Series C, it is typically established in its market. The focus shifts to scaling at a large level. An example of this might be entering into new global markets, launching new products and services, or pursuing acquisitions. Series C and beyond is about solidifying the market position in the long term and continuing to fuel growth through broader opportunities.

Exit strategies

The end goal for many startups is an exit, achieved through either an IPO or an acquisition. An IPO (Initial Public Offering) is when a privately held company goes public by offering its shares to the general public for the first time to raise substantial capital from investors on the stock market. For startups, this provides a significant influx for cash, increases the company’s visibility, and allows early investors or founders to cash out some of their equity. An acquisition is when another company purchases a startup, either fully or partially. This can be done for various reasons, such as acquiring the technology, talent, or customer base. An acquisition can mean an exit strategy where founders and investors receive a payout, resulting in a financial gain as a common exit path for many startups.

Understanding your startup’s funding needs

Before you start pitching to investors, you need to first get a clear picture of how much capital you need. Too many founders either overestimate or underestimate their requirements, and being on both ends can lead to problems down the road.

Review your operating costs

To accurately determine your financial needs, a detailed examination of your operating costs allows you to develop precise projections for your future capital requirements and identify areas for cost reduction. The action of trimming unnecessary costs and streamlining your operations can further present an organised financial picture to potential investors.

Add a buffer for unexpected costs

Raising insufficient capital can quickly lead to trouble. If you underfund your startup, you’ll find yourself back at square one, knocking on doors and stretching your resources thin. On the other hand, raising too much may deter investors who are concerned about your ability to manage excess funds. There needs to be a buffer for unexpected costs in your funding request. This way, you can secure enough capital to handle surprises while maintaining investor confidence in your financial management skills.

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Types of Capital Raise Funding

Self-funding or Bootstrapping

Self-funding, or bootstrapping, refers to using personal financial resources to start and grow a company without external investment. The company reinvests initial profits so it can lead to further growth.

Pros:

• Complete control: Founders retain full ownership and decision-making authority without investor influence.
• Sustainable growth: Bootstrapped companies often prioritise long-term, sustainable practices.
• No debt pressure: Without external capital, there is no stress over meeting repayment deadlines.
• Positive signal to investors: Successfully bootstrapping indicates strong business fundamentals and founder commitment.

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‍Cons:

• Capital constraints: Self-funding may limit growth and expansion potential.
• Personal financial risk: Founders risk their savings or assets.
• Opportunity cost: The capital could be used elsewhere, with better returns.
• Slower scaling: Growth might lag behind funded competitors.

How do I know if this type of funding is for me? This source of funding is highly effective for service-based or low-capital startups, but less so for ventures requiring large upfront investments or rapid scaling to secure market advantage.
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Family and Friends

Family and friends funding is one of the most common early-stage financing sources for startups. It involves raising capital from close personal relationships, such as family members, friends, or acquaintances.

Pros:

• Trust and flexibility: Family and friends tend to offer more flexible terms and may not require immediate returns from the founders.
• Quick access to capital: It can be faster to secure funding from personal relationships compared to traditional funding sources.
• No or low interest rates: Family and friends may provide interest-free or low-interest loans.
  

Cons:

• Strain on relationships: Mixing business with personal relationships can cause tension if the startup fails to succeed or there are misunderstandings.
• Limited funding: The amount of capital that can be raised from personal contacts is usually smaller than other funding sources.
• Lack of expertise: Unlike professional investors, family and friends may not provide strategic guidance or business advice.

How do I know if this type of funding is for me? Family and friends are known to be the first point of contact when raising funds for a new business. Although, founders need to treat this like any other business arrangement, with clear terms to protect relationships and set expectations.
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Crowdfunding

Crowdfunding is a method where startups raise capital from many individuals through online platforms. There are several forms of crowdfunding which include rewards-based, equity-based, donation-based, and debt crowdfunding.
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Pros:

• Market validation: Crowdfunding can help test the market’s interest in your product or service before launching.
• Public exposure: Successful campaigns can garner media attention and provide a marketing boost.
• Accessible to many startups: It is open to early-stage businesses that do not yet have access to traditional funding.
• Potential for overfunding: Some campaigns raise more than their initial goal, providing additional capital.
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Cons:

• High failure rate: Many campaigns are unable to meet their funding targets.
• Time-intensive: Building a compelling pitch and campaign takes time and resources.
• Platform fees: Crowdfunding platforms often charge fees, cutting into funds raised.
• Risk of idea theft: Publicly sharing your idea may increase the risk of others copying it.
  

How do I know if this type of funding is for me? This source of funding works well for startups involved in innovation, research, or social impact ventures. It may not be the best option for startups needing quick, flexible capital.

Venture Capitalists

Venture capitalists (VCs) are professional investors or firms that pool capital from various sources (e.g., high-net-worth individuals, corporations, and pension funds) to invest in high-growth potential startups. Beyond financial support, VCs provide strategic guidance, mentorship, and valuable networking opportunities, helping startups navigate the barriers of scaling on their own.

Pros:

• Large capital injections: VCs can offer substantial funding that is crucial for rapid growth.
• Industry expertise: VCs often have a vast experience in their fields to offer strategic insights and operational advice.
• Access to networks:  Collaborating with VCs opens doors to a broad network of industry connections and potential partners.
• Increased credibility: Reputable VCs as investors can contribute to the startup’s reputation, attracting further investments and customers.

Cons:

• Equity dilution: In exchange for investment, VCs require a large portion of the equity stake, which may dilute the founders’ control over the company.
• Pressure for growth: VCS expect high returns, often leading to pressure for rapid expansion and achievement of financial milestones.
• Intensive due diligence: The process of securing venture capital can be lengthy and competitive due to the need for detailed business plans and projections.
• Alignment of vision: Founders must align their strategic goals with those of their VC investors to ensure a harmonious partnership.

How do I know if this type of funding is for me? Startups with a proven business model and clear growth trajectory, especially in technology sectors such as biotech and fintech, are well-positioned for VC funding. This avenue is less suitable for early-stage companies or those with modest growth expectations.

Angel Investors

Angel investors are high-net-worth individuals who provide early-stage capital to startups in exchange for equity. They invest their own money and are likely to have been former entrepreneurs or professionals with the given expertise in specific industries.

Pros:

• Mentorship and advice: Angel investors bring industry experience and can provide strategic guidance.
• Flexible terms: Angels may offer more flexible terms than venture capitalists, making them a suitable option for early-stage startups.
• Industry connections: Angel investors may open doors to valuable networks, helping startups grow more rapidly.

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Cons:

• Equity dilution: Startups must give up equity in exchange for funding, which can reduce the founder’s ownership stake.
• Limited follow-on funding: Angel investors may not have the capacity to provide a large follow-on investment as the business grows.
• Involvement expectations: Some angels expect a hands-on role in the business; however, this may not always align with the founder’s vision.

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How do I know if this type of funding is for me? Angel investors are suitable for startups seeking both capital and experienced mentors. While the trade-off is equity, the knowledge and industry connections they provide and unequivocally accelerate growth.

Government Grants and Subsidies  

Government grants and subsidies are financial assistance programs provided by government entities to support specific industries, projects, or initiatives. These funds do not require repayment and can help startups reduce costs and foster innovation.

Pros:

• No repayment required: Grants do not need to be repaid, making them a cost-effective funding option for startups.
• Supports specific initiatives: Many grants target areas like technology development, sustainability, or community projects, providing financial support aligned with strategic goals.
• Improved market position: Accessing government funding can enhance a startup’s credibility and attract further investment.

Cons:

• Strict eligibility criteria: Each grant has specific criteria, making it challenging for some startups to qualify.
• Complex application processes: The application process can be lengthy and complicated, requiring detail proposals and documentation.
• Ongoing compliance: Startups must adhere to government regulations and reporting requirements, which can include additional resources.

How do I know if this type of funding is for me? Government grants and subsidies are ideal for startups looking to fund innovative projects or expansions that align with government objectives. It is important to consider that founders should evaluate the application requirements and administrative commitments associated with these funding sources.

Bank loans and lines of credit

Bank loans and lines of credit are traditional financing methods where startups borrow money from financial institutions.

A loan provides a lump sum, while a line of credit offers more flexible access to funds.

Pros:

• Fixed repayments: Loans come up with a set repayment plan, making it easier to manage cash flow.
• Full ownership retention: Unlike equity financing, loans do not require giving up a share of the business.
• Credit improvement: Consistently repaying loans on time can increase the company’s credit profile.
• Flexible use: A line of credit allows businesses to borrow as needed for operational expenses.

Cons:

• Risk of collateral loss: Loans may require collateral, placing personal or business assets at risk.
• Eligibility hurdles: Startups may struggle to qualify for loans without a strong credit history.
• Debt accumulation: Interest rates can heighten the financial burden on young businesses.

How do I know if this type of funding is for me? Bank loans and lines of credit are best suited for startups with stable cash flow or established assets. Startups in earlier stages, or those without collateral, may find it harder to access this type of funding.

Conclusion/Summary

In wrapping up this guide, the journey of raising capital can seem daunting, but it is a necessary experience that determines the future of your startup. The choices you make, from personal investments to engaging with venture capitalists, take the time to develop meaningful relationships with potential investors who meet your values and goals, and leverage their expertise as you scale your business. With the right funding strategy in place, your startup can achieve remarkable milestones and create a lasting impact in the market.