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Startup Funding: How Does It Actually Work?

Recently, there has been a lot of news about how venture capital has all but dried up. While this is not exactly true, it is true that things are tightening up in the world of tech. If you are interested in pursuing startup funding, this can feel like a scary time to jump in.

However, the majority of startups will never see venture capital, regardless of how generous or restrained that class of investors is. While this is the most hyped kind of investor, the majority of startups actually fund their work in other ways.

If you are wondering how they do it and what your options are as a new startup, read on!

The Truth About Venture Capital

If you are new to the world of startups, it might seem shocking that so few startups actually access venture capital.

Shows like Shark Tank and the general emphasis on this type of investment seem to have convinced many people that getting backing from wealthy investors is the only solution.

However, as less than 1% of startups will ever see a dime of venture capital, for most it is an unwise plan to hinge their entire business upon whether they can get it or not.

That’s right. Even with all of the buzz and glamor surrounding this investment class, less than 1% of entreprenuers will ever see a dime from it.

In fact, unless you are incredibly well-connected, depending entirely on VC to get your startup off the ground from the start is likely a guarantee of failure.

So, do not worry at all about the news of VC giving less funding. You still have options. It is likely that most of the hype surrounding VC is because it can give a startup access to astronimcal amounts of capital quickly.

In addition, some VC firms and figures are known for being behind famous and successful businesses. On top of capital, they offer invaluable guidance and respect for the startups they associate with through name recognition.

While it is more than worthwhile for many startups to try to pursue VC, the vast majority will never get it.

It has likely become a glamorized hot topic because our culture is obsessed with the idea of the ‘overnight success’ and loves a ‘garage to riches’ tale.

However, VC is not the guarantee of success that many people think it is.

Why Do So Few Startups Get Venture Capital?

There are two main schools of thought here. Some say that most startups fail to get funding because they aren’t good enough at pitching and selling what they do.

They don’t understand what investors actually want and haven’t formulated a strong enough team, idea, product, or business plan to impress them.

Remember, VC is significant and can skyrocket your startup. Especially if you do not have a strong track record or significant connections, it is unlikely that investors will simply hand you a large sum of money.

While in some cases, it is true that startups are just not strong enough to seem like solid investments, there are other limiting factors it is important to think about.

High Competition and the Capital Gap

The other school of thought here is that VC is so highly competitive that, based purely on numbers, most entrepreneurs will never get it.

Even if they are doing something incredible and have a strong pitch and company, VC is hard to get.

In addition, if you are a female founder or founder of color, it is statistically even less likely that you will receive funding from most VCs.

In 2021, female founders received only about 2% of all venture capital investments. The world of VC can also be quite openly hostile to people of color.

However, it is important to remember that even without these biases coming into play, most startups will not receive VC, because it is highly competitive.

Let’s take a look at the breakdown of how the world-famous VC firm Andreessen Horowitz vets contenders.

Of the 4,000 startups looking for funding, they look at about 3,000 per year, mostly coming from inbound interest. That number breaks down to looking at approximately 12 opportunities per day (50 weeks per year, 5 days per week).

Of the 3,000 they screen, they look at 200 very seriously.

In the end, they invest in about 20 startups each year (0.7%).

So, What Solutions Are There?

Of course, we will present some solutions! These are the other ways that most startups actually approach startup funding:

  • Savings
  • Cash flow
  • Crowdfunding
  • Asking friends and family for contributions
  • Debt: including loans and credit cards
  • Grants

In the world of startups, sometimes conversations can center more around getting investor money than other forms of growth and business operations. This is a mistake.

Anna Marie Cruz, Initiative for a Competitive Inner City manager and former employee at CDC Small Business Finance told Forbes:

“One of the best kept secrets in financing a business is a little-known industry of mission-based lenders, which offer capital as low as $500 and as high as $250,000, a number that seems high, but still falls below the minimum threshold many banks will consider. These community lenders might be non-profits like Kiva or JFLA, or CDFI’s like Accion, Opportunity Fund, LISC, or CDC Small Business Finance. Find these lenders by looking up ‘CDFI Small Business Lender’ or utilizing Opportunity Finance Network’s location-based directory.”

There are actually numerous resources available to entrepreneurs, many of which get very little hype or attention. They are also way easier to access than venture capital for most founders.

Debt and SBA Loans

Many entrepreneurs will use credit cards they already have or take advantage of the introductory rates on new credit cards to build their businesses. This is because many cards will offer promotions such as 0% interest for 12 months.

While it is unwise to build an entire business solely using credit cards, especially if they have high-interest rates, this can help. In addition to this type of debt, startups and all small business owners can apply for SBS loans.

The Small Business Administration (SBA) is a federal agency easing access to debt through a government guaranty. This type of loan offers competitive interest rates in comparison to traditional loans. Most reputable banks offer SBA-backed loans, but these will differ across institutions depending on their tolerance for losses.

You can visit the SBA’s website to see if you are eligible. While most SBA loans require a credit score of at least 680, there are mission-based organizations that have laxer requirements.

Grant Competitions and Small Business Grants

Grant competitions can be highly competitive, but likely have better odds than pursuing VC. If you are not confident in your writing abilities to apply for grants or do not have the time, you can hire a grant writer.

Grants often apply to specific types of businesses, people, or needs. Via research, you can find grants that apply to your niche. For example, here are a few of the grants that apply to female entrepreneurs:

The Women’s Founder Network, The Tory Burch Foundation, Amber Grant and Cartier Women’s Initiative.

If you are located in a city, you can likely find foundations, organizations, and help for your venture locally. Also, you can join the NASE.

If you’re a self-employed business owner and you’ve been a member of the National Association of the Self-Employed for at least three months, you can apply for a grant of up to $4,000. By signing up as an Annual Member (i.e. paying the full membership fee at sign-up), you can apply immediately!

GrantWatch is an online resource that is constantly in touch with grants’ program managers and reviews numerous publications to make sure that provides subscribers with the most up-to-date grant opportunities.

Be sure to bookmark this site as a future resource and check back regularly, or sign up for email updates! You never know when a grant you qualify for may be up for grabs that you don’t have to pay back!

If you want to learn more about different specific funding options, check out our blog post on the topic.

Networking is Key

Many people undervalue the critical role that networking can play in all aspects of a business. Making connections can help you learn about all sorts of potential opportunities. This applies to raising funds as well.

Whether you want to connect with investors, pursue grants, crowdfund, or anything else, joining a community for entrepreneurs is so important. On top of discovering new opportunities you can get tips and share information.

In a like-minded community of people who are doing similar things to you, you can find all kinds of support. Especially if you are a founder at the beginning of your journey and working alone, it can be very isolating.

Seek out local in-person resources, as well as joining communities of entreprenuers on Twitter and LinkedIn. Connect with as many people related to your niche as possible. Take advantage of all of the resources that you have available.

Final Thoughts on Exploring Startup Funding Strategies

To conclude, startup funding is a complex process but it’s certainly one that founders should understand for the sake of their business operations.

After all, by gaining an understanding of the nuances between venture and debt financing, government grants, crowdfunding, and more, founders have access to a wide range of opportunities suitable to their respective needs.

Despite the complexities, many aspiring entrepreneurs and business owners find that startup funding is within reach should they take the right steps in acquiring such capital.

This capital likely will not come from VC, and the good news is that it doesn’t have to!

What do you think? Comment below.

Since 2009, we have helped create 350+ next-generation apps for startups, Fortune 500s, growing businesses, and non-profits from around the globe. Think Partner, Not Agency.


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