Funding and creating startups has grown increasingly common since the cost of bringing a product to market has reduced so much in the last 20 years, from millions of dollars to usually between $20,000 and $500,000.

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Investors can handle the amount of money they need to invest, and the possible profits are tremendous. Possible. The chances of getting your money back are quite low, but the few businesses that do make it big make huge amounts of money. That's why there are people who establish businesses and those who invest in them.

A company goes through a number of financing rounds as it advances from the founder's concept to producing a minimum viable product (MVP) and finding customers, to discovering Product/Market Fit, and then growing its operations and revenues.

There are a number of different words used to talk about the different types of finance that a company may be able to get.

These are the most common rounds that Angel and Venture-Backed businesses go through, however not all businesses go through all of them. Most small firms don't want to grow into Unicorns, thus they don't look for this kind of capital.

The following rounds are shown in the sequence in which they happen as a company grows.

Sweat Equity

Most businesses' founders will work on the concept for free at first. This is where it all begins. At this stage, the founders control everything and have to find out how to use their own resources to grow the company idea. This is where people who work hard and create things get their business ahead without help from others. "Do what you can, where you are, with what you have," stated Teddy Roosevelt.

You can get other people to work for you for sweat equity if your concept is good enough. This can include paying a computer programmer to help develop an MVP in return for ownership in the firm instead of cash.

Bootstrapping

Bootstrapping is using money made from items and services that were made with sweat equity to pay for additional development effort. There is some outside money from consumers who were early adopters, but not from investors. This is a big step forward since it shows that what the firm is producing is needed. It shows that the founders are creative and determined to find a method to go ahead. Investors like entrepreneurs that are tough like this.

The 3 Fs

People normally say "Friends, Family, and Fools," but I prefer to call the final one "Fans." When a new business has come up with an idea, discovered some early customers who are interested, and figured out what to do next, it's time to go out to the founders' personal networks. It's hazardous because your grandma or uncle may give you money, and then you quit in six months, which might make for an awkward Thanksgiving. Before you ask family and former college roommates for help, be sure you're on to something. The first two steps assist advance the concept forward and also teach you how to be disciplined with how you spend this money in the best and most efficient way.

You need a strategy to reach specific goals and deliverables that will be turning points that provide value and lower risk. This strategy has to include a full budget on how to go from here to there. A business owner has to be resourceful and make the most of their money.

Funding Yourself

This is a small group that has the money to pay for the first stage of development. This group includes people who have sold other firms and are now starting new ones. These are entrepreneurs that wish to concentrate on making a minimum viable product (MVP) without having to deal with pitching investors until they know whether the concept is workable and there is enough user interest.

These people also know that the more successful a firm is, the more it is worth and the less equity they need to give up to get money.

Incubators and Accelerators

Incubators and Accelerators are structured programs that take in new businesses and assist them grow their ideas. On presentation day, they show off the graduates to a group of investors.

These initiatives may help founders acquire a little amount of money. They also have credibility since the incubation program has looked at them closely, checked them out, and accepted them.

Y Combinator is one of the most well-known incubators, and some of the best-known companies that have come out of its program include Dropbox, Stripe, and Airbnb.

Funding from the crowd

Crowd financing is now a real alternative for getting ideas from concept to implementation and proving that there is a market for them, thanks to sites like Kickstarter and Indiegogo. These website-driven finance platforms are appealing because they provide a way to get money without giving up equity. This implies that the money collected does not come with ownership (equity) in the firm. There are other benefits than shares, such being able to talk to the founders directly or getting early access to the product.

A crowd-funding project may also help you see how much interest and demand there is for an idea early on.

Angel Investing

This round of finance is also known as Seed finance, and it is the first professional investment from outside the company. Most startups acquire their seed round after successfully using two or three of the early-stage fundraising methods we spoke about above.

Angel investors are those who look for good startup possibilities and usually put a lot of modest amounts of money into high-risk, early-stage businesses. They are basically betting on the founder's character and the chance that the firm will become a tremendous success. If a firm "exits" effectively by being bought or going public, they want to earn 100 times their money back.

Angels are professional investors of different levels, and they need to be persuaded that a firm has the potential to grow and become very valuable.

Funding for the Bridge

The Series A round is the next big round of fundraising. In this round, venture capital companies provide money to a startup. But in a lot of cases, entrepreneurs don't realize how much time and money it will take to meet the goals they need to reach to get VC attention.

A Bridge Round fills in the space between breakeven or profitability and VC financing. The goal is to help the company reach its next growth goal. The investors that put up the seed money usually provide the follow-on fundraising round. They do this because they want to keep the business going or watch it fail and lose their first investment.

A Series

The Series A is the round of investment that turns the business into a professionally run corporation. This fundraising round is done by professional venture capital companies that join the board as part of the agreement and set up adequate "governance." Good governance implies that the firm is properly registered, has frequent board meetings, and maintains a complete record of board decisions, all of which are meant to raise the company's stock price.

Before the Series A, the founders were in charge and didn't have to answer to anybody. The main goal is to discover a product/market fit. After Series A, the CEO will have to spend a lot of time (25%) overseeing the board and making sure the company follows all the rules.

B, C, D, and so on

These are the follow-up rounds that happen once a business becomes a professionally run functioning entity.

Table of Contents

The capitalization table is what the cap table is short for. The official list of all the people who own shares in a corporation and how much they paid for them. The folks that make up the cap table are the ones who took part in the financing rounds above.

Leave

This is the occasion that marks the major payoff for the founders and early investors. An exit might be either a purchase or an IPO (Initial Public Offering). A firm goes public via an IPO, which means that its stock is listed and traded on a stock exchange and it sells shares to the public. IPOs don't happen very often.

A more common exit is an acquisition, in which an existing corporation buys the startup to add to its portfolio of offerings or for some other strategic purpose.

The shareholders each get a piece of the company's acquisition price, and the value of their share is what decides how much money they make on their initial investment. The exit is the final aim for businesses that get money from investors.