How Startup Funding Works

Boundless: How startup funding works

When you have a great business idea, you’ll need money to get it off and running. Funding will help you with product development, personnel, and office space, but how do you get your hands on that money? Nick Ducoff, VP of Content at Boundless, gave attendees at the latest Boundless Networking Night insight into the funding landscape.

Where Does Funding Come From? 

When bootstrapping your startup idea, you will need to quickly become “ramen” profitable. This often means you’ll need to support yourself with a small amount of revenue. While you patch together your app, you can save money by working from home or a coffee shop. You can also leverage open source software and free apps. But note, in the absence of revenue, this model doesn’t work if you have to hire people who want to get paid market wages or if you have to pay money to acquire customers.

Angel investors are those willing to take on more risk in startup ventures. They fall into two categories: personal connections (friends, family, and “fools”) and professional investors.

When taking money from friends, family, and “fools” remember your relationship with these folks will change when they have a financial investment in your business.

When it comes to professional angel investors, these men and women are in the business of making private company investments. Active angels make 5 to 10 investments a year, but only see about 1 or 2 of those return capital. Angel List is a great place to find angel investors.

Until the JOBS Act gets through the administrative process, you should try to only raise money from “accredited” investors that have more than $1 million in net assets.

Incubators have pools of funds and try to build a diversified portfolio of many startups. They hand select which businesses make it into the incubator. The amount of oversight an incubator has over its businesses includes investing small amounts of money and providing helpful tools, like office space or business mentorship. Y Combinator and TechStars are well-known incubators.

What are incubators looking for? Great ideas and good teams. They typically will not take companies founded by a single person.

Venture Capitalists
A venture capitalist looks for much more traction in your business than any of the other types of investors above. VCs commit more capital up front and will often continue to fund your business through multiple rounds of financing. They want ideas that have growth potential and will bring in revenue. VCs typically take a significant equity stake and a board seat with your company.

What’s Next?

Get out there and meet the right people. Pitch your idea and see who bites. Keep in mind that it’s now easier than ever to raise less than $500,000, but harder than ever to raise more than $2 million.

Get more notes and tips in Nick’s slides below.

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