A startup is always more than just an idea, it’s also a lot of time and effort, dedication, focus, and of course – funding.

Over 60% of all startups need external investments. For example, the average cost of developing a platform in the US reaches $75 000, which is not affordable for most startup owners. Raising the money, you have to understand the difference between different funding rounds, as well as investor types. 

Startup funding rounds

First of all, you can’t just get plenty of cash or a business loan and feel set and happy for good, although it sounds attractive, right?

You have to go through a number of funding rounds and prove that your idea deserves the money, meeting different goals and challenges every time. Each round is designed to raise enough capital to grow further and can take as long as a year. However, many entrepreneurs rush things down to a 6 or even 3 months timeframe. 

Based on the raising purpose, startup funding rounds are divided into the following stages:

• pre-seed/seed;
• series A, B, & C;
• and IPO.

Seed stage funding

Pre-seed funding is when founders are trying to give their idea the initial push and often invest their own money.

It is followed by the Seed stage, where founders attract so-called angel investors. These people provide funds for further research, testing market needs, hiring a team, and production start.

At the seed stage, tech startups can aim at anywhere between $500K and $2 million investments, depending on their needs and presentation. Investors are ready to take risks, and typically invest in a number of startups. Those that go through then receive additional capital.

Some of the well-known companies considered for this stage are Y Combinator, 500 startups, SV Angel, and Techstars.

Series A

Next comes round A. It is focused mainly on the startups that have a proven business model, decent customer base, and are already generating profit.

The investments at this stage can start from $3 million and require a specific strategy to reach higher ROI. Typical investors here are venture capital firms that ask startups to show real data and progress received from previous investments. They want to see the startup turning into a valuable money-making machine ready to scale and get to the next level.

Series B

Round B helps startups turn into enterprises.

At this point, they’ve already matured, have a large user base, and are looking for VC-level participation. Investments at this stage can range anywhere around $10 million and up (Mixpanel raised $65 million series B). This stage is all about scaling up the team and exploring new markets.

Some of the biggest investors here are Accel, Insight Venture Capitals, and Sequoia Capital.

Series C

Moving to round C implies an even higher level of expansion.

The companies are already successful, value $100+ million, and are aiming to receive equal funding (again, Magic Leap has raised almost $1 billion). As one of the last funding stages, round C includes not only extending current project capabilities but creating new products. So, prepare to work with the largest VC firms and corporate-level investors that are far more demanding.

Companies at this stage are getting their exit strategies ready to smoothly approach IPO.

IPO

The final stage of a startups’ existence, initial public offering (IPO) is the process of opening a private company’s shares to the public.

This unlocks a vast amount of funding available on the public market along with a new level of transparency. However, it also means additional complexity because now you have to deal with shareholders in addition to investors. Such relationships require a lot of effort and you can expect it to be challenging and expensive.

Fundraising for a startup requires a lot of time and a good strategy to reach the goal. Understanding each of the rounds will give you an advantage over competitors that simply look for any investment passing by.

Startup funding sources

As a startup founder or CEO, you should have a clear idea about the investment types before actually raising the money.

In this regard, there are 7 main options: 

#1 Bootstrapping 

Also known as self-funding. Perfect for early stages when you are just getting started and have enough money to cover the current needs: that is developing a business plan and creating a proof concept. These two elements become your main assets for acquiring future investments and the expenses are comparably small to cover from your own pocket.

The advantage of bootstrapping is that you get tied to the business spending your own money which is appreciated by investors in later stages. However, this is not an option for the startups that need money from day one or large businesses.

#2 Crowdfunding

Internet capabilities are unlimited. Crowdfunding has become a popular way of raising money as it doesn’t need much to get going. The opposite of a traditional business route, here people “pre-order” your product before you even started building it. You then use the money raised for the actual product development. 

Small investments from a number of people on Kickstarter or Indiegogo can make a good starting point for your startup. All you need is to convince people with your business plan, a prototype, or a video where you describe your goals, timelines, and milestones. While there is always a risk of your idea getting stolen, this is still a great way to market your product.

#3 Incubators and accelerators

Accelerators and incubators can be a great option for early-stage startups. Run by VCs, government firms, and universities, they can be found in most big cities, helping hundreds of small businesses every year. They aim at supporting a startup in its early stages through infrastructure, networking, marketing, and financial assistance.

Often used interchangeably, the two terms do differ in functions: incubators bring up startups like children from the very start to becoming a solid business, and accelerators help them scale up. Such programs have strong competition among applicants and take about half a year to help build good connections with mentors, investors, and other startups. 

#4 Angel investors

Angel investors are individuals or groups of people that provide funds to promising startups in the early stages. Angel Investors are looking out for potential IT unicorns like Google and Alibaba and can mentor your business for good equity to compensate the risk (usually up to 30%).

These guys evaluate whether the product fits the market, as well as the technical team and the initial customers. Catching an angel investor and proving your startup’s potential is not easy: you have to prepare a rocking pitch, a flawless business plan, and a proof of concept before contacting AngelList investors in your product’s niche.

#5 Venture capital firms

This is where founders can make big bets. Venture capitals are professionally managed funds that invest in startups with huge potential and scalability. Their expertise and mentorship can lift growing small businesses that are already generating profits. However, VC investors usually plan to return their money within 3-5 years. So they would not be interested in startups that need more time to get to the market.

VCs look for companies with a good plan and a dedicated team that need strong mentorship and control. If that doesn’t seem comfortable to you, it may be not the best option for you.

#6 Bank loans 

A bank loan is the most obvious funding option. Banks provide different kinds of loans to give entrepreneurs complete control over their business and help finance short-term operations. At that, bank loans require a lot of documentation, track record, and strict standards in addition to a detailed business plan. When considering this option, check the interest rates and collateral you can give in return.

As an alternative, you can consider getting a business card or applying for an SBA loan supported by the government. They work directly with banks to fund small entrepreneurs. A business loan can reach $50 000 which is usually enough for the pre-seed funding stage.

#7 Government programs 

Compared to business loans, you don’t have to pay back for small federal grants that are primarily open to startups in science, technology, or health spheres. If your business involves any research, scientific, or environmental initiatives, government programs can cover some of your expenses (if not all).

There are also good chances of winning fundraising contests for startups in other fields. Not only does it encourage more entrepreneurs to set up their own businesses, but also provides media coverage for the contest winners, fueling publicity. 

Crowdfunding and SBA microloans leave you more control over your business. If you aim at a greater amount of money, your needs can be met by angel investors, venture capitalists, and private firms. Almost all startups start from pre-seed and seed stages sponsored on their own. To raise more money, you have to give investors more than just an idea – a video presentation or an inspirational speech.

This “something” should be based on a convincing design prototype, a business plan, a proof of concept, or an MVP with the results of your work and prospects for future investments. These things are difficult to be handled on one’s own. so many startups opt for hiring either an in-house team or outsourced resources, depending on their needs. A development team enters the startup at the first stages and becomes a reliable partner helping to take the concept from a prototype design to a release-ready product. 

Closing the deal

Now that you know whom to contact at each startup funding stage, it’s time to think about ways to convince investors to give you money.

Keep in mind that finding investors is a time-consuming process that requires your constant attention and daily follow-ups. Therefore, attend conferences, meetings, email, and call potentially interested investors, build relationships, and repeat.

In practice, you usually have but one shot to get your idea through to an investor. So, it is crucial to perfect your sales pitch.

Pitch deck

A pitch is… well, your pitch. It’s going to be the face of your idea which investors see, so make sure to create a good first impression.

Therefore:

• Keep it within 20 minutes;
• Create a presentation with up to 10 slides;
• Describe your goals in the first 30 seconds (start with the broad objective and move to details and steps of delivery);
• Stick to three bullets on each slide, each one should be concise and include specific details such as graphics, financial outlook, and future growth;
• Use storytelling and provide real-life testimonials;
• End presentation with a call to action;
• Leave some time for Q&As.

If the startup idea is great and your pitch nailed it, you are just one step away from success.

Negotiation

Even though your concept, pitch, and metrics really define a startup’s potential, at the end of the day investors give money to people, not ideas. So, the final step to you getting the funding is convincing the sponsors and negotiating the deal on mutually beenficial terms.

Here’s how you should approach it:

Preparation

Explain how investors can benefit from your idea. Provide exact numbers, graphics, and a clear business strategy. As people are usually not interested in giving money to startups with no potential, focus on your growth opportunities and plans.

Feedback

Listen to the investors’ concerns and explicitely answer their questions. Be transparent and clear when talking about potential business relationship and roles.

Compromise

If you are looking for large investments, you may have to give up some control over your business: prepare to sacrifice something to reach the goal.

Timeline

Make clear deadlines regarding your plans, from pitching to closing the deal. It will create a sense of urgency and help you get the investments faster. 

On average, it can take you anywhere aroud three to six months from the initial pitch to the money landing in your bank account.

This process can be influenced by several factors: time of the year, market trends, your location, the strength of your data, your pitch and relationships with investors, the time a particular investor needs to make a decision, etc.

If you’ve spent over a year fundraising unsuccessfully, you are probably doing something wrong.

Common mistakes

There are five common mistakes startup owners do when raising funds:

Not filling the market need

If your idea is great, but you have no potential users that may need this product, investors will not consider it a good choice. Make sure you have some early users that prove the market need.

Forgetting about the product

If you and your co-founder spend all your time going to meetings with investors, you leave your product and team not progressing. So when you finally reach the investor you will have nothing to show up. Remember about perfecting your product while fundraising and divide responsibilities with your partners.

Changing your mind

Reacting to every piece of feedback from investors and changing your strategy according to their preferences, you may end up with nothing. For example, one investor may like the idea of a marketplace while another one thinks that mobile users are the future. You never know what is best, so just stick to what you think is right for your business and work around it.

Contacting investors indirectly

Always try to talk with investors, not their associates. Your mission is to give the impression that the train is leaving the station, it is accelerating and investors can either jump on it or miss it forever;

Jumping the gun

The biggest mistake startup owners make is celebrating the raised funds once the investor said yes. You can’t consider fundraising to be over until the money is in your bank account, no matter how many yes you received. If you don’t follow up investors every single day reminding about the deal, it may take ages until you get the money, if you get it at all.

Final word

Establishing a startup is always a risk. Focusing on the right investors, finding the right words for your sales pitch, and presenting a proof of concept created by the right team will help you go through different funding rounds and become a startup that not only survived but succeeded in a sea of competition.  

Many entrepreneurs have great ideas but an idea is not enough to make a startup successful. What should founders avoid to see their business prosper beyond year one? 

At a 90% failure rate, what makes a startup successful?

Building a successful business nowadays is a real challenge: the competition is fierce, the investors are demanding, and the customer is impatient. However, the startup market is still strong. With over 100 million companies launched annually worldwide, 3 new businesses are established every second.

With nearly a third of Americans being self-employed, people are willing to try and build a successful startup even in an intense competitive climate. On the other hand, 90% of businesses close within the first year for many reasons.

However, such a statistic shouldn’t discourage entrepreneurs, but rather inspire them to think and work harder. With that in mind, let’s go over the main pitfalls many business founders walk straight into, along with some tips to maximize their chances for success. 

Generally speaking, there are four main reasons preventing entrepreneurs from making their startup successful:

#1: No Market Need

According to Fortune’s research a few years ago, 42% of startups fail due to the lack of market need.

Your product may be well-thought-out, user-friendly, feature-rich, and technologically flawless.

Guess what?

It is vain if nobody needs it.

At this, your idea does not have to be revolutionary. Just finding a way to solve a specific people’s problem is half the way to make a startup successful. 

Founders often skip doing thorough market research to evaluate the competition and understand their customer’s needs. Excited about the idea, they rush into development fully confident that it’ll be a bombshell. In most cases though, it ends up with wasted money and time.

This problem is caused by two common mistakes:

Not filling the market need.

The market is overcrowded with companies copy-pasting existing solutions to fix all the same problems. On the contrary, you can always develop a unique product that fills the consumer’s needs based on:

• Location (for example, an Uber analog set up for a specific country and adapted to its specific needs);
• Pricing (you can fill the market gap by offering a solution for those unable to afford similar expensive services);
• Innovation (an improved or simplified solution with technical benefits over its competitors).

Apart from filling the market gap, you need to find clients willing to buy your product. A good example here would be Ryanair, which established its market by providing low-cost flight tickets. They offered a basic service but made it affordable for more customers.

Not having a niche market.

Another common mistake with filling the market need is not finding your niche. It’s really hard to make a fortune off of a product or service targeted at everyone.

Imagine that a company develops a universal CRM solution for both SMBs and large enterprises, not taking into account the difference in requirements and processes between them. As a result, the product only covers the consumers’ needs in part. In this case, it would be reasonable to focus on either of the client types and fine-tune the solution for their specific needs.

A niche is typically defined by the consumer:

• Location (village, town, city, country, continent);
• Finance sources (public or private);
• Company size (small, medium, big);
• Sector (healthcare, finance, education, traveling, etc).

To summarize, meeting the market need and focusing on your target niche is the first couple of steps on the way to making a startup successful.

#2: Lack of Funding 

Finding investors for a project is a tough task. You need to convince people you never met that an idea backed by raw estimation is worth their money.

No wonder that 44% of all startups fail to raise enough series A funds. To make things worse, 70% of those that did succeed won’t make it past the seed stage. In general, as much as 28% of failed startups blame a lack of funding or running out of cash for their fate. 

The harsh reality is that most startups that raise solid investments to fulfill an awesome idea collapse within a year. 

Why so?

A research carried out among 400+ early-stage startups pinpoints the key findings:

• Only 1 in 10 startups receive the amount of money requested;
• More than a half of startups raised less than they expected;
• Almost 38% raised over 70% of the initial goal;
• 83% of tech startups aimed to raise funds within a year of the audit, and almost 44% of them failed.

When it comes to making a startup successful, it is crucial to determine when and how to raise the money.

Many founders rush, failing to present investors with a proper business case that will close the deal. Another far-reaching factor is the amount of money required – it is tricky to predict exactly how much a given project needs. In general, you have to properly estimate your product correctly, and investors need to balance potential success with the risks coming.

This is why the difference between funding goals and results is often that ample. 

Fundraising problems.

Now, what are some of the common fundraising obstacles on the way to making a startup successful?

We would highlight four:

• Not enough money. As it is tough to predict how much exactly a startup needs, founders rely on the feedback from mentors and investors which later may end up in an insufficient amount for completing a project.
• Too much money. Some startups set higher costs than the product actually values trying to show investors that it is going to be the next big thing. It can bring the opposite results raising less than initially planned;
• Dilution risk. If you decide to spread your startup’s shares between a few investors, they will get less profit than expected, even if the product goes very well. To avoid this, investors can offer you more money but ask for a bigger share as well;
• Postponing the next round. If you cannot compromise or plan a few rounds of fundraising, investors can propose a lower offer than you requested. Moreover, after you received the first stage investment, putting off the next one can lead to running out of money and losing your investors. 

Solutions.

To ward off the problem of insufficient funding, you can:

1. Focus on your metrics. If at the beginning you can convince investors based on a prototype, enthusiasm, team and some early users, at later stages you will have to provide more numbers in order to get a chance for funding. Professional investors pay attention to real evidence of your potentials such as CAC and LTV: without these metrics, they can just pass with “it’s too early” excuse;
2. Reach out to investors. Speak at conferences, send emails, meet investors, make them listen. A good point will be offering a plan that includes a few stages of funding so that you can draw on one investor to all of them. You should also remember that many investors often hire assistants who do the job of communication for them. So even if you had a talk with someone from VC, it is very likely not reaching the investor at all ending up with a new contact in CRM. Ask the investor for advice: thus you will not only flatter but also learn what you have to achieve to raise the funding;
3. Manage costs. Like a captain of the ship, you need to identify the key components that will help you get to the next round of investment cutting off other expenses. Do not let your colleagues know something went wrong: be enthusiastic and lead your team;
4. Use bootstrapping. Build your startup using existing resources which will bring the risks to a minimum.

Additional note:

behavioral economics has terms like loss aversion and the endowment effect. The first one means that people care more about losing $50 than getting $50, and the other one is that they value things they already own over those they don’t.

Applying these principles to the investors’ potential profits and losses can help you develop an attractive fundraising strategy.

#3: No Team or Poor Leadership

Yet another crucial factor to make a startup successful is establishing and working with a well-functioning team.

Sticking with the ones that contributed to your company’s success from the very beginning is crucial, while a high staff turnover can be drastic to business performance. Your company’s goals and service quality depend on the people you work with, who can either take your business to the stars or flush it down the drain.

Startup owners often hire unqualified employees to save money. This can be detrimental over time. Instead, it makes a lot of sense to invest money into your workers and if they are good enough, do everything you can to make them stay with you.

This comes from good leadership: you have to establish good relationships inside your team, show solid management skills, and listen to your employees to become a better leader. Otherwise, it can impact your sales and partnerships creating a lack of stability, financial problems, and poor reputation. 

Solution:

1. Find a co-founder to keep a critical eye on the product. Make sure that this person shares your views and care reliable in stressful situations;
2. Attract skilled employees with knowledge and experience. Determine the key expertise required to reach your goals and find or train appropriate candidates;
3. Spend time to understand the team’s motivation. Motivated employees perform better, so listen to their feedback and reward for good ideas or results;
4. Hire a dedicated team to build the product. It is highly time-saving and cost-effective if you do not want to run an in-house team. An outsourced development team can handle all the technical parts of a project, from preparing the documentation and writing code to testing and maintaining the final product. In this case, management is a particular value point, as all team members know and cooperate with each other well.
   
   You can also hire specific developers to extend your in-house team’s expertise or cover the workload. 

Remember that investors usually consider not only the financial side but other factors such as a company’s reputation and the executive team’s skills and experience. So, hiring the right people to help you make your startup successful should not be underestimated. 

#4: Focus and Priorities

Another big obstacle on your way to making a startup successful is properly setting up priorities, which can reflect in a lack of focus, complicated business plan, not listening to clients’ feedback, poor marketing, etc.

Let’s look at each of these things to highlight weak points:

1. A complicated business plan. A well-thought-out business model is the backbone of every company. At that, unrealistic goals and complicated plans can destroy your startup at the first stage. Use professional help to develop a clear and concise strategy, show it to your investors, and correct it according to their feedback. You should also review it once in a while and adjust if necessary;
2. Early feedback. Some startups wait too long before releasing the product, missing crucial customer feedback. Do not underestimate the power of the MVP: even if it looks imperfect, launching early gives you an opportunity to test the market and precisely meet the customer needs. Stay open to any feedback, especially negative, and fix your product accordingly;
3. Lack of focus. Many startups eventually failed because they did not concentrate on reaching the goal. You should always understand the priorities for your business. Stay focused on two things – your product and your customers, and waste no time on secondary goals;
4. No marketing. Apart from Apple-like gems, most businesses need to invest in marketing to ensure their customer finds them. Many owners underestimate this and rely on a “bombshell” effect. And while organic reach has a lot of potential, it’s worthwhile to think about traditional advertising and digital marketing to attract customers to your business;
5. Scaling up too fast. After getting their first clients, many entrepreneurs relax, believing that the job is done. However, business growth comes with a growth in expenses, employees, and challenges. Is your startup ready to play the bigger game? Make sure it is, otherwise you will just grow in size without being more efficient.

Unicorn tears: 5 epic startup comebacks.

Failure is just a stage on the way to success.

Although more than half of all startup founders experience it, saying goodbye to a business you built from scratch provides valuable lessons that often become the basis for your future success. Some company owners openly speak about their mistakes in public, and the more such stories you read, the more you realize that failure is not a reason to give up. 

Here are several inspirational stories of epic failure followed by grandiose success.

Jeff Bezos, CEO and Founder of Amazon.

The richest man alive today, Bezos made some huge mistakes getting Amazon off the ground. Just to scratch the surface, we know about a number of cunning users who took advantage of the platform’s post-launch bugs and made free purchases. Then, after overestimating the Christmas season demand the company ended up giving away over 50 million toys.

Here’s how the company’s road to success looked like:

It was definitely not easy, but made Amazon one of the most successful companies worldwide and growing;

Melanie Perkins, Co-Founder of Canva.

Melanie believed that the Internet would soon change the design industry and wanted to be a part of it, inventing an online graphic design platform.

Before her startup received funding, Melanie got over 100 rejections. After three years of attempts, she managed to gather a $3 million investment that allowed her to scale up. Today, the platform is perhaps the most popular easy design program in the world;

Evan Williams, Co-Founder of Twitter.

Back in 2005, Williams was involved in the Odeo podcasting startup. After Odeo failed due to iTunes competition, he turned his attention to another project and worked on innovative ideas for its performance. That product was Twitter.

Like that, the first failure only benefited Evan’s current success;

Nick Woodman, Co-Founder of GoPro.

You have probably never heard about Nick Woodman’s first project – FunBug. This startup became not only a complete mess but one of Silicon Valley’s biggest failures.

However, he used this experience as fuel for his next project, worked 18 hours a day, and reached the goal by establishing GoPro;

Reid Hoffman, Co-Founder of LinkedIn.

Starting with online dating and a social networking service called SocialNet, Hoffman provided users with an opportunity for professional communication.

However, the market was not ready for it back in 1997, and so the startup failed. Years later, Hoffman went on with his project and focused on attracting customers with a clearly defined value proposition, creating LinkedIn.

Moral of the story?

Do not be afraid to fail. Use your experience to change the approach and see how you can make your next startup successful. 

Making your startup successful

Everybody wants to “do everything right”. Even though there is no universal solution for success, there are some general tips that may lower your chances to fail:

1. Create a good and simple product. How would you describe your startup’s purpose in one sentence? If it’s good and easy to understand – people will share it. Remember how you found out about Facebook, Uber or Airbnb – most probably, you heard about it from a friend;

2. Distinguish real trends from fake. Real trends are better to play with because they usually mean obsessive usage. Compare iPhone release with VR: the first one can be used for hours while the latter is discussed more than it’s actually used;

3. Find a co-founder. You need to have a person in your team responsible for recruiting, selling the product, marketing, and raising money. If you cannot handle it yourself, sacrifice your CEO title to another person if it benefits the overall performance;

4. Build a strong team. This is probably your most important function as a founder. Create your own team or outsource developers to make sure that the technical aspects will be covered by experts.

5. Prepare a business strategy. Dealing with investors you need to have something more than a good idea to prove your potential. You do not have to forecast everything, but a general monetization plan is a must;

6. Choose harder tasks. Difficult problems are more meaningful to people, and by solving them you have more chances for success. Many things can go wrong but this shouldn’t slow you down. Just switch to a “we will figure this out” mode and don’t stop until you do.

Thousands of startups emerge and fade away every day. Those that stay focus on avoiding the above-listed mistakes and choose customers over early scaling, teamwork over struggling alone, and success over failure.

And even if you slipped at any point, it is never too late to use this experience as the basis for a new, more effective strategy.