The ability to raise funds is crucial for startups to navigate the initial stages of their growth journey. Ample funding provides startups the financial resources to develop their products or services, expand their operations, hire talented individuals, and market their offerings effectively.
Cash not only allows startups to live and grow, a war chest is also almost always a competitive advantage in all ways that matter: hiring key staff, public relations, marketing, and sales. Thus, most startups will almost certainly want to raise money.
Key Reasons for Raising Funds!
On a broad level, funding helps startups/entrepreneurs quickly scale up their businesses to the next level. But that's not the only reason. Funding is important for startups as it allows them to ...
Develop/Bring a Product/Service to Market
Startups require funding to research, develop and launch their product or service. This can include costs such as product development, prototyping, testing, and manufacturing.
Many startups need capital to develop and refine their products or services, and raising funds can help them achieve this goal.
Hire/Build a Team or Attract Talent
Startup founders often need funding to hire experienced professionals (engineers, salespeople, etc.,) to help build the product/service and run and grow their business. As a result, with the help of funding, founders can offer competitive salaries and benefits to attract and retain top talent.
Market/Promote the Business or Gain Credibility
Startups require funding to market and promote their product or service, including costs associated with advertising, public relations, and creating a website. Raising funds from investors can also help startups gain credibility in their industry, and attract additional customers and partners.
Scale the Business
Startups often need to scale quickly to meet demand, and raising funds can help them hire more staff, expand into new markets, invest in marketing and advertising, or make strategic acquisitions.
Overcome Cash Flow Gaps
Startups also have to cover ongoing expenses such as rent, utilities, and other operational costs while they work to generate revenue. Startups may need funding to overcome such cash flow gaps that may arise while they are waiting to be paid by customers or while they are scaling the business.
Meet Regulatory/Compliance Requirements
Startups may also need funding to manage the risks that come with starting a new venture and/or to meet regulatory and compliance requirements such as obtaining permits, certifications, and licenses.
Whom to Raise From: Angel Investors or Venture Capitalists
Angel Investors
An angel investor is an individual that has accredited investor status. Basically that means they have a million dollars of investable assets, or a really large salary. Angels don’t have to be techies or experts in your industry. They could be your dentist or a friend’s mom. One of the main reasons to work with angels is that they make decisions about where to spend their money based solely on their own preferences. They don’t have investors to consider, or business-partners to consult, or office politics to deal with.
They can write you a check after one meeting if they like you and your idea. It’s their money. Angels can help with things other than money, as well. Many angel investors are experienced operators who can help you solve real problems. So if you need guidance on how to build a marketing team, or input on how to create a product roadmap, an angel who has experience in those areas could be a highly valuable partner.
One thing to consider before raising money from angels is that they typically write smaller checks than VCs. Where VCs might write checks ranging from $500K to millions of dollars, angels tend to invest between $10K to $500K per company. This means that if you’re raising $1 million, you’ll have to close a lot of deals if you only stick with angel investors. Another downside is that angels might not be able to follow on in your later rounds when the check sizes get bigger and the valuations get higher.
Venture Capitalists
A venture capital firm raises money from investors (Limited Partners or “LPs”). Then VCs invest that capital into startups and divide the returns among all the LPs. VCs tend to write larger checks than angels, ranging from $500K to millions of dollars. VCs also tend to set aside capital to participate in their portfolio’s later rounds. VCs are also extremely well-connected. VCs often introduce their portfolio companies to other VCs, to potential business partners, and even potential hires.
In later stages, VCs can also be great board members to help guide the next chapters of the business. The downside is that VCs have investors that they have to consider. As stewards of other people’s capital, they’re obligated to invest only in deals they truly believe will give them a 100x return.
Why Angels or VCs?
Angels aren’t generally looking for a specific ROI. If they love you and your idea, they may invest even if they think they’ll only get a 2X-3X return.
The VC industry is also notorious for putting pressure on founders to raise capital and grow at a certain pace because VCs need to show returns to their LPs.
So, who should you raise from?
If you're a pre-seed founder, Angels are more accessible, they will give you money faster, and often roll up their sleeves to help your startup.
If you’re in the later stages, VCs tend to make more sense since they can provide you with more money and direction when you’re scaling fast.
Conclusion
Startups raise funding for a variety of reasons from launching a product to scaling up a venture. Overall, raising funds can provide startups with the resources they need to achieve their goals and grow their business, but it's important for founders to carefully consider their financing options and the potential trade offs involved.
Content updated on 11-Jan-2025.
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