Startup funding is the capital a young company raises to build, launch and grow its business. Because most startups do not generate enough revenue to cover their operating costs in the early stages, they rely on external financing to bridge the gap. There are different types of funding, suited to specific phases of growth. In exchange for their investment, investors receive equity (a share of the company) or debt-based financing with interest payments.
The first round of startup funding is called seed funding. This is the earliest stage when a startup seeks outside investment to develop its product, hire new team members, and start marketing activities. Often, this seed funding is provided by angel investors and friends and family members of the original company founders. However, in the last few years, dedicated VC funds have also started to appear in the space, as more investors are keen to invest in early-stage tech startups.
Besides seeking outside funding, entrepreneurs may choose to self-fund their startup, using personal savings or liquidating assets from an IRA or 401(k) account. While this approach can give a startup an immediate head start, it can limit the amount of money available for future growth and can potentially create issues with personal relationships if not managed carefully. Another challenge with this approach is that it can be difficult to find the right balance between how much to invest and how much control to relinquish. In addition, it can be challenging to determine the value of a startup and how much equity to offer in exchange for investment.