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How startup funding really works: startup funding infographic

by Abraham Verninac 4 months ago in startup
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Startups can get funding from a variety of sources, including venture capital firms, angel investors and crowdfunding sites.

How startup funding really works: startup funding infographic
Photo by Mika Baumeister on Unsplash

You're a tech startup looking for funding. You're confident you have the idea, but how does startup funding really work? We've put together an infographic that covers startups, venture capital, and startup funding to help you in your quest to get funded. First off, this infographic covers startups and how they differ from other businesses.

For example, a small business usually looks to make money locally vs a tech startup wants to go global.

We will talk about the most common ways startups raise money.

Startup funding is one of the most important decisions you'll make as an entrepreneur. A successful funding strategy can help you grow your company and accelerate your market share. But a bad funding strategy could keep you from reaching your goals. How startup funding works: startup funding infographic The best way to learn about something is by seeing it in action.

In this infographic, we'll walk through the most common ways startups raise money, including venture capital, angel investors, crowdfunding and more.

The ceo of a startup raises capital by selling part of the company to investors in exchange for cash.

How startup funding works: startup funding infographic The ceo of a startup raises capital by selling part of the company to investors in exchange for cash. The investors get a stake in the company, and the money they put up gives them a percentage of the company’s profits. There are two main ways to raise capital: equity and debt.

Startup funding: equity Equity is when you give someone else part ownership of your company. They become one of your shareholders and get a percentage share of your profits. This is how venture capitalists (VCs) invest in startups. They take an ownership stake in exchange for cash — typically between $500,000 and $5 million per startup — which takes time to pay back over several years or decades.

Startup funding: debt Debt is when you borrow money from someone else and they expect it back with interest payments over time. Debt is riskier than equity because if things go wrong, you could be left owing them money while they still own part of your business — which means they could force you into bankruptcy proceedings if things don’t work out as planned.

When raising capital, a startup ceo needs to understand what an investor wants in return for their cash.

When you're raising money, it's important to understand what an investor wants in return for their cash. There are many ways to fund a startup, but the most common is by issuing equity (stock) or debt (a loan). Equity: The most common way for startups to raise capital is by selling equity to investors.

This is called “taking on angel investors” because these investors usually invest small amounts of capital and have less of a chance of making large returns compared to venture capitalists. Angel investors tend to be more hands-on than VCs and often offer mentorship as well as funding. Debt: Another way startups can raise money is through debt financing such as bank loans or credit cards.

While this method typically isn't recommended because it has higher interest rates than traditional loans, it can still be used as a last resort when there aren't any other options available.

There are convertible notes and safes.

How startup funding works: startup funding infographic There are convertible notes and safes. You can get money from a friend, family member or angel investor. You can also get it from a bank loan or credit card. But most startups need more than $100,000 to get started. That's where venture capital firms come in.

They put up millions of dollars — sometimes tens of millions — for a stake in the company. This is called seed funding, and it's often used to pay for initial development costs (like land and equipment) and product development (like hiring developers). In exchange for the cash, venture capitalists get an equity stake — usually between 5% and 15% — in your company at a low valuation ($5 million or less).

This means they have some skin in the game if everything goes well but don't have control over operations. There's also no obligation on your part to give them any more money down the line (although there are some exceptions). VCs usually invest in stages called "rounds.

A convertible note is a loan made by an investor (usually a “seed” investor) that converts into equity at a later date.

How Startup Funding Works: An infographic by the team at Blue Cloud Ventures What is a convertible note? A convertible note is a loan made by an investor (usually a “seed” investor) that converts into equity at a later date. The note holder receives interest payments from the company until it converts, which often happens when the company raises more funding.

The note holder also gets rights to participate in future rounds of funding, if any are issued. What is an angel round? Angels invest in early-stage companies, often providing their own networks and contacts as well as money. They typically invest between $25,000 and $250,000 in exchange for equity or convertible notes.

What is a seed round? A seed round usually refers to an angel round or series A round that comes before an initial public offering (IPO). Seed companies usually use this money to hire employees and build products. How do you raise money from angels? There are many ways to find angels willing to invest in your company: - Ask around: Talk to friends who work at startups or have invested in startups themselves; they might know other investors looking for opportunities like yours.

A safe (simple agreement for future equity) is similar to a note but doesn’t have any interest or maturity date.

Here’s how startup funding works: How startup funding works: startup funding infographic A safe (simple agreement for future equity) is similar to a note but doesn’t have any interest or maturity date. This type of financing is often used by family and friends who want to make an investment in your company without having any influence on the company’s operations.

This section will explain what happens when the investor convert the note or safe into equity.

The investor converts the note or safe into equity. In this section, we'll take a look at what happens when the investor converts the note or safe into equity. The investor converts their debt into equity by issuing new shares of stock to the founder. The number of new shares issued depends on the amount of money owed and how much value has been created since they invested in your company.

Let's say that you owe $10,000 in debt to an investor and you've created $20,000 worth of value for your startup since they invested in your company. This means that the investor will issue two additional shares (for a total of 25) to pay off their debt. You can also use this section to explain how dilution works: if an investor converts their note into equity, then everyone else who owns stock gets diluted (meaning their ownership percentage decreases).

This section explains the early stage funding rounds that follow the seed round.

Seed Round The seed round is the first round of funding for a startup. It's often the smallest round, but it's also the most important one. This is where a company gets its first taste of seed funding, which is usually used to create product prototypes and test them with potential customers.

Once a company has proven that its idea works, they can move on to the series A investment round. Series A Round The series A round is typically the second-largest round of funding for a startup and typically happens after they've proven their business model with initial customers or sales.

In this round, more capital is needed to expand operations, grow their team and scale up production. A series B round may follow if additional funding is necessary after this round has been completed.

To Sum Up

The startup funding system is quite complex, it's true. This infographic tries to break it down, providing readers with a clear overview of how a startup receives funding, how much funding they need, where they can get the funding and more. If you are trying to start your own Business, this post will give you some good ideas on how to find money to get your business started.

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About the author

Abraham Verninac

🤓 I am an entrepreneur who builds brands/influencer. And I want to chat with anyone that is interested in starting their own business/brand or who wants to take it to the next level! You can message me anytime!

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  • 💸 Build Your Future 💸4 months ago

    Thank you for sharing! 😊

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