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Startup Funding, Explained

Everything you need to know about how to fund your startup

You have a brilliant idea for a startup, a fantastic team of highly motivated employees, and a fridge stocked with energy drinks. There’s only one small factor standing in your way, money.

Startups are expensive. The U.S. Small Business Administration estimates the average cost of starting a home-based business anywhere from $2,000- $5,000. Finding sources of funding is essential to startups, no matter the phase.

What kind of costs should you expect?

The first step is budgeting for these costs.

  • Fixed Costs
  • Variable Costs
  • Non-operating expenses

Fixed costs consist of expenses that will stay consistent. These are easy to account for and can include:

  • Rent
  • Cost of equipment
  • Subscriptions
  • Salaries - if you have a concrete amount of employees.

Variable costs will change depending on your sales, and can include:

  • Cost of creating your product
  • Sales commissions
  • Delivery costs

Non-operating expenses are the costs not directly associated with creating and maintaining your product. This could include:

  • Gas
  • Insurance
  • Parking fees

For a more detailed explanation of creating your operating budget, read this article.

Another factor to consider is whether you’ll want to spend money on optional things such as a more spacious office, employee perks, or additional employees.

Once you know your costs, the question is how you are going to fund your business.

How to get funding?

There are many ways a person can receive funding for their startup. Since every startup is different, the best type of funding may vary. Here some different funding options:

  • Self-funding
  • Loans
  • Crowdfunding
  • Grants and Contests
  • Venture Capital Funding

Self Funding

Self-funding has its upsides and downsides. On the one hand, you hold the purse-strings, so you have control. On the other hand, you also have the risk.

If you’re lucky enough to have disposable income to get your company off the ground, it can be a great way to get your business running.

There are a few things to consider when looking at self-funding. Most likely, you’ll have to keep your day job, which will give you less time to invest in your new company.

You may also have a shorter startup runway.

Startup runways are how long your startup can run based on the amount of money you have. The longer runway, the better.

You can calculate your runway using Causal’s Startup Runway Calculator template.

Bank Loans

Not many people have enough disposable income to finance their startup without loans.

Loans can be a lifesaver for young companies, but they can also quickly become expensive.

Banks also tend to be hesitant about loaning to a newer business, and for a good reason. According to the U.S. Bureau of Labor Statistics, 20% of U.S small businesses fail within one year.

Then there is the catch-22. Banks want to know that you can pay back your loan, but if you could provide them with the proof that you could pay it back, you most likely wouldn’t need a loan.

You can’t just pick this option. It needs to choose you as well.

Crowdfunding

If done well, crowdfunding can be a great way to get your company up and running. It can be a great way to make your friends and family block your phone number if done poorly.

Crowdfunding is pretty cheap compared to other methods of financing a business. It also can work as free advertising by introducing your product to the public and garnering excitement.

Crowdfunding is a way of getting money through small donations by using a platform such as Kickstarter or CircleUp.

Not all platforms work the same. Some require you to promise a free product or service in exchange for the donation. Others give the donor a share of your company.

Successful crowdfunding requires strong social media skills, patience, and charisma.

Grants and Contests

Grants are the holy grail of funding. The best part is you don’t have to offer anything in return for the money. Everyone wants a grant, which makes it highly competitive. Finding a grant that matches your purpose will give you a better chance.

Grants do have few strings. The giver of the grant will often dictate how the business can spend that money.

Government Grants

Corporations

Venture Capital Funding

Many startups receive seed funding from a venture capital firm in exchange for a percentage of their business.

This type of funding requires a valuation of your company. Startups have significant risk, so venture capital firms will most likely ask for more of your company in exchange for their funding. They’ll probably have considerable influence over your company.

To receive this type of funding, you’ll need a strong idea, a great business plan, and growth potential.

How Causal Can Help

Causal’s Startup Suite is a collection of models that will help you run your business. Our templates will allow you to calculate the crucial factors while considering the changing nature of a startup.

The Suite Includes templates like:

Our community-based templates offer a wide variety of models, such as the Founder Break-Even Calculator, which can help you calculate when you’ll be able to “break-even.” With the Startup Recurring Liquidity Calculator, you can figure out how to offer recurring liquidity to your employees and retain the best talent.

The process may seem daunting, but we’re here to make it simple.

Build your own financial models for free

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