Usually, the founders are seen as being responsible for funding their businesses in order to achieve their goals. The funding can come from external investors alongside friends and family, and it is up to the founder to negotiate how much investment they are looking for and how the funding is spent.
Some startups do run funding rounds in order to secure funding from external sources if they do not wish to provide all investments themselves.
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Where Does Initial Funding For Startups Come From?
In a startup company, the initial funding usually comes from the founder. This investment will be used to kickstart the company before any official funding rounds can begin.
The founder investing funding into their company at the outset is usually referred to as the pre-seed funding round. This is not an official funding round as any capital injected into the business is only coming from the founder themselves. They are able to choose how their funding is spent at this stage, as it usually comes from their own savings.
Who Can Invest In a Startup?
Anyone in theory can invest in a startup company. After the founder has made the initial investment, businesses sometimes receive investments from family and friends.
These investments are good for startup companies because they do not usually come with conditions attached. Friends and family are less likely to expect returns on their investments or equity shares in the company than alternative investors.
Venture capitalists also search for startups to invest in. Venture capitalist firms are private equity investors, with individuals who invest the shares of the company pooled by the partners. In return for their investment, venture capitalists are looking for an equity share in the startup. They may also have conditions attached to their capital, such as making demands as to how it has spent.
Alongside venture capitalists, angel investors frequently invest capital into startup companies. Angel investors are individuals with a high net wroth who search to invest in up and coming companies. Angel investors operate in the same way as venture capitalists, as they demand an equity stake in the business in return for their investment.
The difference, however, is that if a business does go bankrupt, angel investors do not require their investment to be repaid. With an investment from a venture capitalist firm, the company will be required to provide access to any assets which become liquidated.
As a consequence, startups usually prefer investments from angel investors due to the potential risk of bankruptcy. Both types of investor should usually be able to offer advice and guidance for the startup to help it progress. This should be in the interests of both types of investor as they both want to see returns on their investment.
What Is Startup Funding Used For?
In the early stages of investment, funding will be used to complete market research and develop the business plan and model. This can be beneficial for businesses just starting out as it can give them a clear idea of direction and how they can progress.
In addition to this, startup companies will use funding to employ additional staff or buy and rent office space. At the outset, startups do not usually have many employees, which can lead to the few who are employed having to fill multiple roles. Having more staff can decrease the pressure and allow for each employee to focus on their own individual role for the benefit of the business.
Funding can also be used to start supplying additional products or services. This can help a startup to appeal to more customers and make additional profits.
