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December 20, 2023, vizologi

Money Talk for Young Startups: How Do They Earn Their Cash?

Starting a new business can be tough, especially making money. Young entrepreneurs want to succeed but struggle to figure out how to earn the cash to keep their dream alive. There are many ways for startups to make money, from product sales to crowdfunding. Let’s take a look at some of the most popular methods for startups to earn their keep.

Getting to Know Startups

What is a Startup and How Does It Grow?

A startup is a young company. It aims to develop a unique product or service, bring it to market, and make it irresistible for customers.

Startups grow by continuously improving their products. They do this through feedback and usage data. They also rapidly expand their customer bases.

The goal is to create an entirely new template, not duplicate what has been done before.

Funding for startups comes from several rounds, such as IPOs, SPACs, and seeking returns on investments. They also secure funding through self-funding, crowdfunding, loans, grants, private equity firms, and incubators and accelerators.

Startups can make money through options like acquisition, merger, IPO, direct listing, or by continuing to grow and self-fund.

Each funding option has its benefits and considerations. So, it’s important for startups to carefully assess their funding needs and choose the best fit.

Different Ways Startups Get Money

Using Your Own Money to Fund Your Startup

Using personal funds to fund a startup has its pros and cons. It gives you full control over the company, but it can also risk your personal finances. If the startup faces money problems, you might struggle to access extra funds. Using your savings or assets can impact your financial stability and limit your risk tolerance. To balance this while supporting a startup, make a detailed budget, explore other income sources, and diversify your investments to manage risk.

Also, keep an emergency fundand seek professional financial advice to handle any financial hurdles.

Asking People for Money Online: Crowdfunding

To ask for money online, startups should:

  • Highlight their unique value proposition
  • Showcase their product or service
  • Clearly communicate their business plan and financial projections

A compelling narrative will attract donors who believe in the company’s vision. But challenges include:

  • Standing out among competing startups
  • Managing donor expectations
  • Meeting legal and compliance requirements
  • Protecting sensitive information
  • Maintaining a strong reputation among donors

Borrowing Money: Loans

  1. Startups have different loan options to choose from, such as SBA microloans, microlenders, and loans from friends and family. These options give startups the financial support they need to grow and expand their businesses.
  2. Startups can qualify for loans from traditional financial institutions by showing a strong business plan, a good credit score, stable cash flow, and collateral. By meeting these requirements, startups can secure the funding necessary to fuel their growth and development.
  3. Borrowing money through loans for startup funding provides access to capital needed for business growth. However, it also comes with potential risks such as high interest rates, inflexible repayment terms, and the possibility of incurring debt. Startups need to carefully consider the risks and benefits before deciding to borrow money for their funding needs.

Getting Help from the Government: Grants

Government grants can help startups get funding. These grants have requirements based on the business type, location, and funding purposes.

Startups may need to be in specific industries, located in certain areas, or focus on particular research or development. There are different types of grants such as research and development grants, small business innovation grants, and grants for minority-owned or women-owned businesses.

These grants can be available at the federal, state, or local level, offering startups a variety of options. To apply, startups need to research eligible grants, prepare a detailed proposal, and submit their application through the designated government portal or agency.

The application process involves providing information about the business, financial needs, and plans for using the grant funds to support growth.

Investment Companies Putting Money into Startups

Investment companies research and do due diligence before putting money into startups. They look at the potential market, the startup’s management team, and the overall growth potential.

Investing in startups can bring high returns if the startup succeeds, but there are also risks, like the high chance of failure and loss of investment.

Investment companies help startups grow and succeed by providing funding, guidance, mentorship, and business connections. They advise the management team and help navigate challenges as the business grows.

Special Places that Help Startups Grow Fast

Special places that help startups grow quickly include:

  • Private equity firms
  • Incubators
  • Accelerators
  • Crowdfunding platforms

These places provide startups with:

  • Funding
  • Mentorship
  • Networking support
  • Access to potential investors

Startups benefit from joining these special places by:

  • Gaining financial resources
  • Guidance from experienced professionals
  • Connecting with other entrepreneurs

Additionally, these places offer:

  • Valuable exposure to potential customers
  • Industry contacts

Participating in these special places:

  • Accelerates growth
  • Increases chances of success
  • Provides access to a wide range of resources
  • Contributes to long-term sustainability.

Explaining Startup Funding Rounds

Your First Money: Pre-Seed and Seed Funding

Pre-seed funding comes from a small group of investors – like friends, family, or angel investors. It helps startups with initial research, development, and early operations.

Seed funding can come from a wider range of investors, like angel investors, venture capital firms, or crowdfunding platforms. It’s used for hiring key team members, product development, and initial marketing efforts.

Startups attract investors by having a compelling business idea, a strong business plan, a dedicated team, and a clear go-to-market strategy. They need to show potential for growth, market demand, and the ability to generate returns.

Both pre-seed and seed funding stages affect equity ownership in a startup. In the pre-seed stage, early investors and founders typically have higher ownership. In the seed stage, ownership may be diluted, but the company’s valuation is usually higher, reflecting progress.

Getting More Money: Series A, B, and C

Startups rely on Series A, B, and C funding rounds to get the money they need to grow, expand, and develop new products or services. They get this money from venture capitalists, angel investors, and private equity firms in exchange for a share in the company. Startups should think about how much money they need, what their goals are, and which funding source is the best fit for them.

They have different options like self-funding, crowdfunding, loans, grants, and joining incubators and accelerators.

Big Money for Big Growth: Series D and Beyond

Startups have various options for getting funding to grow. They can self-fund, use crowdfunding, get loans, win grants, seek help from private equity firms, or join incubators and accelerators.

To secure significant funding for major growth, startups can turn to venture capitalists, private equity firms, and other investors for Series D and beyond funding rounds. In return, they give up some ownership of the company.

Startups also have exit strategies to make money, such as being acquired by a larger company, going public with an IPO, or founders buying back shares from investors.

Making Money Without the Company’s Profit

Selling the Whole Business: Trade Sale Exit

A startup can sell the whole business in a trade sale exit in a few ways:

  1. They can find a strategic buyer within the same industry who sees value in their products or services.
  2. Another option is to engage an M&A advisor to help identify potential buyers and negotiate the sale.

The implications for share value when a startup exits through a trade sale can vary depending on the terms of the sale and the valuation of the business at the time of exit.

Potential stakeholders that may own parts of the startup before it exits through a trade sale include angel investors, venture capitalists, and other early investors who hold equity stakes in the company.

Going Public: IPO Exit

A startup can transition from being privately-owned to publicly-traded through an initial public offering (IPO). During an IPO, the company sells shares to the public for the first time, raising funds. This process involves financial audits, legal filings, underwriting agreements, and marketing efforts. After an IPO, the share value and ownership of the company can change based on market demand and performance.

Before an IPO, stakeholders like early seed investors, venture capitalists, and angel investors provide crucial funding and support to help the startup grow.

What Happens to Share Value When Exiting

When a startup exits, the value of its shares can change. This depends on factors like how well the company is doing, the market, and the exit plan.

If the startup is growing and making money, the share value may go up. This can attract potential buyers or investors. But if the startup is having a hard time, the share value may go down, making it less appealing to buyers or investors.

During this process, shareholders can be affected. Their investment’s value will directly reflect the changes in share value. If the share value goes up, shareholders can gain, but if it goes down, they can lose. The exit strategy’s terms, like a merger or IPO, can also impact the share value and affect shareholders.

Who Might Own Bits of the Startup Before It Exits?

  1. Before a startup exits, shares or equity are usually owned by the founders, investors, employees, and advisors. They may have received equity as part of their compensation, investment, or advisory role.
  2. Ownership of a startup changes during different funding rounds. As startups secure additional funding, the ownership stake of the founders and early investors can decrease. New investors come in and receive a portion of the equity.
  3. As a startup prepares to exit, the potential implications for founders and early investors depend on the exit strategy. Depending on the chosen exit route (like an acquisition or an initial public offering), founders and early investors may see a change in their ownership stakes and control over the company.

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