Da Vinci Studio: how to fund a startup?

Everyone who works in the IT sector is very familiar with the term startup, but sometimes this word is overused. Is every new business a startup? When does a startup stop being a startup and become a company? How do you raise funds and where do you look for investors? After reading this article, you will know the answers to these questions.

Small business or startup? What is the difference?

Eric Ries, author of The Lean Startup, defines a startup as an organization that: 

• aims to create an innovative product or service
• operates in an extremely disruptive environment
• has a new business model that does not yet have competitors

According to Investopedia, a startup is an early stage company that seeks outside funding (e.g., from various institutions, family, using crowdfunding, venture capital, or other sources). A startup does not have a secure, working business model and stability comparable to that of a mature company.

Where to get money for a startup? Start with an idea

The first question to ask yourself before raising funds for a startup is: does it make sense? And then: does this particular business model have a chance to make money, and can the people involved in the project manage to create and maintain it? Some startups prefer to draw funding solely from internal sources, e.g. from the private money of the originators. On the one hand, they leave themselves full decision-making power, but on the other hand they give up numerous benefits connected with networking (e.g. using the wisdom and knowledge of business sharks). 

A startup must offer an innovative product or service. The vision for products and services is itself variable, because a startup, by definition, does not have the data to guarantee specific results. When the startup lacks funding, the product or service needs money to prove its innovation and become part of the digital revolution. But before you start looking around for external funding for your startup, ask yourself, are you really one?

A start-up company is not always a startup

Why is this happening? Imagine a company that creates websites, mobile apps, and offers body leasing and outsourcing. It's new to the market, yet it's not a startup. Why? Because the company operates in a business model similar to the one developed by other companies existing on the market for many years.

Such a company from the beginning of its existence generates profits and does not require additional sources of financing. Which, of course, does not mean that its resources are limited only to its own capital. The difference between the owner of a small company and the owner of a startup is that the former is sure that there is a demand for his products and services.

The magic border - when does a startup stop being one?

An appropriate and profitable business model, as well as the first competitors on the horizon - make a startup a regular company. A startup, like a newly formed company, can seek external funding such as:

• venture capital
• business angels
• business incubators
• crowdfunding
• loans
• grants and subsidies

It is worth looking for support and mentoring also in mature business, i.e. in companies with experience, which are willing to share their knowledge and provide support not only in matters strictly related to IT solutions.

Financing a startup - where to look for funding?

The most common solution for funding a startup is internal capital and revenue (for most startups, these are quite low at the beginning). However, it is worth keeping in mind that proving a startup concept or a minimum viable product (MVP), usually requires external help. 

It is thanks to the capital from external sources (venture capital, business angels, or business incubators) that a startup grows stronger. The basic condition for raising funds is to prepare an attractive and concise presentation. An investor offering often much more than six-figure sums must be well motivated to put money into a starting business. He must be confident that the contribution will pay off.

Getting funding is still the beginning of the road, not a guarantee of success. Startups operate in a difficult and disruptive environment from the beginning, and the risks they constantly take are inherent in this type of business.

Venture Capital - how does it work?

Equity investors are eager to fund companies with great potential and innovation. This happens right at the very beginning when you are developing your startup. The investor can cover a lot of costs, and in return, the startup hands over its shares - which, as you can easily guess, has both good and bad sides. The stock given to the venture capitalist reduces its risk, but the startup loses its autonomy in decision-making. 

Business Angels - will their wings lift your startup?

The help of business angels is not just about the money invested in the startup. They are private investors who also advise and mentor entrepreneurs. Thanks to their experience, long-term work and commitment, they know how to create a successful business from scratch.

Business incubators and their support

Business incubators are organizations that help startups in many areas. They show you how to get started and provide funding to a select group of startups. They also support accounting, legal and marketing aspects. They bring together young people who are at the beginning of their life adventure.

Crowdfunding for a startup

Financing a startup through crowdfunding is possible, although it requires a developed social network. This group cannot be random. It has to include people who are interested enough in the product/service/innovation introduced by a given project to support it financially. This solution is advantageous in that it allows you to test the interest of potential customers without going beyond the project phase.

Loans and a startup - do they mix?

Loans are also one form of raising funds for a startup. However, you should not look for them in the bank, because banks are reluctant to give them to "uncertain ideas". It is worth turning to loans from individual investors. Your first impression and the right presentation of your project are very important; it will determine whether a potential investor will want to analyze your idea further and invest in it.

Grants and subsidies for startups

To get money for your startup you can use grants or subsidies. There are many opportunities to get this kind of money, especially from the European Union funds. Of course, this is associated with meeting specific conditions. You can also take advantage of de minimis aid - that is, non-refundable support for your company's projects. This is a type of financing that can be obtained under various types of programs run by e.g. business environment institutions.  

How to find potential investors?

Despite appearances, finding places that bring investors together is not that difficult. Especially since startups are extremely popular in the business community. There are also numerous conferences organized in Poland that bring together particular groups. In order to find potential investors it is worth browsing:

• dedicated forums and groups on social networks (e.g. LinkedIn, Facebook)
• specialized websites and blogs dedicated to start-ups
• websites of business angel networks and investment funds (e.g. IdeaLab Ventures)
• crowdfunding sites

Summary

Getting funding for a startup is an exciting path, and it's also an opportunity to make a lot of interesting friends. Start on this path and see how the story of your business unfolds. Money will help you promote and run your business, but it's still just the beginning. It's worth remembering that the most successful startups are those that live off the money they earn from their customers. In such a model, healthy and stable growth is most possible. It all depends on your business vision and expectations.