4.10 Funding Basics

Turning ideas into reality often requires money. Here are common funding sources:

• Bootstrapping (Self-funding): Using your own savings, credit cards, or reinvesting early sales to fund the business. For example, a student might start selling handmade crafts online and use all profits to grow. Bootstrapping means you keep 100% ownership, but growth can be slow due to limited funds. It’s common in very early stages when external investment isn’t yet available.
  
  

• Friends & Family: Raising money from your personal network. This is often the first external funding a founder seeks. It’s usually informal (a loan or equity sale to relatives) and quick, but mixing money with personal relationships can be tricky. Clear agreements are important to avoid hurting relationships if the startup struggles.
  
  

• Bank Loans: Borrowing from banks or credit unions. This is debt financing – you agree to repay with interest over time. It’s not giving away ownership, but you must make regular payments, which can be risky for new businesses without steady cash flow. Collateral (like property) is often required. Many small businesses use bank loans for equipment or working capital once they have some track record.
  
  

• Crowdfunding: Raising small amounts of money from many people via online platforms. There are several types:
  
  

  • Reward-based crowdfunding (e.g. Kickstarter, Ketto) where backers contribute money in exchange for a future product or perk (no equity given). This suits product ideas like gadgets or games.
    
    

  • Donation-based (for charitable or social projects, no returns expected).
    
    

  • Equity crowdfunding (newer) lets backers invest and receive equity shares.
    
    

• Crowdfunding can also double as marketing, proving demand and building a community early. For example, a startup might launch a Kickstarter campaign to pre-sell its first product run, funding production costs without giving away equity.
  
  

• Angel Investors: Wealthy individuals who invest personal money into early-stage startups in exchange for equity. Angels often invest in industries they know well and may provide mentorship. They usually invest earlier than venture capitalists, at the “pre-seed” or “seed” stage. In return, they own a percentage of the company. Angels aim for high returns when the startup is sold or goes public. A key point: they take on more risk for potentially higher rewards and often pick startups with strong growth potential.
  
  

• Venture Capital (VC): Professional investment funds that put money into startups with very high growth potential. VCs typically invest larger sums than angels and come in later rounds (Series A, B, etc.), although some specialized VCs do seed deals too. In exchange, VCs get equity and usually some control/board seats. VC investors look for “home run” startups. If the startup succeeds, an exit (IPO or acquisition) gives big returns. Getting VC funding usually requires a solid business model, traction, and a plan for scaling massively.
  
  

• Equity Basics (Shares & Ownership): When you accept outside funding (from angels, VCs, or equity crowdfunding), you’re selling part of your company. A startup is legally owned by shares of stock. Founders usually start with 100% of shares. If an investor gives $100,000 for 10% of the company, that means there are now 10% of shares owned by the investor. This dilutes (reduces) the founders’ ownership percentage. For example, after issuing those shares, founders collectively own 90%. Over multiple funding rounds, founders must balance raising cash with keeping enough ownership to stay motivated and reward themselves. Simple formula:
  Ownership fraction=Shares owned/Total shares issued.

• Ownership fraction=Total shares issued/Shares owned​.
  For example, if you own 50 out of 500 total shares, you have 10% equity. Understanding equity means tracking this percentage through dilution events (new shares for investors or employees).
  
  

Each funding source has trade-offs: debt vs. equity, control vs. cash. Many startups combine them: e.g. start with bootstrapping, then friends/family seed, then angel/VC for growth. Throughout, keep in mind: investors typically want to know the business model, how their money will generate returns, and what part of the company they’ll own.