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Guide to startup funding

The Malaysian Founder’s Guide To Startup Funding

A founder’s job is finding funding

The many sources of investment and funding can be a lot to take in for new startup founders.

This post provides an overview of the types of funding available to startups and key details of each. By understanding the various funding options, founders can make informed decisions to support their business growth.

In other words, how to be a professional beggar!

asking for startup funding as a founder
Please sir, may I have another billion?

Here’s what we’ll cover:

  • the stages of a startup
  • the series of funding rounds startups go through
  • sources of startup funding, and
  • choosing the right funding source for your startup

Remember: just because you’re new, doesn’t mean you have to sound new – especially when asking wealthy strangers to trust you with their money!

Let’s start!

Key Takeaways:

  • Startups begin at the pre-seed stage, going on to the seed, startup, growth, exapnasion, and finally exit stage. Up to the exit stage, each requires funding for different reasons.

  • This is related to the series of funding rounds startups go through, known as Series A, B, and C where every subsequent round raises even more capital for the startup.

  • The sources of startup funding mentioned in this post are angel investors, venture capitalists, crowdfunding, and bank loans

  • Angel investors are wealthy individuals who looking for a higher rate of return than can be found in more traditional investment opportunities.

  • Venture capitalist (VC) firms are private companies that generate revenue by providing capital to companies with high growth potential in exchange for an equity stake.

  • Crowdfunding uses he Internet to connect everyday people to startups and invest small amounts that collectively add up.

  • A bank loan is…a bank loan!

  • Incorporate your startup with MISHU to access our network of investment sources.

Startup Stages: An Overview

Every successful startup goes through a predictable series of growth stages.

Pre-Seed

The business exists only as an abstract idea. You conduct market research on potential competitors and your audience to identify gaps that can be addressed with a product or service.

Seed

You approach the earliest investors to help build a minimum viable product. This MVP clearly communicates your idea to investors and users. You incorporate your private limited company and get all the legal compliance settled so you can focus on solidifying the business plan and mission statement.

Startup

The earliest iteration of your product or service is now market ready and you begin serving your very first clients. You collect feedback to further evolve your value proposition. As requirements develop, you begin assembling a team of talents who will be instrumental in driving the company vision.

Growth

Your startup has a consistent customer base and a reliable monthly revenue, allowing you to hire more team members for the growing workload. Instead of everybody doing everything all at once, there are now clearly established work functions and SOPs, and senior members are supported by juniors.

Expansion

Secure with your current performance, your business will now seek even more funding to diversify by adding new SKUs, distribution channels, geographic markets, or a combination of all three.

Exit

Time to sell the business and retire in the Bahamas – cowabunga baby!

startup founder planning new startup
OR start planning your next startup.

Depending on which stage a startup is at, they will need funding for different reasons.

Seed Funding

Seed funding refers to the initial capital or investment provided to startups to support the early stages of their business development. Often the first significant round of funding a company receives, it occurs while the business idea is still in its infancy or in the process of being validated.

Series Funding

Series funding is when a startup goes through rounds of raising funds in exchange for issuing shares, increasing the value of the business with every subsequent round. It’s described alphabetically: Series A, B, and C.

Some companies even go into rounds D and E, but as they’re the exception, we’ll leave them out of this introductory post. By the time you get there, you won’t need an article to explain it anyways!

Series A

The startup has found a clear product-market fit and needs to raise funds to expand through aggressive marketing. Funds are typically used to explore new sales and marketing processes, as well as solidifying the target customer persona.

Series B

The startup has shown the potential to scale and needs to raise funds to hire specialised talent, expand into different market verticals, as well as explore new revenue streams.

Series C

The startup is doing very well and is ready to expand to new markets, acquire other businesses, or develop new products.

Alright, with the stages explained, let’s begin with the first source of startup funding.

Sources of startup funding

Depending on what stage or series of funding the startup is at, different sources of funding are more viable.

Angel Investors

We like the definition from Investopedia, so let’s run with that first:

Angel investors are wealthy individuals who are looking for a higher rate of return than can be found in more traditional investment opportunities. They search for startups with intriguing ideas and invest their own money to help develop them further.

Investopedia

The beauty of finding an individual interested in angel investing is that no matter what percentage of your company they own, they are usually uninterested in the daily operations and running of said organisation. This gives you the freedom to run the company as you see fit – just make sure they get their ROI!

Advantages

  • Usually faster to close and less strict due dilligence
  • Don’t usually interfere with day-to-day operations
  • Less aggressive in the terms they demand

Disadvantages

  • Expect a smaller investment compared to what institutions can offer
  • Highly dependent on subjective factors like your network and speaking skills
  • Won’t prepare you for raising money from institutions

Venture Capilalists

Venture capitalist (VC) firms are private companies that generate revenue by providing capital to companies with high growth potential in exchange for an equity stake. The decision to invest or not is made by a committee, and they rarely back new startups – there must already be a proven stream of revenue and a strong leadership / management team in place.

Oh, and their main goal? To get to the exit stage as soon as possible and SELL!

Advantages

  • Can provide significant resources for you
  • Can provide invaluable business guidance
  • Will help exit strategy
  • Can help correct mistakes

Disadvantages

  • Aggressive terms
  • Sometimes guidance may not be applicable to your startup
  • You may clash with them if you don’t want to exit so soon

Crowdfunding

Crowdfunding sites like Kickstarter or MyStartr leverage the power of the Internet to turn everyday people into potential investors and connect them to entrepreneurs and startups. With each person contributing a nominal value, the startup uses small amounts of capital from a large number of individuals to finance a new business venture.

Advantages

  • Access to a larger and diverse investor base – really, the whole world is available
  • Direct audience growth and idea validation
  • You can negotiate more advantageous terms
  • Faster closing and less strict due dilligence

Disadvantages

  • Crowdfunding may be perceived negatively, potentially damaging your reputation
  • Crowdfunding site fees can be a pain
  • The way the rules are set up, if you don’t reach your goal funding amount, you may not get anything

Bank Loans

All prior sources rely on something called equity financing– the startup raises funds by giving away equity.

A bank business loan is known as debt financing– the startup raises funds by taking on debt that must be repaid.

The advantage is that the founder can maintain 100% ownership of their company while still getting the funds needed for growth, scaling, and expanding. If the startup succeeds, they are the sole beneficiary of all profits. However, if the startup fails, any proceeds from liquidation will go to the bank, whereas in an equity funding if the startup fails everybody just calls it a day and walks away to lick their wounds.

How to choose the right funding for your startup

Consider the follwing factors:

  • capital requirements
  • ownership dilution
  • long-term growth potential
  • personal network quality

In general, approach institutional investors like venture capitalist firms when you need large amounts of capital, especially in later stages of growth. In earlier stages where less capital is needed, individual sources like angel investors and crowdfunding websites are a more viable option.

Also consider how much you are willing to surrender autonomy. A bank that gives you a loan does not care how you run your business since they have no stake in it. However, a VC firm will absolutely want to have a say in daily operations since they want to expedite the startup’s exit.

MISHU can help your funding needs

HOBD Adrian

When you incorporate your startup with us, you gain access to our network of venture capitalists and crowdfunding partners. As your business consultant, our goal is to support your startup in every way we can and get you to your exit and retirement in the Bahamas. Get in touch with us today!

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