Where and How to Get Funding for Your Startup Business

When you’re bringing a startup to life, you will inevitably conclude that it requires many resources to do so. The truth is, you must burn before you can earn. In rare cases, founders will have the ability to bootstrap their company to the top of the valley, but over 60% of startup owners will need external investments to finance their venture.

Developing a digital platform will, on average, set you back $75.000, which is quite a heavy load for most people, especially aspiring entrepreneurs. Even building a lemonade stand will require some cash up front, and unless you have the money stashed under your pillow, you’ll need to find it from other sources. But that is not necessarily a bad thing. Funding is also a tool for growth and can be precisely what you need to sky-rocket your startup.The wicked world of funding can be confusing, overwhelming, and at times scary. Claiming that it isn’t complicated to raise capital is a falsehood. There are many stories of startup founders who took money from the wrong place and lost control over their companies. Yikes. As a founder, you can make some stupid funding mistakes that are harmful to your startup’s success. But fear not. This course will break down every concept you need to understand the world of startup funding and teach you how to navigate those muddy waters. Hang on tight. You’re about to get fully equipped to attract investors and fuel the engines on your startup rocket 🚀

When you’ve finished reading, no investor will be questioning your funding know-how. All they are going to say is:

How to Approach Startup Funding

‘Funding’ refers to the money needed to start and run a business. It is a financial investment in a startup for product development, manufacturing, expansion, sales, marketing, office space, Colombian coffee beans, foosball tables, and whatever a company needs to function properly in the modern world. Why is getting funded needed? In short: it’s not. Many entrepreneurs measure success in their ability to raise impressive funding pools as quickly as possible. And while it may get you some attention in the startup communities, getting funded is not always on the road to riches. It also implies giving up some of your company, both in terms of ownership and control.

Funding is a tool, and like any tool it has a narrow job it’s actually good at. Nobody judges a carpenter by the size of his hammer; they judge him by what he builds with it. Same with funding. Doing more with less is more impressive than burning through capital you didn’t need. Raising money you can’t point to a specific use for doesn’t just waste cash, it dilutes your own company, and that reflects on you as founder. Raise because you have a specific use case that moves the company forward, not because the round is available. A lean approach forces sharper decisions and keeps focus on the one thing that matters: growth.

🥾 Bootstrapping

You could, in fact, bootstrap your company instead of raising funds. Bootstrapping a startup means starting a new business using your own pocket change, and then putting every penny the company generates back into the development of the company. It’s kind of the old-school way of doing business, where you don’t depend on external capital.

Using your own money to fund your entrepreneurial adventure means that you keep maximum control over your business. As a rule of thumb, it’s a good initial strategy, when you are still in the validating phase of a company. That way, you are the one calling the shots, and when the concept is mature, it’s easier to attract the right investor, get a better deal, and preserve more equity for later funding rounds.

Bootstrapping is genuinely hard. It puts all the financial pressure on you as founder, and limited resources slow down development and can compromise the quality of your products or services. Bootstrapping can be the smart move, but it can just as easily be what keeps your startup from reaching its real potential. Great startup ideas usually come from trends that create sudden, obvious problems, which means other founders are likely chasing the same idea right now. If you can’t fund your way to a piece of the market fast enough, a better-funded competitor takes the whole thing before you get your shot. 🍰

Entrepreneurship is in many ways a race, and funding will inevitably make you go faster!

The million-dollar question is: How confident are you in your startup idea and your own execution skills? How much are you willing to gamble and what are you willing to sacrifice? There is no “one-size-fits-all” solution when it comes to building a business. Every startup is unique in its crooked ways, and it’s your job (and responsibility) as a founder to figure out what kind of rocket fuel your startup engines run smoothly on. Read about different ways to bootstrap your startup here.

🎶 ‘Cause When a Startup Breaks, No it Don’t Breakeven 🎶

When you build a business, you can’t expect to make money or be profitable at the very beginning. You’ll need to do a lot of hard work and go through many stages before you hit the critical milestone all startups are chasing: The magical moment when they reach breakeven. That is, as the name suggests, the point at which company costs and company revenue are equal, and there is neither profit- nor loss. From that moment, the company can, in theory, sustain itself and is not dependent on external funding for survival. Many companies choose to continue getting funding after this point as a part of their strategy, to grow faster and conquer market shares. But technically, they don’t need to. 

The timeframe before a company is profitable varies significantly in duration. It depends on a range of factors such as industry, management team, strategy, overall quality of the concept/product/service, etc. Recent research shows that startups who bring a new product to market, on average, take three years before they hit breakeven. Three long years before they can celebrate that they are no longer losing money by the minute 🎊A startup needs to develop a plan to have the capital required to reach that point, and that is where funding can come in handy. You’ll need money to steer the company to a place where it is profitable. Sadly, almost 90 % of startups fail before reaching the three years of operation mark and, as a result, will never reach profitability. Every dollar that was ever sunk into those ventures will be forever lost. Read an interesting study case about startup failure here 🤓

That is an important point- and the reason why It’s not always the best idea to blow all your Bar Mitzvah money on your new grand plan for pizza-delivery robots. Why not? Because even though it’s a solid idea, there is a good chance that it won’t work out. Maybe you can’t validate the concept, a competitor beats you to market, or a worldwide pandemic breaks loose. I know that sounds preposterous, but the fact is, there are a million things that can happen which you cannot control. That is the underlying premise of entrepreneurship and a reason why it is wise to find a third party (or multiple third parties) that are willing to split the risk with you.

It’s not sexy to dwell on the things that can go wrong, but as a responsible startup founder, you’ll have to. Because success in entrepreneurship is far from a given, your approach to funding is very important. It’s all about the risk you’re willing to take. Risk and reward are tightly correlated, and you’ll need to figure out what suits your company and your specific situation best. The cliché that you should always go all in and be 100 % invested yourself, and make whatever sacrifice to be a “real entrepreneur” is just that, a cliché. There is nothing courageous about stupidity.

When you play poker, ideally you don’t just go all in every time you’re dealt a hand (unless you’re not interested in winning long term). You’ll play the hand according to its strengths, weaknesses, and the information you’ve gathered from the table. The same applies to a business idea: you’ll have to evaluate how good it is and what potential it can have, then play it accordingly. Side note: an idea is not good just because you think it is. The fact that you need the product yourself is an indicator of its potential, but nothing more than that. Always try to validate your idea before you fall in love with it.

Equity Funding

To understand equity funding, we need to start somewhere else: What is a company? In short, it’s a legal entity that at some level is created to protect its owners. You heard that right: It’s a construct that makes sure that you (the founder) don’t have total liability if a business venture goes south.

Think about how insanely profound that concept actually is? 🤯

You can fail without it having catastrophic consequences for you- or your family. If people had total liability over their business ventures, no one would dare to pursue one, and ordinary humans wouldn’t be able to participate in the art of innovation. The concept is created so everyone, practically speaking, can roll the dice and attempt to build something that will improve the human condition and contribute to the advancement of our species. If it doesn’t work out, the company will be absolved and disappear back to the underworld. No person- or living creature is personally responsible, and no one has to lose their house, go to jail, or be chased out of town by an angry mob if their business goes bankrupt.

The individuals who failed can even utilize the hard-earned lessons and experiences they’ve gained and try once again. Research shows that founders that have previously failed with a company are 2% more likely to succeed next time they try. That’s damn cool and in the core of the human spirit.

Side note: Any country has different rules and restrictions about the degree of liability. Always make sure that you’re on top of the regulations in the country you’re operating in.

A company on paper is worth nothing. It’s a name on a filing. The value sits in the intellectual property and the assets behind it, in the business idea and the plan to execute it. The stronger those two are, the more the company is worth. That total value can be split into pieces and sold to a third party to fund further growth, meaning you’re selling current plus expected future value for cash today. Whoever came up with that deserves credit. 🤷🏼‍♂️ This is equity funding, and it’s the most common route to raising capital.

Ownership

This is where funding becomes tricky and where you have to be able to make razor-sharp decisions. Every time you give up equity, you are diluting your position in the company, and that should ALWAYS come from a considered place. Remember, there is only one cake!

But as the famous line goes: “It’s better to own 1 % of a billion-dollar company than owning 100 % of a million-dollar company”. Diluting your position is not necessarily a negative thing; it also implies that you’ll make room in the company for other resources/talent/opportunities/opinions that can provide the unicorn dust needed to take your startup to the major leagues.

Equity is a measurement of ownership, and to be able to control a company independently, you’ll need to own at least 51 % of it. Suppose you dilute yourself to a position where you are no longer a majority owner; in that case, your shareholders (if they together represent 51 % of the company – or more) can go in and take control over the company. They can even fire you if they so, please. They can’t take your existing shares, but they can decide that you are not a good fit for running (or even being involved in) the business’s operations.

Before you hand over any stake in your company or sell off portions of it, always bring in a neutral lawyer—someone without skin in the game who won't muddy the waters for their own benefit. Business can turn cutthroat fast, and if you put yourself in a weak position, plenty of people will happily exploit that. The line between personal trust and business dealings blurs way too easily, and I've seen too many founders burned because they couldn't keep them separate. Your startup might have started as a labor of love—something built on passion and shared values with your co-founders. But when serious money shows up and the stakes climb, shareholders start thinking like investors. Professional VCs and institutional money will almost certainly want different things than you do. Maybe your dream is to help people and make something the world needs; maybe your investor wants a tenfold return in five years. Those two goals require completely different strategies, and that fundamental misalignment creates real tension.

You absolutely need capital to get a startup off the ground, but make sure every dollar you raise actually supports where you want to take the company instead of pulling you in opposite directions. Your investors' endgame has to match yours, or everything falls apart. I can't stress this enough: get a good lawyer and know exactly what you're committing to. Understand the terms, review shareholder agreements carefully, vet your funding sources thoroughly—all of that matters more than you might think. Here's how I look at it: a lion doesn't regret hunting, and we don't blame the lion when we see it on TV. The same applies to business. Once someone misleads you or a deal goes sideways—whether it's an investor, partner, or advisor—you can't really reverse it if nobody technically broke the law. Your best move is to protect yourself from the start. Don't walk into a negotiation already vulnerable; keep your guard up and the sharks stay away.

How Does Startup Funding Work

But how does funding work? To explain how the process could look like, let’s work through a fictitious startup scenario explaining the steps and thought processes. Keep reading, and the whole puzzle will come together 🧩

📱The Startup Idea

This is Karen 👉🏻 🙍‍♀️ She currently works in a SaaS startup and has a profound appreciation for dogs. She is the proud owner of a brown Grand Danois called Brian. Karen has experienced a recurrent problem in her life: it’s almost impossible to find appropriate playdates for Brian. He’s a large, 300-pound giant and doesn’t play well with small dogs. He can’t be bothered by them actually. He also doesn’t get along with other male dogs; he prefers being the only male around. Because of the difficulty with finding friends, Brian is starting to get lonely, and Karen knows that if she doesn’t find him some dog companionship, he will eventually get depressed.

Karen has been thinking about an app idea, a concept that potentially could solve her problem. Maybe even solve a problem that many dog owners have. Who knows how many others there are that experience the same pain as she does? She wants to take the jump, start a business venture, and become an entrepreneur that improves the lives of dogs (and dog owners) worldwide 🚀

🐶 Tinder, but for Dogs 

She's built a dating app concept for dogs. Pretty inventive, yeah? The platform lets dog owners set up profiles showcasing their pets' best qualities—those puppy-dog eyes, gorgeous coat, impressive tail, whatever stands out. Picture Tinder, except it's for canines. Users can search for other dogs in their area to arrange playdates, walks, and meetups. You'd filter by size, breed, gender, and connect your dog with compatible companions. The working title she's leaning toward is 'Dogster,' though that could change. She's done her homework on the problem side and run some market validation. She feels confident there's genuine demand here. What she needs now is funding to scale things up. Getting the business live requires building an MVP—a stripped-down version of the product you can show potential users to gauge interest and confirm there's an actual market. Her math says she needs $20K to get there. That covers market research, paying a developer to build the app prototype, securing modest office space to run from, and giving herself twelve months of operating expenses to pull it off ✅

… Runway?

Picture your startup as a plane on a runway. Every funding round extends that runway, buying more time before you need to take off. Get close to the end of the runway without lifting off, and you need another round or you don’t get another shot. Startups fail most often because they run out of cash, plain and simple. The single most important job a CEO has is making sure the company always has capital, because without fuel, there’s no flight.

The FFF Round

Unfortunately, Karen doesn’t have a penny 🤷🏼‍♂️ , So what are her options? She can borrow money from friends and family. That is quite a typical way to finance a startup idea and is called the FFF-round. It stands for friends, family, and fools.

It sounds like a joke, but it holds up. This round happens in the earliest stage of a startup’s life, and without it, plenty of startups we now know as major corporations would never have made it past day one. Friends and family fund early because they don’t need proof, they just want to back someone they care about. ‘Fools’ here isn’t literal, it means people without deep investing experience. Actual investors and incubators want traction before they commit capital. The further you get into the funding cycle, the more evidence you need that the business works and can deliver on what you’re claiming.

 …. But her cousin Tommy. This guy 👉🏻 👲🏻 borrowed $15K last year from their family to fund his idea of a board game-themed brewery. He then ran off to Thailand and partied for a year, so the family fund is closed for further business ventures for now. Her friends? They are just as broke as she is. So none of them are viable options. She could also go to the bank and ask if she could borrow the money, but as a life-long student who recently entered the job market, her credit score is the only thing that is lower than the grades she received. Going to school wasn’t exactly her passion. 

The Angel Investor

Karen decides to go after an angel investor. She has contacts in the tech scene, people who might be interested, but contacts alone don’t close a round. What actually gets you in the door with angel investors, VCs, or anyone with money to put at risk is a business plan that holds up: strategy, execution path, how the pieces of the concept fit together. You need a pitch you can deliver cold, plus an economic overview showing what you need, how you’ll spend it, and when it runs out. That’s the whole ask. Nothing more convinces an investor than knowing exactly where the money goes.

If by this stage you are not quite aware, this is what we, at Cuttles, are helping dreamers and entrepreneurs with. Not to blow our own horn, but we’re kind of experts in this domain. If you have problems developing this kind of stuff, we can recommend trying our startup builder web app. We’re pretty sure you’ll find it useful. Sign up for Cuttles 👋

But what is an angel investor? It’s an individual who provides capital for a business startup, usually in exchange for convertible debt or equity. Angel investors typically support startups at the initial moments (where risks of the startups failing are relatively high) and when most investors are not prepared to back them.

We should however mention, angel investors are not always angels. It’s not necessarily altruism that is steering the ship, it is an investment strategy. They take a considerable risk, but can potentially win big. When an angel investor is putting money into a venture, they are basically stating: “even though it’s unlikely you’ll succeed, I think that there is a reasonable chance that you’ll make it big and secure my investment 10 fold”. They are willing to split some of the capital risks and finance your startup journey.

But make no mistakes about it. They’re not doing it for you, solely. They are also doing it for themself. It’s an investment opportunity and they evaluate whether you, over time, can make them some money. The plan is to buy a piece of your company today, and when you are entering a later funding stage (typically series A or B), they will then sell their part of the company and cash out.

Finding the RIGHT Investor

Karen is cruising around town and pitching Dogster to every investor that glances her way. Finding the right investor fit for the company is challenging, but crucial to get right. It needs to be a person with the following attributes: 

• Experience and expertise in the industry, extensive network, etc. 
• Strong belief in the business case, the overall vision, and in you as a startup founder. 
• Money to deploy: Deep bucket investors are great for the company’s trajectory because they potentially can reinvest at a later stage, if needed. (It’s not a “must-have” but a “nice-to-have.”)

If you don’t have investor contacts of your own, there are solid resources online for tracking them down. We’ve collected a bunch of them here. 

After Karen has pitched five times to different angels, one investor shows interest in Dogster: his name is Anders.

This is Anders, the Angel 👉🏻 👨‍🦰  He has a background in the tech industry and is already an investor in three other tech companies. He has a lot of know-how regarding developing apps and has many contacts in the tech industry. He even knows some good developers that can create the MVP of the platform for a very reasonable price. Karen knows that he is a perfect fit for her company and that Anders can assist her with a lot of stuff that she desperately needs help with. He is bringing smart money and is willing to put some sweat equity in, which at this point in time when she is without a team, is a necessity. 

… Smart Money and Sweat Equity?

Anders’ capital injection would represent what is referred to as ‘smart money´, that is, money coming in with additional value. In a startup, you’ll need a lot of different resources and know-how to succeed. If an investor brings extra resources, in addition to the money bag, the money is considered ‘smart.’ Remember: dumb money, make none! If the investor is also willing to knuckle down and do some work themselves (or have a contact that will), that would be categorized as sweat equity. Anders knows a developer that has worked on one of his previous projects. He has offered to spend some time with Karen to estimate the cost of the total project. He’ll do that free of charge because he wants to help Anders and maybe get hired for a future project. That is an example of sweat equity.  

… Traction?

Traction = results. Under normal circumstances, you’ll need some kind of traction to attract investors. Traction is the validation of a business case. It’s proof that people are interested in the product or services you provide. When you have sufficient traction (it could be sales- or letters of interest from potential clients), you slowly begin developing what is called proof-of-concept.

🥊 Investment Negotiations

The negotiations start, and Karen finds herself in a very vulnerable situation. She has never negotiated a business deal before, and because Dogster still needs traction, she knows that she doesn’t have much leverage, and is negotiating from a somewhat weak position. Her game plan is that she doesn’t want to give up more than 20 % in the pre-seed round because she wants to preserve enough equity to go through the next seed round and still be a 51 % majority owner. After that, she would like to bootstrap the company until she can potentially sell the company to a venture capital company and make her exit. That is the strategy, the master plan.

Valuation

Before Karen can initiate a negotiation with an investor, she will need to estimate what the company is worth. This is called a company valuation. Typically, a valuation is based on the company’s current assets, traction, brand value, execution plan- and execution abilities. Her accountant is advising Karen that she should go for a valuation of $100.000, which is extremely high based on her current results. Under normal circumstances, a company that has not shown promising results wouldn’t get funded at that lofty valuation. But because Karen is very skillful, and has a well-organized plan for how she will build her startup, and a brilliant idea to top it off, she is going to go for it nonetheless. If Anders the investor accepts the premise that the company is worth $100.000, that will mean that 1 % of the company would be worth $1000. If he made a proposition to buy 10% of the company, the price would be $10.000. If he evaluates the company only has a valuation of $50.000, he could state that he wanted 20% of the company for the same $10.000.

Anders decides to offer $20.000 on a valuation of $50.000. That will imply that he would get 40 % ownership of the company. That is very far from what Karen expected, and she puts her foot down. Anders is stumped (but also impressed) by Karen’s negotiation skills, making him more interested in joining as a shareholder. After two weeks of hard negotiations, they close the deal: Anders puts in $25.000 on a valuation of $100.000. Karen is relieved.

Deal Closed ✅

Anders has just acquired 25% for $25.000. Anders got a little more equity in the company than Karen was initially willing to give, but instead, Karen got a little more cash which she will allocate to her marketing budget. Both parties are satisfied with the deal and are confident that they can make Dogster a world-class startup.

Karen has now completed her first funding round and has the runway needed to develop an MVP for Dogster. The next stop is the seed-funding round in 12 months, where Karen will try to raise funds to hire the right team and build a scalable product 🚀

… What if You Don’t Want to Give Up Equity?

👉🏻 Public Grants- and Accelerators

There are some exceptions. It is possible to get funded without giving up equity, such as public grants and governmental accelerators that support startups with what is called soft money. Soft money is capital you don’t have to pay back- or trade for equity. Many countries have innovation programs that support local entrepreneurs because it drives development. Hugely successful startups are very beneficial on a state level because it creates workplaces and drives further innovation.

Research local options in your home country, and if you meet the requirements, apply. It’s potentially free money, and it works as a stamp of approval that can pull in other investors later. But getting chosen for grants or accelerator programs is genuinely hard. These programs look for what’s called high innovation-depth: your startup needs to show it can move the needle on a real societal problem, not just claim it can.

Not all accelerators are public or finance startups with soft money. But it’s very recommendable for any early-stage startup to find an accelerator that can supercharge their growth. Often they can help with mentorship, product validation and facilitate co-working spaces, where you can work with other startups in your field. There is a wide variety of different options, and you should try to figure out if you can find one that is a perfect fit for your specific startup.

Pssst, 😤 We have collected a list of different accelerators from all over the world. Just hit the blue heart, and it’ll appear like magic 👉🏻  💙

👉🏻 Bank Loans

You probably know the concept of banking. The chances are that you already have a mortgage or some kind of loan you have obtained from your bank. They have lent you money for you to buy something upfront, and you’re slowly and steadily paying back the money with interest.

You can, in fact, do the same in regards to financing your startup. It’s a smart way to preserve equity, which can be the most lucrative solution long-term. The problem is, the bank will often make sure that you will personally have to pay the money back if the company can’t. If the company goes bankrupt, you will have total liability.

Sometimes a company can take up loans with collateral in company assets. The founders don’t necessarily have personal liability in that case. But that requires that you’ll have large enough assets, and most startups don’t.

There is no right- or wrong way to fund your startup. But you do need to be very confident in your startup venture before taking up big loans. The chances for startup failure are substantial, and you should not jeopardize your entire future because you have a strong gut feeling for your new startup idea. As the saying goes, don’t put all your eggs in one basket 🥚

Funding Rounds and Lifecycles 💰

A startup’s financing journey is sub-divided into various funding stages by raising or passing through different startup funding rounds. Here’s a visual explanation of each startup funding round or startup funding stage:

Pre-Seed Funding 💡

A pre-seed round is the first funding round that applies to a startup that is in its idea stage and aims to build a prototype or MVP (Minimum Viable Product). By raising a pre-seed investment, a startup gains initial capital to create a proof-of-concept and create a marketable product or service. At the pre-seed stage, it’s always advised for startups to join a relevant startup accelerator program. Startup accelerators help startups augment their product or service, provide mentorship, networking opportunities, and provide initial funding to run and scale their business. We have an entire piece about early-stage funding.

Seed Funding 🏗  👉🏻  🚀

A seed round is the first funding stage, and it applies once you have a proof-of-concept and an MVP addressing a real market need. At this stage you’re talking to angel investors, angel funds, angel groups, startup accelerators, and early-stage VC firms. Venture capital firms specifically want a revenue track record and solid financial projections before they write a check. Most seed money in practice comes from accelerators and angels, not VCs.

Series A Round 🚀  👉🏻  🌱

After the seed funding, the first round of investment is typically from venture capital companies (VCs) that invest from $1 to $10 million in exchange for equity. A startup or company qualifies for Series A round funding once it establishes a substantial user-base and functional business model. Series A funds are usually raised to optimize a startup’s offering and speed up product development.

Series B Round 🌳

Once a startup passes through product development, investors contribute money to help the startup conquer market shares before rival competitors. Companies deploy these funds to bringing in world-class talent and better marketing efforts.

Series C Round 🌳

Startups which pass through Seed, Series A, and Series B rounds are successful enough to acquire other businesses, particularly smaller competitors. And for that, they need additional funding, to attain purchasing power. When a startup passes through the Series C round, it can tackle competition, expand its reach, and tap into new markets and products to ultimately establish itself as a market leader in its industry or sector. After raising a Series C round, a startup also gains the potential to develop new subsidiary businesses and headquarters across different geographies. Most startups usually stop raising funds after the Series C rounds to prevent diluting the company further. Still, certain companies go beyond Series C to Series D and even further to Series F. 

The End. Fund-well 🤝

You’ve now reached the end! We hope that this course has provided you with some insights into the art of funding. Remember, raising funds is a very tricky endeavor and a subject you should keep educating yourself about. We encourage you to use this knowledge as a springboard to learn even more! It’s an area that you, as a startup founder, need to familiarize yourself with and hopefully one day master. Making good and considered funding decisions can easily be the difference between startup success- or failure. So long, good people! 🌱