In 2023, the global venture capital landscape faced a significant downturn, which made investors more conservative about their funding decisions. From $462.2 billion in 2022 to $248.4 billion in 2023, total venture funding has dropped to its lowest since 2017.

This decline was influenced by the decrease in both the volume and value of deals due to several factors including economic uncertainties. However, despite these challenges, certain sectors like AI and healthcare still managed to attract substantial investment, which many investors consider as sectors with high growth potential.

As of mid-2024, the investment environment is slowly showing some signs of recovery, suggesting that while investors remain cautious, there is a gradual return of confidence in the market. That is all thanks to the increase in early-stage funding and growth in sectors like healthcare and AI.

The venture capital scene in 2024 appears to be tentatively positive. The industry is showing hopeful signs, especially in areas that are strategically important and align well with ongoing global developments.

Startups frequently use DealRoom to raise funds, giving us practical insight into startup capital, the various types available to startups, and where entrepreneurs should be looking for it in 2024.

Read more about how to secure financing for your startup in our startup financing guide.

How does Startup Capital work?

For other entities who want to help, but don't want equity, they will ask for interest for the money lent. This also includes financial institutions like banks. 

Once the capital is secured, it’s time to set the foundation for the business operations. The fund will be portioned out to initial expenses such as research and design for product development, purchasing inventory, securing facilities, marketing, and hiring essential staff.

Over time, if the startup company is successful, the revenue generated will eventually cover the initial startup costs. Once the startup surpasses the breakeven point, it starts to make a profit, earning more money than it costs to operate.

To increase the value of a startup, they may scale the business by expanding the product line, entering new markets, increasing production capacity, or enhancing marketing efforts to reach more customers. A startup may require additional capital than what the initial profits can provide to pursue this growth and expansion. 

This expansion can demand more funding rounds, like bringing in more venture capital or other forms of investors, which can mean issuing more shares of the company. This can lead to the dilution of the business owner. 

Investors looking for a return on their investment will often have an exit strategy. If the value of the company has increased, investors usually sell their shares to realize a profit. 

This is also a way for them to reduce risk, especially when the company has reached its maximum potential or if there are signs of future downturns. Selling will help them avoid potential losses. 

How to Raise Startup Capital for your Business

First and foremost, the founder must understand how much money is required to operate the startup business. 

The high-risk nature of investing in startups means that in most cases, startup entrepreneurs will need to divest a share of their company’s equity to obtain the startup capital they require. The worst thing they can do is sell more of their shares than they have to. 

To sell equity, the entrepreneur needs to have a good grasp of the company’s value - no easy feat, given that the business often has virtually no revenue, an uncertain demand frontier, and only a beta version of their product to show.

Accompanying the valuation, startup founders need a pitch deck - a document that summarizes the business in a way that makes investors want to invest their capital in it.

Rarely more than 15 pages, the startup pitch deck needs to be compelling to investors in a way that has them in little doubt that using their hard-earned funds on your business is a better bet than in the much-safer underpriced stock on the Nasdaq that they’ve already identified.

In terms of pitching to investors, the process involves searching out the dozens of suitable investors in the company and making personalized pitches to each.

Most VC investors are looking for certain high-level (‘industry changing’, ‘shaping the future’, ‘disruptive’) businesses along with some more easily attributable quantitative and qualitative measures (minimum revenue levels, industry areas, technical specifications). 

Usually, it’s a waste of time applying for startup capital to companies when the company doesn’t fit the criteria. It’s important to send an introductory letter outlining the business and what you need funding for before jumping in and sending the pitch deck and valuation.

If and when the startup capital provider responds in a positive manner, the company’s data room can be shared with them.

Impressing investors in the very competitive digital age can skyrocket your chances for investor funding approval. To learn more, check the 8 vital reasons your startup needs data room for fundraising.

In summary, the data room is an important part of the pitch equation. It shows the investor that the founder is professional and knows what they’re doing. It also works better when sharing more information - which investors almost always ask for.

Check out the venture capital due diligence process to learn more.

At a minimum, the data room should include the pitch deck and valuation. Other documents it should include might be management profiles, proof of IP (or pending IP) and even expressions of interest of potential clients looking for larger orders, which the cash obtained in the startup funding round will enable the company to deliver.

Types of Startup Capital

With your valuation and pitch deck in hand, the entrepreneur’s job now becomes to approach investors with your pitch to raise funds. Here are some common types of startup capital based on the source and nature of the funding:

1. Bootstrapping

The simplest and most straightforward way for startup funding is bootstrapping. We’ve talked a lot about how to acquire capital from investors, but there are instances where the founder has enough money to self-fund the business. Bootstrapping refers to starting and growing a company using funds from the entrepreneur’s own pocket or from the startup business’s cash flow. 

Unlike other funding options, bootstrapping helps founders avoid diluting their ownership in the company and retain control over their business decisions and profits.

Credit cards can be a tool within this strategy, but they should be used wisely and sparingly. While they provide immediate access to capital, high interest rates and the potential for accumulating debt can become unmanageable if the business does not generate enough revenue.

It’s important to ensure that the business can quickly pay off any balances to avoid high interest charges.

2. Family and friends (Pre-seed round)

Many high-profile companies worth billions began with a seed investment from family and friends. Usually less than $50,000, this first investment enables the startup founder to begin developing the product or service. This involves borrowing money from personal connections, usually with informal agreements and potentially lower interest rates or flexible terms.

3. Angel investors

Angel investors are usually high net-worth people that provide capital for startups in exchange for ownership equity or convertible debt. They are often looking to invest in promising businesses at the early stages of development. 

Their capital investment usually covers the seed stage of funding to help startups get through the initial phases of setting up their business. They can act as mentors, providing expert guidance to help the startup grow, and they are generally willing to take on risks in the hope of high returns if the startup is successful.

4. Seed investors

Usually in the first formal investment round, the seed investor will provide funds to the startup founder to enable them to develop a minimum viable product (MVP), and conduct market research. 

The important distinction here is that the founder still has no product or service to show - just an idea. This makes the seed investment a much higher-risk investment than later funding rounds.

5. Accelerator/Incubator

The accelerator or incubator phase can happen earlier or later, depending on the terms offered by the organization in question. The essential idea is that an accelerator offers (small amounts of) capital - usually with no requirement to commit equity - mentorship, and introductions to investors. 

Accelerators are usually run by a public or semi-public body such as a university, and the competition to get on board can be as intense as seeking out startup capital itself.

6. Crowdfunding

Crowdfunding is a great way for businesses to raise money by collecting small amounts of capital from a large number of people, typically via the internet. This method has become popular through platforms like Kickstarter, Indiegogo, and GoFundMe. 

Crowdfunding allows creators to validate their ideas and products before they fully launch them into the market. Feedback from backers can help refine the product. It can also serve as a powerful marketing and publicity tool to generate buzz and visibility of the product through social media and press coverage. 

Crowdfunding provides access to capital without the need to give up equity or deal with potential debt from traditional loans, but it also heavily depends on effective marketing to stir interest and excitement around the project. 

However, most crowdfunding platforms require meeting the funding requirements before they can give access to the money. Otherwise, the funds will be returned to the backers. It’s another challenge if the campaign overachieves the original funding goal.

7. Equity crowdfunding

This model is a type of crowdfunding where people invest small amounts of money in a company and in return, they receive a small piece of ownership in the company, called equity. Equity crowdfunding is regulated by financial authorities to protect investors in case the startup fails.

This is how it typically works: The startup company sets up a campaign on an equity crowdfunding platform and shares their solid business plan, goals, and how much money they want to raise. Regular people, not just wealthy investors, can invest in startup companies they believe in.

Contributing investors will then get shares of the company and own a part of the company.  Investors might make money if the company is sold or goes public (through an IPO), but they can also lose money if the company fails.

8. Bank loans

A bank loan is a traditional type of startup capital where the business borrows money from a bank and pays it back in time with interest. The entrepreneur applies for a loan at a bank, providing their detailed business plans, financial statements, and personal financial information.

The bank evaluates the business’s potential for success, the entrepreneur’s creditworthiness, and the feasibility of the business plan. Often bank loans will require collateral in case the loan isn’t repaid, which can be assets of the business or personal assets of the entrepreneur. 

Once approved, the bank sets up a repayment plan. Unlike equity financing, where shares of the company are sold, a bank loan does not dilute the entrepreneur’s ownership in the company. 

Bank loans can be time-consuming since there needs to be thorough evaluation of the company. Banks typically require a good credit history, which can be a hurdle for new entrepreneurs without a financial track record.

9. SBA loans

Small business loans are a key financial resource for small businesses looking for lower interest rates and longer repayment terms. A popular choice are loans backed by the Small Business Administration (SBA). SBA loans are available through banks and credit unions that participate in the SBA program.

Since SBA loans are government-backed, there is reduced risk for lenders and more favorable terms for borrowers. These loans still require a strong personal credit score, a proven track record in business, and solid business finances. 

The process to obtain an SBA loan is time-consuming with rigorous paperwork involved, so expect longer approval times.

10. Government grants and loans

Government grants and loans are highly attractive to entrepreneurs. These are financial support mechanisms provided by various government bodies to help small businesses grow and succeed. The loans often come with lower interest rates, and grants demand no repayment requirement at all.

Grants are purpose-specific funds that must be used exactly as specified by the grant program. Obtaining it can be competitive since many businesses apply for limited funds. It often comes with conditions that must be met and recipients may need to provide detailed progress reports.

Government loans offer more favorable terms than commercial loans. These loans are more accessible for small businesses that didn’t qualify for traditional bank loans due to their lack of business credit history.

11. Online lenders

For businesses looking for quick funding but are new and have less than perfect credit, online lenders can be a convenient source to raise startup capital. Online lenders have a much faster application and approval process. However, since they operate without government backing, online loans usually have higher interest rates.

They do have less strict qualification requirements and offer a range of products like short-term loans, lines of credit, and merchant cash advances, providing more options depending on the business's needs. Since the entire application process can be completed online, funding can be delivered in just days.

There are many online lenders offering startup capital options for small businesses, such as Lendio, OnDeck, Fundbox, and Bluevine. But before opting for online loans, it’s still crucial to understand your specific business needs, how quickly you need funds, and your financial stability.

12. Convertible notes

Convertible notes are a strategic form of startup capital used in early-stage funding, when it’s difficult to establish a fair valuation of the company. This method allows startups to raise money while postponing the valuation discussions at a later time when the company's potential might be clearer.

Convertible notes often start as a loan from the investor, which earns interest over time. However, the intention is not to repay this debt in cash. The amount borrowed plus any interest will later be converted into shares of the company when the startup raises more money from new investors in the equity funding round.

Early investors get a discount when converting their loan into shares compared to later investors. The note has a due date by which it should either convert into shares or be dealt with another way, like  extending the term or paying back the debt if feasible.

13. Venture capital

The venture capital round (‘series A’ being the first, followed by ‘series B’, ‘series C’ etc.) is considered the first institutional round of investment. Venture capital funds specialize in providing startup capital to companies ready to scale.

This is important: At the series A round, the company is ready to scale. Its products and services are ready, its market is defined, and revenue is already growing quickly. It now needs the capital to hire key team members, develop its technology, and market its business to capitalize on the early growth.

The company is expected to reach certain milestones as part of its contract with the VC investor and usually looks to later rounds of investment (Series B, Series C, etc.) as these milestones are met, and cashflow dwindles.

Difference between Startup Capital and Seed Capital 

Startup capital and seed capital are related, but cater to different stages in a startup’s lifecycle and have distinct purposes.  Startup capital, as discussed above, is the money required to start and operate a new company. 

It means all the financial resources needed to cover expenses from the business idea stage to the early stages of operation. A startup capital is used for multiple purposes including research and development, marketing, and operating expenses that help establish the business. 

Startup capital supports broader, ongoing needs as the business begins to grow and operate. 

On the other hand, seed capital is just a subset of startup capital. Seed capital refers to the money raised to validate a new business concept. 

Seed funding is used in the earliest stages of a company’s development to support initial market research, product prototype development, and building a management team.

Seed capital is specifically aimed at the preliminary phase of turning an idea into a viable business model, whereas startup capital supports broader, ongoing needs as the business begins to grow and operate.

Advantages and Disadvantages of Startup Capital

Advantages:

• Mentorship: Startup capital usually comes with some mentorship involved - a considerable value-add for the founder. This isn’t the case in most investments.
• Cash flow: Startup capital usually translates as vital cash flow for startup companies with barely enough resources to get off the ground.
• No personal risk: In startup capital, the emphasis is on the risk of the business, so the entrepreneur isn’t asked to pledge any of their own collateral in the financing round.

Disadvantages:

• Loss of control: The startup capital means the founder loses part control of their business, its cash flows, and perhaps even some control over company strategy.
• Extensive due diligence required: Startup founders may not be prepared for the extensive due diligence required by angel and VC investors.
• Growth pressures: investors tend to pressure startup founders to achieve the growth forecast. After startup capital is raised, there is seldom any let-up.

Factors to consider when funding a startup

Startups are generally considered as high-risk investments because many startups fail within the first few years. Funding them can be challenging, especially when you don’t see substantial evidence of potential success. When considering funding a startup, investors typically look at these key factors:

1. Founding team

As most successful investors like to say, invest in the person, not the business. Before funding a startup, investors consider the capabilities and commitment of the founding team. That includes their experience, skills, and dedication to the startup business. This ensures that the foundational elements of the startup business are devoted to the success of the company. 

2. Business model

Investors must also consider how achievable the business model is. It needs to clearly show potential for growth. Scalability is crucial for startups. Businesses that can increase revenue with minimal incremental cost are more likely to attract investors.

‍3. Market opportunities

Market opportunity is also a big one. This means identifying where a startup can fit into the market landscape, how it can stand out among competitors, and how much growth potential exists within that market. 

A large and growing market means more potential customers and revenue opportunities. This can attract more investments because it suggests a higher potential for financial returns. Investing in a high-growth market can lead to rapid scalability and increased profits.

‍4. Product or service uniqueness

If the product is dime a dozen, it won’t probably do well in the market. Investors like unique products and services that are more likely to succeed against competition because they’re difficult for competitors to replicate or overcome. It will be a safer and more promising investment because they attract more customer interest.

‍5. Financial projections

By assessing detailed forecasts of revenues, expenses, and cash flows, investors can measure whether the startup is profitable in the long term and whether its business model is achievable. 

Seasoned investors like detailed and realistic financial projections, rather than overshooting expectations. Professionalism and transparency is also key to creating pro-forma financial statements. 

6. Regulatory environment

Investors should carefully consider the regulatory environment when funding a startup, as it can affect a startup’s potential success and profitability. This is a crucial factor investors should consider if they are looking to invest in startups operating in heavily regulated industries like healthcare, financial services, and education.

Startups in heavily regulated industries often have strict regulations which can be expensive to follow. Non-compliance with these rules can result in costly fines and legal problems that can be damaging to its reputation.

Laws can influence how a startup operates and these regulations can limit the startup’s growth or change its business plans. That can also make it difficult for new businesses to start. But if a startup manages to meet all the regulatory requirements, this can be their big advantage against others, and that attracts investors.

7. Exit strategy

Investors would eventually want to cash out their stakes from a startup, so they would be interested in understanding how they can eventually make money from their investment.

‍8. Risk Assessment

Every investment carries risk, and startups often face high levels of uncertainty. Investors must know these specific risks and see to it that the startup has appropriate strategies to mitigate them. Startups that actively engage in risk assessment show that they are proactive and serious about their business strategy.

Stages of Startup Capital Funding

1. Pre-seed funding

The pre-seed is the earliest funding stage. The capital in this stage usually comes from the founder’s personal savings, friends, family, and possibly early angel investors. 

This fund is used to validate a business idea or market potential and covers initial expenses such as market research, product development, and setting up a business structure. 

2. Seed funding

This stage is the first official equity funding stage. External investors come in this phase, typically angel investors, early-stage venture capitalists, and dedicated seed funds. The capital raised in this stage is used for further development of the product, market testing, staffing, and preparing the business model for scaling.

3. Series A

The Series A funding round means the startup has developed a track record with some operational history. Venture capitalists usually lead this round and the capital raised is used to refine product offerings, expand into new markets, and increase marketing efforts to scale the business further.

4. Series B

Series B funding takes the business to the next level beyond the development stage. By this stage, companies have already proven their market potential and solid user base. Therefore the funds raised by this stage will be used for expanding market reach and increasing operational capacity. In this stage, the company may also possibly make strategic acquisitions.

5. Series C

Most companies seeking Series C funding are those who are typically looking to develop new products, expand to new markets, or even acquire other companies. That is because these companies are already quite successful. 

They will use the funds raised in this stage to scale the company globally, build more substantial market share, and prepare for a potential business sale through an IPO or a major acquisition.

6. Series D  

When a company hasn’t hit its goal to go to the next stage or before they go public, they may use additional funding rounds or bridge rounds such as Series D.  Series D is often dominated by later-stage VCs who specialize in scaling mature startups, unlike earlier rounds, which typically include a mix of investors.

Companies usually go for a Series D round if they want to expand to new markets or segments but they need additional capital after Series C to finalize their growth strategies or prepare for public offering and other exit strategies. This funding might be used to clean up the balance sheet, acquire strategic assets, or reduce debt.

Conclusion

DealRoom has worked on hundreds of startup capital-raising projects for companies across a wide range of verticals and geographies. We know the challenges that startup founders face in attempting to raise capital.

Talk to us today about how our data room solutions can work for you.