Why do startups need funding?
Surveys show that a lack of capital is one of the most common reasons why startups fail.
If you’re building a lifestyle company or a small business where you can hire a few people, generate steady revenues and sustain, you’re good to go without funding.
But, if you’re building a company that can beat industry leaders, disrupt or create an entire industry, or change the world, you need money to build that game-changing company. And for that, you need money, lots of it.
Take the venture capital assessment to find out if your startup can raise venture capital.
In order for a technology company to be successful, it needs investors and venture capitalists. These people can help the company grow and become more successful.
Many successful businesses, like Apple, Facebook, Netflix, Google, and Amazon, started out as small startups. They were able to grow into huge companies because they received funding.
It can be tough to get money to help with your business. But companies today have a lot of options for getting the money they need. Some of these options include venture capital, angel investing, or crowdfunding. You can also get help from startup accelerator programs.
What is startup funding and why do startups need it?
Startups = Growth.
What separates startups from small businesses or even large companies, is that startups mean growth. The entire idea behind a startup is to build a disruptive product and become the market leader in an industry. And this is not possible without funding.
Statistically speaking, 95% of unicorn startups around the world are VC-funded. That doesn’t mean that funding is equal to success. But what it means is that funding increases the chance of success. Most startups fail (funded or not) but most successful startups are funded.
Startups and funding are two sides of the same coin, one doesn’t exist without the other.
The three most important expenses for startups are:
- technology development
To build a game-changing company that can disrupt an industry, you need to build technology and you need to hire the best people. And the best people come at a higher price. People make up between 60-80% of a startup’s costs.
If you’re building a high-tech company, then you need to spend a lot on building your product. This can also include high spending on research & development.
The remaining goes towards marketing. Without marketing, you can’t reach the right people and hence no sales.
Startups need funding in order to get off the ground and running. This could come from a variety of different places, but most often it comes from investors who are willing to put money into a company with the hopes that it will become successful.
There are a number of reasons why startups need funding, but the most important one is that it allows them to grow and scale their businesses.
Funding is important for startups because it allows them to hire more employees, build better products, and expand into new markets.
Additionally, funding gives startups the ability to market themselves and reach a wider audience. Without funding, many startups would simply be unable to get off the ground.
10 reasons why startups need funding
1. Startups need funding to cover the costs of initial development and launch. This includes things like research and development, marketing, and any other expenses associated with getting the business up and running.
2. Startups need funding to pay salaries. In order to attract and retain top talent, startups need to offer competitive salaries. This is often one of the biggest expenses for a startup. In order to grow and scale a business, startups need to hire additional staff. This could include salespeople, marketing professionals, engineers, and more. Founders can also draw a salary from the funding.
3. Startups need funding to purchase or lease office space. In order to accommodate a growing team, startups need to have adequate office space. This could mean leasing or purchasing an office outright. With most people working remotely, many startups are avoiding renting an office. This helps save costs.
4. Startups need funding to buy equipment and supplies. In order to function, startups need to have the necessary equipment and supplies. This could include things like computers, furniture, office supplies, and more.
5. Startups need funding to cover legal expenses. Startups are often required to pay for various legal expenses, such as trademarks, patents, and incorporation fees.
6. Startups need funding to pay for marketing and advertising. In order to generate buzz and awareness for their business, startups need to invest in marketing and advertising. This could include online ads, PR campaigns, and more. There’s a popular saying – “whoever spends the most on acquiring the customer, wins the customer”.
7. Startups need funding to attend industry events. Attending industry events is a great way for startups to network and meet potential investors. However, these events can be expensive to attend.
8. Startups need funding to entertain clients and partners. In order to close deals and build relationships, startups often need to entertain clients and business partners. This could include taking them out to dinner, hosting events, and more.
9. Startups might need to acquire a competitor company or integrate another promising into their business.
10. Startups need funding to prepare for the future. Startups need to have cash reserves in order to weather any unexpected bumps in the road. This could include things like economic downturns, legal issues, and more.
11. Startups need to undertake market research and test new markets. It costs money to sell into new geographical areas or to new types of customers. This might mean spending money on new advertising campaigns or even opening new retail outlets.
Every startup needs funding in order to be successful. These are just a few of the many reasons why startups need funding.
Funding = Startup Success
When a startup gets funded, the founders not only get access to capital but also access to media and press. Funding is equated to success.
Often you see founders announcing their seed, series A, etc raise on social media, sometimes even without the need to mention what the company does.
Funding solves a lot of problems other than initial capital to run the business.
- media and press mention resulting in public awareness
- interest from the investment community to fund the company now or later
- more room for mistakes, as founders can experiment and keep pivoting till they find success
- validation of the business
- Getting funding from a reputable VC equates to achievement on the founders’ resume
What percentage of startups are funded?
A VC fund on average funds 1 to 2 companies for every 100 startup proposals received. That means, 1-2% of startups get funded. But this is when times are good. When the economy is bad, then 1 out of 200 companies (0.5%) startups get funded.