23 Startup Funding: Why Funding
CJ Cornell
First, let’s define funding, in the context of entrepreneurship and startup companies. For the purposes of this chapter we are referring to external funding.
As an entrepreneur, you might think you need external funding. External funding usually means:
- Funding (money) exchanged in return for stock in the startup company (equity), loan payments (debt), or for a series of payments (e.g. royalties).
- Funding is not the result of the sale of a product or service.
- The startup receives cash (money that can be deposited into the startup’s bank account)— as opposed to other products/services the company needs. (For instance: If an organization provides your startup with office space, laptops, or servers, this is not considered funding).
- Funding is from a person or organization not officially affiliated with the company (i.e.,—not an employee, founder, or major customer).
Most other forms of funding would be “internal” or organic funding—from the founder’s family, or from consulting or other revenues. While these are valid and common forms of funding for startups, they don’t require formal or deliberate fundraising activities and preparations—and the money is not dependent or controlled by sources unrelated to the company.
When entrepreneurs think about funding, usually their first thoughts are “How much do we need” and “How do we get funding for our project or company?” And then “Where can we find funding?” or “Who can we ask for funding?”
And these are the right questions—but in the wrong order. There are more important questions that need to be asked, and answered, first:
- Why do you need (external) funding?
- What is the unique product or service?
- What specific value will you offer to customers? That is, what is your “value proposition”?
- What is your industry category, or product category?
- What is your mission?
- What are the risks?
Asking those first questions is more than just an exercise, or soul-searching. The answers will, in part, dictate “who” you should be asking for funding. The “who” should be aligned with the “what.” Only then should you work on the “how” to secure funding.
Before we focus on the details of startup funding sources, and how to attract and secure funding, let’s first focus on the “why”—but from the perspective of the funding sources. Knowing why they want to fund a company or project is vital. Your reasons need to be aligned with their reasons. It the reasons are not aligned, then nothing else matters.
If you need funding to pay yourself a salary, pay back loans, or to merely make sure the business can pay its current bills then the chances are you will never obtain outside funding. But if you need funding to advance your product development efforts, launch a new product, to enter new markets, or to grow and expand then your reasons may be more aligned with funders’ reasons.
Reasons for Funding (from the Other Side of the Table)
When anyone provides support, resources o