What Do Startups Use Funding For?

Start-ups can acquire funding through different sources, which is good news for founders worrying about what to do if a GoFundMe campaign doesn’t reach its goal. The money raised is usually used for product development, market research, staffing, marketing and daily operations (including paying for startup advisor responsibilities, if any)—basically for everything a start-up needs to execute its growth plans.

How a start-up allocates its funds is a great indicator for investors to use to assess its potential for success. A successful start-up allocates its money between the necessary channels needed to advance its business goals, depending on the stage of the plan it is in. For example, an early-stage start-up typically uses funding to develop its products, while a later-stage start-up focuses its spending on marketing and distribution.

Why Is Funding Important For Start-ups?

Funding creates a cushion for a start-up during its infancy to ensure that it can weather problems as it grows until it starts generating profits. It provides a start-up with the resources it needs to realize its vision.

Getting funding often correlates to the success of a start-up. More money gives them more means to achieve their goals. However, it also signals trust in the community generating additional funding and public confidence.

Types Of Funding For Start-ups

Start-ups typically seek funding through different sources, and it’s crucial to consider those with several backers. These include:

Accelerators And Incubators

Accelerators and incubators are programs designed to help start-ups advance their business models and strategies. They do this by providing start-ups with resources, mentorship, and funding, often in exchange for equity in the company when it grows (that’s how start-up accelerators make money).

Angel Investors

Angel investors are high-value individuals who provide capital to start-ups in exchange for equity ownership or convertible debt. Most of them invest during a start-up’s early stages when other investors are not prepared to back them.

Venture Capitalists

Venture capitalists are similar to angel investors, except they are usually large firms. They make significantly larger cash investments than angel investors, but that comes with stricter criteria. Venture capitalists typically only back start-ups with very high-growth potential and an already stellar track record, and are rarely interested in early-stage businesses.

Loans

Start-ups can also pursue more traditional forms of funding, such as loans. This option is accessible to most founders, especially with a growing number of lenders beyond traditional banks that are ready to support small businesses.

Crowdfunding

Crowdfunding is the act of raising funds through multiple people. You can do this through crowdfunding sites like GoFundMe or Kickstarter. You set up a campaign, and then invite individuals to donate to your business. These are not necessarily professional investors, but regular people who contribute. The donation is often in exchange for some reward such as a discount or equity.

What Do Start-ups Use Funding For?

Start-ups can raise between thousands to millions of dollars in funding at different rounds. Depending on where it is in its roadmap, this support can be allocated to various expenses. Here are the most common activities start-ups direct their funding to:

Technology

Start-ups funnel a lot of funding towards research and development, specifically to develop the technology needed to produce and distribute their product.

Market Research

Many founders invest a lot of money into market research to identify market needs. They will then develop a business model that fulfills these needs. 

Staff

A lot of funding is directed toward recruiting staff members to expand the start-up team. The idea is to build a team that can perform tasks as needed at different stages of the business’ life.

Marketing

Marketing is essential to growing a business and requires a lot of funding to be effective at a large scale.

Professional Services

Many start-up founders hire professionals, such as mentors or legal experts, to help ensure they’re running a tight ship.

Final Thoughts

Funding is necessary to ensure a start-up’s success. But getting the money isn’t enough. Start-ups must know how to allocate their funds to achieve their business goals. A start-up that efficiently makes use of its capital is bound to succeed. It is an indicator that investors should pay attention to before investing.