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Startup Financing Challenges and How to Overcome Them

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Finding funding is stressful. Whether you're starting a business from square one or trying to find funds to push your startup forward, raising capital can be a full-time job.

For businesses with a short runway, or limited operational timeline, this full-time job can come with crushing stress. Startups and new businesses begin with so much hope, excitement and promise, but the search for capital can be a crushing responsibility that grounds the soaring excitement of starting your own company.

"Getting in front of the right investors is always a challenge, but even when you do that you're also competing against a lot of people for the same money," said Bill Rader, president and CEO of Efferent Labs.

The type of investor you approach will depend largely on where your company is in its development. Self-funding, for instance, is the first step for most companies, followed by finding angel investors or venture capital firms to back larger funding rounds.

Regardless of what stage you are in – or how successful you've been in raising capital in the past – the best way to find prospective investors is join your business's community. Rader, who is based in Buffalo, New York, said this is as great way for new companies to get out, start networking, and meet local investors and organizations. Establishing a local foothold can be an important first step for businesses that don't have a lot of clear funding options.

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"You need to network all the time – not just going to events," Rader said. "As a startup entrepreneur, you have to be talking to people, constantly, because you just don't know who's going … to lead you to the person you're looking for right now."

From here, as your business grows, bigger firms may begin to reach out and take interest in your company. 

The biggest challenge for any startup is finding investors willing to back your business. However, there's a big difference between finding investors and finding investors that are the right fit for your company.

Jayna Cooke, founder and CEO of EVENTup, said it's important for business owners to think about their financing options. It can be tempting to jump at every company that's interested, but this may not be the best use of time. You need to ask yourself what companies they are investing in and at what stage, Cooke said. This was a lesson she learned while raising capital for her own company.

"Later I went back and [looked] at these companies and … they're writing $5 million checks at Series B, so why was I talking to them when I was doing a note before series A?"

Doing research and determining the type of VC or angel investor is a crucial first step in understanding how serious a firm is about investing in you. Cooke said some firms have requirements for how information is presented, and it can take a lot of time to create presentation and (in some cases) travel to offices for meetings. She said, depending on who the investors are, it's a good idea to have a set presentation or set of facts for all investors, and then tailor your response to investors who are more likely to write a check.

"If they're not a right fit for now, still give them some information," she said. "You want them in your court for later should that time come. [You] don't want to … blow them off and be rude, but you don't want to spend more than 30 minutes on it."

By spending less time presenting to every investor and more time targeting your pitches to the right companies, you'll have a more specific funding approach. [Interested in alternative small business loans? Check out our best picks for providers.]

Networking is at the heart of startup financing. Forming relationships with other companies and business contacts is one of the most important aspects of growing your business. There are countless strategies for developing a healthy and functional business network.

Cooke advised business owners to consider who they already know. She had experience at a few companies prior to EVENTup, and she said that this experience helped her as her own venture grew.

"Your best introduction is always going to be from another entry that potentially has raised money from the same firm," she said.

However, if you're starting a new business while still working for another company, or are expanding into a field where you have few connections, there are a few things you can do to get started. Rader said that networking isn't easy, and business owners should always be on the lookout for their next connection. He suggested casting a wide net to help cover more ground.

"Today an entrepreneur has a lot of opportunity for getting their ideas out there," he said. "There's a lot of soft money lying around. You have to get out there, you have to do some work, you have to enter these competitions. … It comes with a lot of practice."

Cooke suggested that having an exit strategy can help provide more opportunities for funding. By having clear goals set and an idea of where you want to be in the future, you can potentially consider other funding options.

"I wish … I had reached out to more people, maybe on the peripheral of our industry and [said], 'Oh, this may be a company that we can work with in the future,' whether a partnership or an acquisition."

Having an exit strategy plays into other advice Cooke has for new companies: Make sure you have a plan. While every business is different, having defined parameters on how much money you need and what you need it for can help you as you approach investors. Cooke said she had everything outlined and clear before she began talking to investors, and that she ended up asking for about 20 percent more than her company needed to account for any problems that could arise.

Finding funding can be difficult, but with the right amount determination and hard work, you can find the right investors. Depending on where your business is in its development, it's usually a good idea to start looking for funding about six months before you expect to run into financial trouble. Of course, by always having an ear open, this timeline can change drastically.

Finding funding may not be easy, but by putting yourself in position to succeed, sometimes you can let luck take over.

"The bottom line is, as a startup, you have to walk in with a very open eye to the fact that money doesn't just fall off the trees," said Rader. "Even if you got the latest cure for cancer, or you've solved the energy crisis with some magic device, it just doesn't work that way."

Matt D'Angelo

Matt D'Angelo is a Staff Writer based in New York City. After graduating from James Madison University with a degree in Journalism, Matt gained experience as a copy editor and writer for newspapers and various online publications. Matt joined the team in 2017 and covers technology for Business.com and Business News Daily. Follow him on Twitter or email him.