What are the sources of early-stage venture funding?

Table: Types and ways startup or venture founders can fund their venture growth

	Channel	Pros	Cons	How do you weigh your options?
Bootstrapping (Self-funded)	Own startup capital	Founders take full control and accountability of the money they spend.	n/a from founders perspective.
(See our conclusion for new founders below this section)	Founders should use this to start if they can
	Generated revenue	Highest quality of funding source to sustain and grow ventures		Founders take total charge of their destiny
Dilutive (Gives capital in exchange of equity)	Friends & Family	Hard expectation on financial return is the lowest amongst all sources	Undercommuncated financial expectations and accountability over capital use often happen at this level of funding
Tips: Maintaining the relationship is key regardless of the ultimate business result (success or setback)	Friendliest source of non-self-funded capital - based almost entirely on a personal relationship
	Angels	Professionally savvy and influential angels can almost be the “perfect sleeping partner” as they can open up doors for business development, other angles, VCs, strategic partnerships etc.		If founders don’t have F&F, they can build a network with prospective angels who can add value to the business as credible venture advisors or industry subject matter experts.
Tips: Multiple angels can come in a single round (angel syndication).
	Investment Incubators/ Accelerators	The best place for founders to expand their network (mostly friends)
Helps to validate founders/startups to a certain degree	Not all accelerators are created equal
• Investment terms may not be founder-friendly
• Program quality varies (Academic vs. practical advisory)
• Network quality varies (Quality of peers, stage of the cohort of startups, quality of mentors/advisors, and quality of investors)
• Level of “prestige” and publicity	As accelerators become more popular, founders need to weigh the time cost and the incentive for the accelerator to help them.
Ask yourself these questions:
• Do I need knowledge/skill set?
• Do I need capital?
• Do I need a network? Who specifically do I need?
• Do I need social proofing or PR? What kind?
	Venture Capital	Designed specifically for risky innovation ventures that have scalability and wouldn't otherwise funded by traditional means of SME financing (e.g. debt).	Each VC has a different, subjective preference for startups that are not outright obvious to founder
Some VCs do not have startup operating experience and knowledge, and they behave more like a capital provider and may not add too much value or support post-investment	VC money is not for traditional, slow-growing, and asset heavy businesses.
Ask yourself these questions when exploring VC investment:
• Am I growing fast enough? How can I return the money that I’m going to take from VC?
• Do I have what it takes to build a highly defensible and fast-growing business?
• Why do I need VC money?
	Corporate Venture Capital	Venture capital fund craved out by a large corporation’s balance sheet to invest in ventures with innovative solutions that serve some strategic angle to their value chain
Investment by CVC is a credible recognition of the value the venture can bring to the corporation.
Possibility of exiting (selling) the business to the corporation.	Taking investment from CVC may restrict ventures from working or fundraising from other enterprises that are in a competing relationship with the corporation.	Ask yourself these questions:
• Why do I need CVC’s money?
• What strategic value add or advantage do I have in taking CVC money?
• Is there an alternative source of capital I can raise?
Non-dilutive	Grants (Government or non-government sources)	If successful, founders get “prestige” and “free” media publicity.	Application paperwork is time-consuming, often on a reimbursement basis. It may require co-funding and may have restrictions on what it can be spent on, such as reporting work.
There might be “strings attached” for more strategic grants.	Don’t go for this if the founder/team is not ready for the administration process and has at least 6-9 months of patience in expecting some form of capital in the bank.
Founders may need to pay up the expenses before being reimbursed.
The founder must know that the publicity or the “stamp” might be more than just a vanity reason. It can distract from running the business.
	Prizes & Awards	“Prestige” and “free” media publicity, exposure to the hard-to-access investment community, and feedback.	Similar to grants, it usually requires a “credible” third-party nomination or recommendation to be shortlisted.
	Debt	Great source of working capital without financing through shareholder equity	Loan offer only to stable and proven business models that have good cash flow to pay back and assets to collateralized	Debt wouldn’t be applicable to ventures until the growth stage (Series A/B), when the business model and cash flow are stable.
It is a very useful financial instrument and strategic way to fund established businesses that require a large amount of working capital (e.g., funding the production of goods/inventory, loan book, infrastructural assets, etc.) and create robust credibility with large financial institutions through good repayment track records.
Ask yourself these questions:
• How healthy is my cash flow? Can I repay the debt as scheduled?
• How would the working capital help me generate more revenue to prepare for my next official round of fundraise?
Hybrid	Venture-debt	Debt financing made for venture-backed startups to provide additional working capital without needing the founder to raise equity money	Ventures need to be VC-backed, usually reputable VCs
Interest rates are higher than conventional bank loans
Loan eligibility/evaluation process involves in-depth financial due diligence
Equity dilution happens when the venture fails to repay the loan.