fueling growth: how to raise capital for your startup

Andy Stofferis • Aug 30, 2024 • 13 min read

A guide to raising money for your startup. Explore funding options, consider pros and cons, and see what options and advantages there are for Estonian e-⁠resident founders.

Two business people considering financial documents and different funding options for business growth

What is absolutely critical to fuel growth for any startup? Money! But, as we haven't discovered a tree from which money grows, we still need to work to get it. Luckily, there are many startup funding options out there to scale your operations, from simple bootstrapping or crowdfunding, to applying for loans or grants, and gaining venture capital or angel investments.

As a startup founder, it’s important to have a long-term strategy and vision of how you want to grow your business, and what type of funding you’re willing to consider. In other words you have to plan how you will navigate the early stage of your startup journey.

While there are obvious benefits to having others invest in your business to help you scale growth, they typically go hand-in-hand with loss of equity and control.

Navigating the business of raising funds can be tough. To help, here's a brief summary of some funding options to consider for your new venture.

What to consider when deciding how to grow your startup
The early startup growth phases
- Pre-seed stage
- Seed stage
9 funding options to fuel startup growth
Final thoughts on how to find funding for your startup

What to consider when deciding how to grow your startup

There are diverse sources of funding for startups to consider to grow your business. When comparing these options, make sure to understand how your own needs first. Namely, the amount of funding you need, the type of support that can be useful to fuel growth (such as mentorship), and the duration for which you need funding. It’s also important to consider whether you’re willing to give up some equity and control over your startup in exchange for funding.

These factors will all play a role in finding the best type of funding for your startup.

Many of these decisions will revolve around what stage of the startup journey you’re on. At the pre-seed stage, you’re likely to be focused on developing your business idea and making it viable. Quite often at this stage, startup founders opt for bootstrapping or getting their friends and family to support them.

Once you’ve launched your business and validated your products or services, then you may want to continue with bootstrapping (if you have sufficient funds), consider crowdfunding, or perhaps opt for a small business loan.

Some seed-stage and more commonly, early stage startups, then start looking for more significant investments and funding to fuel accelerated growth. At this stage, many opt for angel investors and VC capital, but incubators and accelerators can also be very attractive and worthwhile.

Choose Estonian accelerators for startup success

Explore the ecosystem and find information about open programmes.

The early startup growth phases

There are various stages of funding for startups, which go from pre-seed funding all the way to exit stage when you’re close to an initial public offering (IPO). As this article is about the early stage of startups, we’ve limited these growth phases to the pre-seed and seed stages.

Pre-seed stage

The pre-seed funding stage is typically when you’re just starting your business and have an idea of what you want to do, but you may still be busy testing if your idea is viable, what model you’ll use and how you’ll fund the startup. Oftentimes, this stage involves founders bootstrapping their startups or asking their friends and family to help support the initial research phase.

Seed stage

The seed funding stage comes into play when you’ve developed your business and have launched your products and services, are investing in marketing and are starting to hire a small contingent of employees.

Seed stage startups vary greatly in size and revenue, and can be valued at anywhere between around $100,000 to over $5 million. Founders may use a combination of all the funding options below to help fuel the growth of their startups.

Navigating the early stage startup journey

Read also our blog post with 10 key tips to grow your startup and put yourself on the right track to business success.

9 funding options to fuel startup growth

Below are 9 different funding options to fuel growth at your startup. Choosing the right type of finance will determine the future success of your startup and how much control, equity, and debt you may have.

It’s important to remember that these funding options can be combined and used simultaneously, such as bootstrapping and crowdfunding.

1. Self-funded startups (aka bootstrapping)

We’ve all heard the stories of startups being run from home basements and being funded by one or more student founders.

Self-funding your startup, also known as bootstrapping, is one way to get your startup off the ground quickly. But, you’ll need to ensure that you have enough funding to cover the startup phase. And, bootstrapping is not without risks – after all, it’s all your own personal savings you’ll be ploughing in to fuel growth of your new venture.

It also has many positives. For one, when investors see how much confidence you have in your own business, that can be attractive. Plus, you can avoid the high interest rates associated with loans, or relinquishing equity through deals.

Tips for bootstrapping your e-Residency startup

An interview with an e-resident and his tips for bootstrapping your business.

2. Ask for funding from family and friends

If you’re able to ask friends and family to support your startup while you’re growing it, you can also avoid having to get a loan or apply for other types of funding.

What’s attractive about this type of funding is that it can be quite easy to acquire (assuming your friends and family are willing and have enough money).

But, the downside is that it can be a risky investment for your loved ones, and if the business fails and they lose their money, then it could affect your relationship with them.

That’s why it’s important to be realistic about how much money you’ll need, and how long you’re likely to need support for, so that you can scale and repay your friends and family without any disputes.

3. Crowdfunding

Crowdfunding has become an increasingly popular way to fund startups. There are many globally recognised crowdfunding platforms like Kickstarter and GoFundMe that enable anyone to pitch their startup idea and request funding from people online who they don’t even know. In Estonia, be sure to look at options like Fundwise or Funderbeam.

While it does take a certain amount of skill and effort to launch a successful crowdfunding campaign, it can be a great way of getting the initial backing you need to get your startup off the ground.

What’s more, the fact that you’re able to attract enough through crowdfunding to grow your startup, can be used when pitching to venture capitalists at a later stage – showing how many people believed in your idea.

It should be noted, however, that it’s not as easy as it may seem to attract enough funding through this method. And, you may have to work hard to deliver something in return for the funds – like delivering free merchandise, which can be costly and time-consuming. In addition, you’ll need to factor in the fees that the crowdfunding platforms take, as they can cut into your expectations.

Crowdfund your business

The e-Residency funding portal has numerous funding and investing options, including crowdfunders like Fundwise and Funderbeam.

4. Apply for a startup business loan

Another option is to apply for a startup business loan. There may be limits to how much of a loan you’re eligible for, and you may have to produce a solid business plan, a good credit score and some security.

While business loans may sound attractive, they also come with terms and conditions attached. That includes having to pay back the loan with interest, even if your business doesn’t make a profit.

The good thing about taking a small business loan is that you get to keep control of your company and don’t have to part with any equity shares. That can buy you the time you need to scale the enterprise sufficiently before starting to turn a profit. And, by that point, you should have also racked up a great credit score, so you can apply for an even larger loan if you need it.

Business loans and microlending are based on debt funding, which helps to provide you with the needed cash flow to fund the growth of your startup. The consequence of this is that if you’re unable to repay your loans on time, you may end up losing your business.

5. Angel investors

If you have a great business idea, but you can’t secure any other type of funding, then you may want to look for an angel investor.

Angel investors are wealthy individuals or organisations that are often dedicated to funding startups and entrepreneurs. To get a deal with an angel investor, you’ll need an excellent startup pitch and business plan, and they will generally want to have some equity or ownership of the company in return for their financing.

Many angel investors can offer mentoring and business expertise to help you grow your startup, in addition to funding. This in itself can be invaluable, particularly if they are successful serial entrepreneurs themselves.

Angel investors may also have large networks, and can make introductions that can transform your business entirely. From contacts that can improve your supply chain, to partners who can increase your customers and sales, to networks of other investors willing to fund your startup.

So, even though you may have to give up some equity and ownership, the perks of having an angel investor may be worth it. ‍

Considering that Estonia has a thriving angel investor network, this is one of the many reasons why startup founders choose to start a company in Estonia.

Find angel investors in EstBAN

For ambitious entrepreneurs, the e-Residency funding portal offers funding options for founders at a pre-startup idea to later stage scaleups.

6. Venture capital

One of the reasons why many startup founders register their companies in Estonia, is the access it provides to large venture capital funding opportunities, and the close-knit community of entrepreneurs in Estonia.

Venture capitalist companies typically invest in startups that have proven success and want to scale. As venture capital firms get approached by many companies for funding, they do thorough vetting and research into who they decide to fund, but can invest more than some angel investors if they see the potential.

According to the Estonian Private Equity and Venture Capital Association (ESTVCA), it has €3,08bn under management and an active portfolio of 750 companies.

Many startups aim to attract venture capital (VC), and in exchange part with some of their equity in the company. VCs carry a lot of risk investing in startups, which is why they may take quite significant equity shares in your business.

Similarly to angel investors, VC firms can also have a wealth of expertise and can help mentor your startup and unlock a range of partnership opportunities and networking opportunities that can catapult your startup to success. And if you’ve been selected by a VC firm for funding, especially ones with a solid reputation, this can be an important signal helping to elevate your brand and attract more customers, partners, and top talent.

7. Startup incubators and accelerator programs

There are a large number of incubator and accelerator programs around the world, which aim to help grow businesses by providing mentorship, training, networking opportunities and other benefits.

Coming to Estonia might also be a good move if you’re on the funding path. There are several options to relocate to Estonia. For example, startup founders from outside of Europe can apply for the Startup Visa.

The Estonian e-Residency program has an extensive list of funding, grants and growth opportunities for startups including many other accelerator and incubator opportunities.

Typically these programs run for several months and require quite a bit of commitment in terms of time, and can help you to formulate your business plans and pitch so that you’re ready to approach VCs and other funders.

It can be competitive getting a spot on an incubator or accelerator program, but it can be a rewarding experience and a great opportunity to network with other entrepreneurs. Plus, some offer access to workspaces and other facilities which can help reduce your initial operating costs.

Estonian e-residents can apply to participate in many of these startup-boosting programs. These include Tehnopol Startup Incubator AI, Prototron, Elevator Startups.

Founders of Glassity awarded top 20 team in Ajujaht accelerator programme

The 9 best funding and mentoring programmes in Estonia

Apply and participate in a variety of mentoring programs, incubators, accelerators and paths to funding - here are some of the best open rounds in 2024!

8. Grants

An often overlooked funding opportunity is to apply for grants. Governments, foundations and other organisations offer grants which can help propel startups to success. Many grants have specific criteria, such as being for social impact organisations in a specific region.

One of the benefits of grants is that they don’t require you to pay anything back, and you don’t have to give up any equity. But, on the flipside, grants may have strict conditions attached to what they can be used to fund and you may have to provide ongoing reports and data to the funders.

The Estonian Business and Investment Agency (EIS) offers grants to companies in Estonia, including eligible e-resident companies. Estonian e-residents can also apply to a wide range of EU grants. These include Horizon Europe programmes - focused on funding startups that are involved in health care, climate solutions, digital technology and sustainable energy.

EIS spoke about their grant programmes in our webinar on funding in April. Watch the recording below:

Please to watch this video.

9. Revenue-based funding

A relatively new way of raising funds that avoids relinquishing equity or taking on debt, is to sell a portion of your future revenue to investors. Revenue-based funding (RBF) is often not as much in monetary terms as what VC firms and angel investors may offer, but it can help you scale enough to avoid having to give up any equity in future, or at least not too much.

Final thoughts on how to find funding for your startup

It’s an exciting time when you’re at the stage of your business journey to be fueling growth. That usually requires funding of some kind, whether you bootstrap your startup or get an angel investor on board.

Whichever funding option, or combination of options you decide on, it’s good to be prepared for making decisions about what type of funding you want and the implications that go along with these different options.

This article was written by guest contributor and seasoned digital nomad Andy Stofferis (www.andysto.com).

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fueling growth: how to raise capital for your startup

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What to consider when deciding how to grow your startup