Top 7 US Startup Funding Options: Ultimate Guide [2022]

Raising money for your startup is arguably the most challenging exercise you will face as an entrepreneur. Whether you need starting capital to start or a bigger round to scale, there are a number of options available to you. Beware, whilst you should look at alternatives to increases your chances of fundraising, not all sources are suitable for you.

In this article we lay out the different sources of funding you can claim as a US startup: what they are and who are they for.

Friends & family

Friends & family is by default the first source of startup funding you should be looking for when starting your own business. Unless you have a strong track record as an entrepreneur, chances are you won’t be able to secure any funding right away from venture capital firms and angel investors alike.

Entrepreneurs often start their own businesses by bootstrapping: they use their own funds to a certain extent. As your own pockets might not be deep enough, friends & family is one of the best option to raise capital at the beginning.

The pros and cons for raising friends & family capital are:

• Money is readily available: friends & family will likely not do the same due diligence as other investors might
• No or limited legal costs: often, raising capital comes with hefty legal fees as you need to record the terms of the agreement between you and investors. Why would you pay $4,000 to a lawyer if you need to raise $100,000? Friends & family, in comparison, is usually contracted via a personal loan and/or a guarantee between yourself and investors. As such, if any, the cost to draft these contracts is much lower
• Flexible terms: as there is a relationship of trust between you and investors, terms can be relatively flexible (no repayment, none or low equity percentage, etc.)
• Beware of selling too much equity to investors today. It can seem attractive to sell 20% for $100,000 today for instance. Yet if you sell too much equity early on, investors might ask for the same treatment in the future and you will lose ownership very quickly

If you are interested in raising friends & family capital, read this great article from the Founders Institute.

Government grants

After going at your inner circle, you should consider the different public US startup funding sources available to you. First, you should look at public government grants.

What is a grant?

Grants are very popular, as they are free money: you get money without any dilution nor need repay in the future.

Amazing you would think? Well it also comes at a cost. The 3 main cons of a grants are:

• It will probably take a long time for you to find a grant you can qualify for. There are hundreds of grants out there, each with their own qualification requirements as they are designed for specific types of businesses
• Once you find a grant you’re eligible for, you will likely wait a long time so your application is reviewed, accepted and the grant is released to your bank account. The whole process can be quite time consuming (weeks, if not several months). Indeed, there are so many applications and remember you are also dealing with public institutions
• Grants come with restrictions when it comes to use of funds. You will need to spend the grant as per very specific certain conditions: free government money should be well spent

How can I find a grant?

To find federal and state grants, there is no easy way unfortunately: you should browse government databases based on your location and industry. If you are part of an entrepreneur or startup community (e.g. accelerator, etc.), do ask around. There will likely be a time when small business grants will be clearly listed onto a public, easily accessible database, but it isn’t the case today unfortunately.

List of top federal small business grants

As there are hundreds of grants out there, we will give you here a shortlist of the main ones only.

Federal agencies distribute several grants to small businesses in specific industries like scientific research or technology. These grants often cannot be used to fund any startup costs yet: they focus on research and development instead.

In order to successfully obtain one of these federal grants, you will need to prove funding will be used for market research, experimental development, prototyping and early-stage commercialisation.

A few examples of the biggest small business federal government grants are:

• Shuttered Venue Operators Grant (SVOG)
• Grants.gov
• Challenge.gov
• GrantWatch
• Small Business Innovation Research Program (SBIR)
• Small Business Technology Transfer Program (STTR)

Interested in applying for a grant for your startup? Have a look at our article on the top 6 US public startups grants you should know.

SBA Loans

If you haven’t yet heard of SBA loans, read this carefully. The Small Business Administration runs multiple loan programs that serve startups and small businesses across various industries: from brick-and-mortar businesses to tech startups.

SBA loans are small business loans that are funded by government-approved private institutions (banks) and (partially) guaranteed by the government. Loans range from $500k to $5.5m.

SBA loans aren’t public funds, and unlike government grants they aren’t free money: you will need to repay the loan in the future. As such, SBA loans often come with strict qualification criteria: you will need a good credit score and often lenders will require a down payment.

In short, if you are looking for seed funding for your early stage startup, look elsewhere. SBA loans are worth considering for startups with at least $100,000 annual revenue and positive unit economics. Indeed, you will need to prove to a traditional bank you will be able to pay back the loan in the future.

For more information on SBA loans and how to get one, read Forbes’ article here.

Crowdfunding

Crowdfunding may be a very attractive option to obtain large sums of capital quickly. Many platforms have emerged recently and connect thousands of startups looking for capital with potential retail investors.

There are 2 types of crowdfunding: reward-based and equity-based.

Reward-based crowdfunding

In this form of crowdfunding, investors typically invest a small amount in return for discounts and/or exclusive merchandise. This is especially useful for ecommerce businesses to finance design, sourcing and manufacturing costs before selling the products to consumers.

Pros and cons are:

• Funding is non dilutive: you do not sell any equity in return for capital
• You acquire your first customers: reward-based crowdfunding investors will invest money in return for your product
• It is very competitive, and you might have to invest time and efforts into marketing campaigns

The 2 main platforms for US reward-based crowdfunding are:

• Kickstarter
• Indiegogo

Equity-based crowdfunding

Unlike reward-based crowdfunding, with equity-based crowdfunding you are selling a share of equity to investors in return for their investment. You might raise $100,000 from 200 different investors investing each $500.

This form of equity is less competitive than reward-based. Indeed, your application will likely go through a screening from the platform you are applying to. Equity-based crowdfunding platforms have a list of criteria you need to meet in order to be successfully listed onto their platform.

The main pros and cons of equity-based crowdfunding are:

• You will need to sell equity in return for the capital you raise (it is dilutive)
• You will go through a screening process (thereby also limiting competition should you succeed)
• Because you raise investment from a large number of small investors, you prevent a single shareholder from gaining control over your business

A few examples of the main US equity-based crowdfunding platforms are:

• SeedInvest
• Republic.co
• Microventures
• EquityNet

For a full review of the top 9 US crowdfunding platforms, read our full guide here.

Incubators

Incubators are not strictly organisations that aim to provide funds to startups. They main objective is to guide entrepreneurs throughout the development of their business and give them the tools and advice they need to succeed.

Still, if you are looking for mentoring, guidance and support from fellow entrepreneurs and seasoned investors, be sure to consider applying to a number of incubators. They have their screening process as well. Whilst most will ask you to pitch your business idea, some incubators also accept applications from anyone looking to find a co-founder.

Incubators also are a great source of personal finance: they typically offer a monthly salary for the period during which you will be ‘incubated’ (six months typically). This is quite helpful when you are still in your market research phase and haven’t yet started to incur development costs.

Yet, incubators are highly competitive too. If you are accepted, you will follow a structured time-limited schedule. At the end of each period you will have to pitch your business idea to their panel of investors, allowing you (or not) to go through the next phase.

Here comes the interesting part: successful applicants who make it until the final phase will typically be entitled to an investment up to $150,000 in return for a percentage of your business (usually 10%).

There are many incubators in the US, each more or less influential and prestigious. The main ones are:

• Techstars
• AngelPad
• Y Combinator
• 500Startups

For an exhaustive list of the 23 top US incubators, refer to this article here.

Angel Investors

Angel investors are high-net-worth-individuals, who provide financial backing to startups and entrepreneurs in return for a share of the business’ equity. US angel investors can have operational experience or not: ideally you would target angel investors who have experience in your field as they will provide more value than just capital: mentoring and relationships too.

The pros and cons of angel investor funding are:

• Angels can provide significant capital early on. Because they are high-net-worth individuals, they act as family & friends, yet can provide a lot of capital for early-stage businesses. It isn’t uncommon to see angel investors investing $50,000 to $250,000 in promising startups. Of course, the more experienced and knowledgeable they are in the field, the more likely they will comfortable investing a big amount of capital.
• They will ask for a significant share of equity: because they invest very early, angels are looking for high returns. As such, you might have to sell 10-20% of your equity in return for their investment. By having them at your board of directors with such a significant amount of ownership, you may have to take their decision into consideration in your strategic decisions in the future.

The best way to reach out to angels is to use your own personal network. Through friends of friends, you have better chances to pitch your startup to an angel than sending hundreds of messages on Linkedin.

Still, if you do not know any angels in your inner circle, the US angel network is actually well documented unlike the UK for example. Many great platforms exist, among others:

• The US Angel Investment Network
• AngelList
• Golden Seeds
• Tech Coast Angels

For an exhaustive list of the top angel investors websites, click here.

Venture capital

It is the most cited source of funding for startups as we often read about venture capital firms in the press. Yet, most venture capital firms do not invest in early-stage startups. Indeed, they often finance Series A+ rounds instead of pre-seed and seed, read our article on the subject here.

Many entrepreneurs make the mistake of seeking venture capital whilst, more often than not, they unfortunately waste precious time they could spend elsewhere.

Unless you are an entrepreneur with track record, venture capital firms will not risk investing big tickets in your business. Instead, VC funds are look for some form of early traction and proven product-market fit.

Therefore, venture capital should be the way to go once you already raised pre-seed and seed funding from other investors. They will be able to fund significant capital, anywhere between $500,000 to $5,000,000 usually.

More Free Resources For US Startups

We have lots of free resources for US startups, see our articles below:

• The 6 Top US Startup Incubators & Accelerators You Should Know
• Top 6 US Public Startups Grants You Should Know
• How To Find US Angel Investors: Full Guide
• US Business Angels: Top 7 Interesting Facts
• R&D / Payroll Tax Credit: Is Your Startup Missing On $250,000 Runway?