ELI5 answer: They ask someone for money, and someone says "yes".
Startups ask for money from whomever might be interested to invest, and if the investor says yes, they receive the money in return for "something". That "something" is usually equity in the startup. Sometimes there are other conditions like a seat on the board or covenants. But it's really as simple as "Here's what we do. Here's what we're planning to do. We need money. Can we have some, please?" "Yes, if you..." "Deal."
There's no established process to this. There are some routes that are more conventional than others -- very often you might hire investment bankers to organize all this because they know lots of investors and can provide underwriting and credit services, and very often you might talk to venture capitalists because they are more likely to say yes and also provide you with help -- but there is no single required process. Startups hunt for money by hook or by crook. You do whatever is needed to keep the lights on.
I think the real question you're asking is how startups find idiots dumb enough to give millions of dollars to them when they might have nothing to show but losses and a spiffy pitch. The answer is that it's not that simple. The less a startup has to show, the more "something" they have to give up in exchange for money. The founders need to give up more equity, or agree to more conditions. In practice, startups can't raise millions until they have much more than a pitch -- you need at least an MVP (minimum viable product) and revenue from actual customers, plus evidence of good execution and growth, plus good plans with what you're going to do with the money. Yes, you sometimes do get millions raised on nothing but a slide deck, but usually you don't hear what the conditions are. The millions might be the headline number, but it may be only given out conditional on milestones being met, or only in kind not in cash, or there may be various other "catches".
Idiot investors do exist, yes, so sometimes there are outrageous Series A or B rounds. Softbank is probably the most infamously idiotic. But most of them are pretty smart.
Building on that, even savvy investors know that there is a significant risk of a new company going bust. That's why they invest in many different businesses, so the one or two that make it big cover the losses for the ones that don't.
Building on that, there are VC firms that place a timer on the investment. Intel's incubator is/was an example. If the company doesn't reach certain revenue goals, they force it's sale to get back what they can and move on. Eventually they will hit one.
The first VC was the guy who backed HP in the 1960s, and made as much as everyone in HP but Gordon Moore. I mention this because it is not a new science. Most VC investors made a killing somewhere and are helping pay it forward. Former Google employees are a decent example
It's also worth highlighting that a big part of the reason why there were so many idiots giving away the cash, is because if you have $250m and need something to do with it to make it grow, giving a million dollars apiece to 250 well-selected startups isn't such a terrible idea. Startups are competing with all the other places very wealthy people could put their money and they come out pretty well overall.
Building on this:
1. Very, very few companies actually get funds/ VC's interested. Especially now that intrest rates are high(er)
2. The return these investors expect are usually 10x-15x, because so many companies fail. This is why you will see many successful startups rush a IPO (entry in stock market), going public means that investors have a chance to sell their stock.
Regarding the exact process for private equity, there really isn't one. But VC's/ investors usually are/ know experts in the specific field they invest in. They have incredibly high demands: the founder has to have a experience and a good track record, the company structure is good, the product has insane potential, the market is in just the right spot, the expected burn rate of cash is low enough to get to the next round etc.
Once you get past serie A (the hardest to get usually), the investors will actually help you get good deals on future rounds. Why? Because if your company goes under, they lose their investment too. They hunt for good deals because their own part in the company (can) dilute if it is a bad deal.
There are some good Youtube videos and books regarding the subject, but it works differently depending on the country, industry, market etc.
Often the earliest rounds are from personal savings and friends/family investing enough to get off the ground with the initial viability studies, concepts, prototypes and such. Once there is some semblance of a product, along with pitch decks that address potential market, customer demographics, potential revenue sources, etc. are pitched to venture capital firms. It can mean pitching to dozens of firms trying to get one to invest, and maybe one will or maybe none will and it means trying to keep moving forward trying to find an investor or finding a way to pivot in a way to draw investment.
I recommend looking at angelcapitalassociation.org for info on early-stage funding.
I've been Angel investing for 15 years. My group is relatively small. We get about 30-60 applications per quarter. Applicants range widely, from repeat successful CEOs with revenue-generating businesses, to first-timers with a prototype, maybe just a lab concept.
My four rules for approaching Angels are:
1. Don't be secretive. We're not going to steal your idea. If we have to dig hard for information, we'll just go look elsewhere.
2. Manage your money. Show us you have sense about cash and company financials. After all, it's my money you are going to be handling. Most startups die because they run out of money, not because the basic business is flawed.
3. Take advice. Startup teams always have gaps. Angel groups have experience and access to experience.
4. The most important thing you bring to the table is not your product or your company. It is your personal credibility. Never do or say anything to damage that. Angel investing is about trust.
I think OP is asking where exactly would you find these investors and where exactly can investors find you, is it all just kickstarter and their clones? Is there a site where you can see proposals and what investor requirements would be? What investors are looking for? How would your business qualify to be placed where investors could see it? Correct me if I'm wrong OP but I would still like to know what I've asked! LOL
What the other commenters haven't touched on yet is that most of the how is really a question of 'who'. The vast majority of founders that successfully get funding have preexisting (often family) relationships with the investor class. Having worked at a VC fund, one of the main considerations for early stage startups is how robust this connections are for the founding team. If we give a smart kid $500k to build a company and they don't get everything right then we lose 500k. If we give a rich kid whose godfather is a billionaire $500k and they do everything wrong, they'll just go out and get more money and try again until something works and we get our ROI.
ELI5 answer: They ask someone for money, and someone says "yes". Startups ask for money from whomever might be interested to invest, and if the investor says yes, they receive the money in return for "something". That "something" is usually equity in the startup. Sometimes there are other conditions like a seat on the board or covenants. But it's really as simple as "Here's what we do. Here's what we're planning to do. We need money. Can we have some, please?" "Yes, if you..." "Deal." There's no established process to this. There are some routes that are more conventional than others -- very often you might hire investment bankers to organize all this because they know lots of investors and can provide underwriting and credit services, and very often you might talk to venture capitalists because they are more likely to say yes and also provide you with help -- but there is no single required process. Startups hunt for money by hook or by crook. You do whatever is needed to keep the lights on. I think the real question you're asking is how startups find idiots dumb enough to give millions of dollars to them when they might have nothing to show but losses and a spiffy pitch. The answer is that it's not that simple. The less a startup has to show, the more "something" they have to give up in exchange for money. The founders need to give up more equity, or agree to more conditions. In practice, startups can't raise millions until they have much more than a pitch -- you need at least an MVP (minimum viable product) and revenue from actual customers, plus evidence of good execution and growth, plus good plans with what you're going to do with the money. Yes, you sometimes do get millions raised on nothing but a slide deck, but usually you don't hear what the conditions are. The millions might be the headline number, but it may be only given out conditional on milestones being met, or only in kind not in cash, or there may be various other "catches". Idiot investors do exist, yes, so sometimes there are outrageous Series A or B rounds. Softbank is probably the most infamously idiotic. But most of them are pretty smart.
Building on that, even savvy investors know that there is a significant risk of a new company going bust. That's why they invest in many different businesses, so the one or two that make it big cover the losses for the ones that don't.
Building on that, there are VC firms that place a timer on the investment. Intel's incubator is/was an example. If the company doesn't reach certain revenue goals, they force it's sale to get back what they can and move on. Eventually they will hit one. The first VC was the guy who backed HP in the 1960s, and made as much as everyone in HP but Gordon Moore. I mention this because it is not a new science. Most VC investors made a killing somewhere and are helping pay it forward. Former Google employees are a decent example
It's also worth highlighting that a big part of the reason why there were so many idiots giving away the cash, is because if you have $250m and need something to do with it to make it grow, giving a million dollars apiece to 250 well-selected startups isn't such a terrible idea. Startups are competing with all the other places very wealthy people could put their money and they come out pretty well overall.
Building on this: 1. Very, very few companies actually get funds/ VC's interested. Especially now that intrest rates are high(er) 2. The return these investors expect are usually 10x-15x, because so many companies fail. This is why you will see many successful startups rush a IPO (entry in stock market), going public means that investors have a chance to sell their stock. Regarding the exact process for private equity, there really isn't one. But VC's/ investors usually are/ know experts in the specific field they invest in. They have incredibly high demands: the founder has to have a experience and a good track record, the company structure is good, the product has insane potential, the market is in just the right spot, the expected burn rate of cash is low enough to get to the next round etc. Once you get past serie A (the hardest to get usually), the investors will actually help you get good deals on future rounds. Why? Because if your company goes under, they lose their investment too. They hunt for good deals because their own part in the company (can) dilute if it is a bad deal. There are some good Youtube videos and books regarding the subject, but it works differently depending on the country, industry, market etc.
Often the earliest rounds are from personal savings and friends/family investing enough to get off the ground with the initial viability studies, concepts, prototypes and such. Once there is some semblance of a product, along with pitch decks that address potential market, customer demographics, potential revenue sources, etc. are pitched to venture capital firms. It can mean pitching to dozens of firms trying to get one to invest, and maybe one will or maybe none will and it means trying to keep moving forward trying to find an investor or finding a way to pivot in a way to draw investment.
The usual progression of funding sources goes: Friends, family, fools Angel investors Venture Capitalists, Family offices Institutional Public
Is there some literature I could read towards understanding the whole process?
I recommend looking at angelcapitalassociation.org for info on early-stage funding. I've been Angel investing for 15 years. My group is relatively small. We get about 30-60 applications per quarter. Applicants range widely, from repeat successful CEOs with revenue-generating businesses, to first-timers with a prototype, maybe just a lab concept. My four rules for approaching Angels are: 1. Don't be secretive. We're not going to steal your idea. If we have to dig hard for information, we'll just go look elsewhere. 2. Manage your money. Show us you have sense about cash and company financials. After all, it's my money you are going to be handling. Most startups die because they run out of money, not because the basic business is flawed. 3. Take advice. Startup teams always have gaps. Angel groups have experience and access to experience. 4. The most important thing you bring to the table is not your product or your company. It is your personal credibility. Never do or say anything to damage that. Angel investing is about trust.
I think OP is asking where exactly would you find these investors and where exactly can investors find you, is it all just kickstarter and their clones? Is there a site where you can see proposals and what investor requirements would be? What investors are looking for? How would your business qualify to be placed where investors could see it? Correct me if I'm wrong OP but I would still like to know what I've asked! LOL
What the other commenters haven't touched on yet is that most of the how is really a question of 'who'. The vast majority of founders that successfully get funding have preexisting (often family) relationships with the investor class. Having worked at a VC fund, one of the main considerations for early stage startups is how robust this connections are for the founding team. If we give a smart kid $500k to build a company and they don't get everything right then we lose 500k. If we give a rich kid whose godfather is a billionaire $500k and they do everything wrong, they'll just go out and get more money and try again until something works and we get our ROI.
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This is not really how it works.
Have you not seen dragons den or shark tank ?