When and how to raise funding for your startup.
Every startup embarks on a unique journey. Yet, one aspect that binds most, if not all, is the eventual quest for funding.
Whether you’re seeking investment or just trying to grow your company, it’s important to know the options available to you and your business.
The journey into the world of startup finance can seem daunting. It’s a critical decision and with its convoluted jargon and myriad options, it can become frankly overwhelming.
With that said, understanding these complexities can be a make or break for entrepreneurs ready to take their startup to the next level.
Understanding the Basics
Before diving in head first, it’s helpful to grasp the basic terminology as it relates to startup financing.
Funding for early-stage startups can come in two primary forms: equity and debt.
Equity funding implies offering a stake of your company’s ownership in exchange for investment. Conversely, debt funding involves borrowing money to be paid back later, often with interest.
‘Valuation’ is another term that startup founders should be well-acquainted with. This word defines the financial worth of your business and plays a significant role when raising capital. The higher your valuation, the more your business is perceived to have a high growth potential. Consequently, investors will anticipate a higher return on their investment.
The method in which to calculate the valuation of a startup can sometimes be more art than science. For the purpose of keeping this post focussed, I’ll refer you to this article: https://corporatefinanceinstitute.com/resources/valuation/startup-valuation-methods/
There’s more to funding than just securing ‘the bag’ - as the kids say. It’s important to understand any legal requirements, a realm governed by ‘Security Law’, before signing an agreement.
Engaging a lawyer during this process is highly recommended. In fact, I would put it in the ‘must have’ rather than ‘nice to have’ basket. The most important thing you can do is make sure that any agreement signed is one that will benefit your business the most – no matter the outcome.
‘Investor’s Expectations’, ‘Due Diligence’, and your ‘Exit Strategy’ are additional terms that bear weight during and after you have closed a funding round. An investor will have expectations and goals when investing in your business, so it’s crucial to ensure that these align with your vision. Remember, an investor’s primary objective is to get a return on their money.
‘Due Diligence’ refers to the research an investor conducts on your business before committing any funds. As for your ‘Exit Strategy’, it outlines how an investor can expect to see a return on their investment.
The path to securing funding is a process with an extensive ‘Fundraising Timeline’. This timeline can be anything from weeks to months and can depend greatly on the market conditions, size of the round (investment) and the investor themselves.
And finally, we have ‘Negotiating Terms’—this is when you outline the conditions of the investment, such as the equity offered, valuation, and the investor’s rights and responsibilities.
Evaluating Your Funding Needs
Before you even begin the process of raising capital for your business, consider the bigger (and most important) question:
Does your startup really need funding?
While the prospect of securing investment might seem alluring, not every startup needs to tread this path. Some entrepreneurs might opt to bootstrap their business, relying on personal savings and organic revenue.
On the flip side, securing investment can be a significant boost for startups looking to scale rapidly. An influx of capital can help cover operational costs, amplify marketing efforts, and accelerate product development.
Remember that taking on investment often means relinquishing some control of your company and having someone else to potentially answer to for various decisions you want to make. All of which are factors to consider seriously.
As a general rule of thumb: If the goal is for your startup to become a multiple million dollar business, you likely don’t need venture funding. If you’re looking to create anything beyond the $100M valuation range then funding might be the fuel that gets you there effectively.
A Closer Look at Different Types of Funding
Once you’ve decided funding is the right choice for you and your business, it’s time to familiarize yourself with the various types available. From SBA Loans and Angel Investors to Crowdfunding and Venture Capital, each funding type offers unique advantages and comes with its own set of challenges.
Small Business Administration (SBA) Loans are government-backed and designed to help small businesses access funding. These come with low-interest rates and flexible terms but also require a long application process and strict eligibility requirements. The low-interest rate point is also not always a given.
Angel Investors are individuals who invest their personal funds into startups. Their investment often comes with valuable mentorship and industry connections but can be smaller in size. Be sure to set firm expectations on how involved the investor wants to be.
Crowdfunding involves raising money from a large number of people through online platforms. This offers access to a broad pool of potential investors and serves as a way to test market demand. However, crowdfunding platforms often charge high fees and don’t guarantee funding success.
Venture Capital involves firms or individuals who invest in high-growth potential companies. This option provides access to large sums of money and industry expertise but usually requires giving up a significant percentage of equity and a potential loss of control.
Business Grants are non-repayable funds provided by government agencies or other organizations. They come without the need to give up equity or repay the funds but are bound by strict eligibility requirements and a competitive application process.
Personal savings or loans is an approach that doesn’t involve giving up equity or paying interest, but keep in mind it may strain personal relationships and may not provide as much funding as other options. Before taking money from friends or relatives, it’s important to consider that everyone involved may end up with nothing if things go south.
And now for the cliché disclaimer…the best choice for your startup will depend on your specific goals, the funding available to you, and your comfort level with the terms of the investment. Raising funds is not a one-size-fits all game.
Finding the Right Funding Source
Knowing which funding type suits your business is only part of the work. The next step involves finding the right source of that funding. Fortunately, the modern business landscape offers a myriad of ways to connect with potential investors.
Networking Events are an excellent way to meet potential investors and business partners. Similarly, Online Platforms such as AngelList, Seedrs, and Kickstarter can connect you with a diverse range of investors. Incubators and Accelerators provide access to resources and potential investors and mentors. Referrals from friends, family, and business contacts can also lead to potential investors or venture capital firms.
Professional Associations in your industry can provide networking opportunities, and Social Media platforms like LinkedIn, Twitter, and Instagram offer a way to showcase your business to potential investors. Additionally, Startup Competitions and direct outreach to Angel Investors are more avenues to secure investment.
Choosing the Right Investment Partner
When you raise capital, unless explicitly stated, assume that the transaction isn’t just about getting the capital; and it shouldn’t be. An investor should bring more than just money to the table. The right investor should offer mentorship, industry connections, and valuable advice that can help your startup grow and flourish.
When you have a meeting with an investor, you should be interviewing them as much as they are interviewing you.
When it comes to partnering with the right investors, consider what they bring beyond finance.
Do they have experience in your industry?
Do they share your vision for the future of your business?
What type of experience will be needed in your business shortly after you raise funds?
Do you want someone on your board with say-so over large business decisions?
Again - the fundraising process is as much about you interviewing the investor as it is about them interviewing you.
Avoiding the Pitfalls of Easy Money
While outside investment can offer a quick influx of capital, it pays to remember that it comes with strings attached. Equity investors gain a stake in your company, and with it, a possible say in how you run your business. Likewise, debt funding must be paid back, with interest, placing a financial obligation on your business.
Therefore, the best investment could well be the investment you don’t need. Nurturing resourcefulness, creativity, and strategic thinking can help your startup achieve its goals without diluting control or accruing debt.
Be sure to balance the desire for quick growth with maintaining the autonomy and direction of your startup.
As a general rule it’s good to revert back to your founding vision and find partners who believe in you and your startup’s potential.
Preparing for Investment
Before you step into the world of fundraising, ensure your startup is investment-ready. This process begins with a clear, compelling pitch deck that clearly articulates your business model, market analysis, marketing strategies, financial projections, and team structure. It provides investors with a snapshot of your startup, helping them understand your vision and potential growth trajectory.
If you made the right impressions, investors will want to understand your product or service intimately. Be ready to share a fully developed product or a prototype that can be used to tangibly demonstrate your startup’s potential. Similarly, early customer feedback, market traction, or a unique technological advantage can be used for added shine when having investor conversations.
If you’re seeking investment be prepared to go deep with a detailed financial model outlining your current financial situation and future projections. This includes revenue, expenses, cash flow, and profitability forecasts. Showing how you spend money, make money and plan to make money is where most of the focus will be during follow on meetings and investor research.
Ensure that your startup is legally compliant and has a clean legal record. This includes verifying business registration, patents and trademarks, contracts, and employee agreements. No startup is perfect, but nothing gets a meeting off to a awkward start like not being in good legal standing.
Crafting a Winning Pitch
Before anyone even gets anywhere near a deep dive analysis of your business, they will want to hear you ‘pitch’. Before going any further, know that you will likely pitch 100 investors for every follow on meeting you get. Don’t take rejection to heart - it’s just part of it.
Your pitch should be a clear, concise, engaging, and most importantly, memorable presentation.
In this article, I cover how creating a pitch deck is a great idea even for companies that are not actively seeking funding.
Perhaps the most crucial part of your pitch is the ‘ask.’ This is where you clearly ask for money, and clearly state what those dollars will be spent on. How much capital do you need, what is your plan to use it for, and what’s the equity you’re willing to offer in return.
Navigating Investor Meetings and Due Diligence
Once you’ve piqued an investor’s interest, you’ll need to navigate investor meetings and due diligence. As we’ve briefly covered, these meetings provide an opportunity for investors to delve deeper into your startup’s operations, financials, market, and team.
It’s a good idea to familiarize yourself with common investor questions. A quick Google search, or ChatGPT prompt, will give you plenty to start with. These questions may revolve around your business model, competitive landscape, customer acquisition strategy, financial projections, or exit strategy.
Be ready to answer these questions clearly and honestly.
Remember investors are not looking for the perfect company, they are looking for the perfect opportunity. Sell your vision as much as anything.
Investor due diligence can be extensive, covering legal, financial, operational, and market aspects. Make sure all your documents are in order and be prepared to provide additional information upon request.
Understanding and Negotiating Term Sheets
Once an investor decides to proceed with the investment, they will present a term sheet. This document outlines the key terms and conditions of the investment, including the amount, valuation, investor rights, and exit strategy.
It’s important to thoroughly understand the terms and conditions outlined in this document. Again I would recommend engaging a lawyer to review the term sheet and ensure there are no unfavorable terms. Negotiation is often part of this process—don’t be afraid to push back on terms that don’t align with your startup’s interests. Rather do it now when there is little on the line.
I’ve created a term sheet template for you to use during this stage of funding:
Closing the Deal and Beyond
Securing investment is just the beginning of a long-term relationship with your investors. Regular communication is key—provide updates on your progress, challenges, and any significant changes or decisions.
Your investor(s) should be partners in your startup’s journey and should be there to provide valuable advice, connections, and support.