Considering raising money to fuel your business startup? Here’s what you need to know.
Startup fundraising has become a hot topic. A whole new ecosystem and industry are popping up just to serve entrepreneurs and startups as they seek to raise money for their ventures.
In this quick guide, we’ll break down what you need to get the money, the basics of how it works, how much to ask for, and whether you should be raising or not.
The Pros & Cons Of Fundraising For Startups
Rushing to raise big money for a new business idea may just seem like the thing to do these days. It’s worth taking a moment to really think about it. Why do you want to raise money? Do you have what it takes to get funded? Do you need the money or will it just be a detour you are following as a part of the status quo?
The Pros of Raising Money For Your Startup
- Getting the money you need to make your idea a reality
- The credibility that will help with sales, partnerships and hiring great talent
- Speed to market and expanding
- Enabling others to share in your success
- Gaining experienced advisors and connected backers
The Cons of Raising Money For Your Startup
- Giving up equity, ownership, and control of your business
- It’s a consuming process which may require 50% of your time
- It’s a lot harder and more complicated than it looks
- You might build a better, more profitable, and more sustainable business without it
- Once you start you’ll always be fundraising
- Taking the money means committing to pursuing an exit
Types Of Fundraising
There are a variety of funding methods you can use to finance your startup.
Startup accelerators and incubators can provide some basic early funding, help nurture your startup and introduce you to the market.
Friends & Family
Raising initial money is probably the most common form of early-stage startup funding. It’s the easiest money to raise with the least downside risk.
Loans & Credit
You can also bootstrap your startup using a combination of personal credit, loans, and even government grants.
Far more angel investors and angel groups have popped over the past decade. More may emerge if the reputation of the market stays strong and we keep adding more millionaires to the population.
Equity, debt, and donation crowdfunding are all potential options. They can offer increased visibility and branding while raising money.
Venture Capital Firms
These are the big money funds that everyone wants to get the real money from.
Big corporations are stepping up to make more and more investments in startups. It offers many potential financial benefits for them.
Funding Rounds Explained
Startups have begun raising more and more rounds. Now it isn’t crazy to see companies raising all the way through a Series D or E round.
Friends & Family Round
This can extend to any personal contacts and friends of friends. They may want to see some kind of business plan, but you should be dictating the terms.
This is generally where you’ll pick up angels, accelerators and the crowd. At this stage, the vast majority of the weight is being put on you as the founders, rather than any results.
Raising at this stage is going to be more about the traction you’ve achieved. Where are you at with a finished product, gaining customers, and starting to generate revenues and profits?
A Series B builds on the last round. You should have a working business model, be showing consistent improvements and be getting ready to go big.
Series C & Beyond
Funding at a Series C round is about scale. Everything is working, money is coming in, the model works. More money now is just going to speed and amplify success. It may be used to buy up market share, move into new markets, and even acquire other companies ahead of an acquisition. Follow-up rounds add to this and extend funding until a liquidity event, IPO, or acquisition.
What Investors Want To See
What are investors going to want to see before they write you a check?
As already mentioned, different investors are going to have different expectations and demands at different rounds of funding.
The later the funding stage, the more due diligence investors are going to do in order to protect their investment and partners. They’ll be digging into absolutely everything they can to make sure the numbers add up and there aren’t any hidden legal risks.
The basics across all stages are going to be:
- A great pitch deck
- Executive summary of a business plan
- Marketing plan
- A good pitch
What You Need To Be Fundable
Here’s what you need as a startup in order to get funding:
- A fantastic pitch deck
- A good business idea
- A strong founding team that inspires confidence
- Experienced and credible advisors
- A really big market
- A tangible problem to solve
- A whole lot of focus
How Much Money Should You Be Raising?
As a good M&A advisor will share, the best answer to this question may somewhat depend on the market and economy. If things look like they may be tougher and tighter in the near future, you may want to bring in all the money you can now. Especially if the terms are great.
However, the more money you take, the more responsibility and obligations you are taking on. The more you are giving up or are promising to deliver. So, be wary of taking on more than you really need (plus some cushion), especially if you don’t have a good way to invest it and make a return on it.
Don’t sell yourself short, but do be wary of asking for too much. Remember you’ll always be in fundraising mode once you start. You should be bringing in new rounds of capital every 6 to 24 months until you go public or sell.
Where To Learn More About Fundraising
- The Art of Startup Fundraising Book
- The Dealmakers Podcast
- Fundraising consultants and advisors
- This fundraising training