Writing about law, Wall Street, VC & startups. Echelon-1.com
Often one of the biggest obstacles to starting a business is finding the capital to get your idea off the ground. Those who cannot turn to their own personal savings or borrow funds from family members or friends must turn to investors, funding organizations, or bank loans to raise startup funds.
Read on for more information about how to raise startup funds.
The three main sources of startup capital are angel investors, venture capitalists and syndicates.There are different funding rounds and early-stage startups typically go through a funding round every 12–18 months.To prepare for your funding rounds, you should have clear objectives, create a budget and gather data, research investors and create a pitch deck.Storytelling is the key to a successful pitch. Know your audience, metrics and develop your own style.
Startup funds or startup capital is seed money that is raised through investments or bank loans to start a business. This money can be used for any business-related expense, including the purchase of office equipment, marketing campaigns, and product development. There are three main sources of investors that provide startup funding for new businesses. We take a look at these below.
Angel Investors: Angel investors provide the initial seed capital for startups at an early stage when other more risk-averse investors are not prepared to invest. Generally, angel investors need to meet the SEC’s criteria for being an accredited investor (at least $1 million in net worth, excluding primary residence, and greater than $200,000 per year in earnings for at least the two most recent years).
Venture Capitalists: Venture capitalists manage large pools of money often invested by wealthy players who serve as limited partners.
Limited partners in a venture capital firm can include pension funds, university endowments, family offices, and ultra-high net worth individuals. In some countries, even the national government can become involved in venture capital efforts in order to boost the national economy.
Syndicates: Also known as special purpose vehicles (SPV). A syndicate allows groups of up to 99 people to invest in a single startup. Using a single entity helps to keep the cap table clean. Having a clean cap table becomes very helpful for later-stage investments, as it can greatly reduce transaction complexity (and legal bills). A benefit of having your startup funded by a syndicate is that there may be a lot of investors who possess different skillsets and a willingness to actually participate in getting the startup off the ground through both financial means as well as mentoring.
Other options for funding your startup include:
Accelerators or incubators: Accelerators or incubators are often public-private partnerships that provide training, office space, and sometimes cash for tech startups.
Crowdfunding: This has become a popular way for individual investors to fund startups. There are traditional crowdfunding sources such as Kickstarter or Indiegogo, as well as equity funding through accredited or non-accredited investors.
Revenue loans: These loans are provided by investors to fund the startup, with the promise of a share of the startup’s revenue.Secured bank or venture loans: These loans are available for startups who normally have assets or property that can be used as collateral.
Business plan competitions: These local competitions are often a good way to win quick cash and in some cases even receive free services from advisors.
Attracting investors to your startup is no mean feat. Investor expectations are high and so is the competition. Not only that, but the process can also be physically and mentally demanding for founders who are likely to field many ‘no’s’ before they attract the right investor.
Even then, after you’ve secured an initial investor, the reality for most startups is that they secure just enough funds to meet their next milestone.
After that, they typically go back to raising funds multiple times in order to attract new investors and garner more money needed to continue fuelling operations. This process often repeats itself every 12–18 months in the early stages of a startup.
This is the first real stage of funding that a startup experiences. Often, at this level, funds are obtained through friends and family members. However, this stage is also often used to float the business idea to those who are interested in giving money in a later phase to see the idea take flight.
In this phase, startups typically seeks to raise funds to spend on further research, testing the product-market fit, product development, and investment in key hires.
It is often the angel investors and the incubators who put in the most funding in this round, as they are able to provide $10,000-$100,000 in startup capital.
Larger seed venture capitalists, with at least $50 million in capital, are also common players in seed-round funding, as they are willing to take bigger risks in businesses they believe will work.
A common strategy among seed founders is to invest in a number of new businesses to see which ones gain traction. Those that begin making money with their idea are then prioritized for later rounds of funding.
By the time a business reaches Series A in funding, the company should be able to provide real data to potential investors and has a solid idea of how much money the business can produce. Series A, B and C rounds should build upon a firm foundation of product development and market research.
Earlier investors are invited to participate, provided they have the funds available to take the venture to the next level. By the time businesses reach Series B, they are seeking the amount of funds that a venture capitalist can provide, as the funding, they’re looking for falls in the tens of millions of dollars range.
By the time a business is ready for Series C and later funding, they likely have a startup that is worth more than $100 million.
Securing funding for your startup is a process that requires careful research and planning in order to attract investors. Preparation is key. Use these steps as a foundation for preparing for your next fundraising round.
What are you planning to do with the investor’s funds? How will these funds be applied, and how will they contribute to the success of your organization? The first step in your preparation is to outline your goals and objectives.
This outline is later incorporated into your business plan and your investor pitch deck, providing you with powerful tools to demonstrate how you will scale quickly, stay on track, and use the funds as intended.
It’s hard to plan a budget when you have limited historical data to determine future expenses of your business. One way is to consider known expenses that your business will incur, including:
Equipment: Equipment is one of the biggest monthly expenditures that your company will face. How much is needed for computers, terminals, and other technology that can be used to operate your business?Human resources: Human resources expenses, including items such as payroll, employee recruitment, training, and benefits can quickly eat up to a quarter or more of your total revenue.
Legal: Are your legal responsibilities included in your budget? There are some ways to minimize these costs, including alternative fee arrangements with lawyers and outsourcing your general counsel.
Marketing: This is an important piece to your company’s success, and your budget must include marketing strategies for website development, social media, and advertising at the very least.
Once you have outlined your objectives and have built your budget, the search for investors begins. Part of this phase includes connecting with industry leaders, mentors, and peers who have navigated a fundraising cycle. Ask for investor referrals and introductions to those who may be interested in providing funding for a business like yours.
Finally, check out online investing communities for information about investors.
Remember, don’t pitch your idea blind. Instead, develop relationships within the industry that can help you create a pool of potential investors to choose from. Once you have that pool, you can begin to hone in on the investor whose vision and style best matches your own.
When you’ve found the investor you wish to pursue, it is time to develop your pitch deck, which a short printed presentation that will convince the investor that yours is an idea worth pursuing. What makes your business important to invest in right now?
If you are in the process of raising funds for your startup, following the tips listed below will help to ensure that your business idea is in prime position to attract the attention of the right investor.
You need to develop a compelling narrative about yourself and your business. Time and thought must be given to your story because that is often the hook that makes investors interested in your project.
However, don’t make your pitch too complicated. Powerful stories are simple. Perfect your “elevator pitch”, a short description of your business and mission that you can deliver in the span of an elevator ride.
Know your stuff. This includes the market you’re looking to attract, the macro-trends of broad consumer interest; the leading players, the people with the skills and experience to deliver, and the technology that will provide you with a competitive advantage. You want an “ah-ha” moment in your pitch that reveals how your business provides a solution to a discrete problem.
Too many startup owners try to change who they are or what their business model is to attract an investor. This is a mistake that often leads to discontent from all sides and can lead to many problems and arguments at later stages.
While it is important to understand what investors are interested in and how they like to work, you should also take the time to find the right investor for your project. This is where referrals from individuals who know both sides of the equation and their similarities in style can prove valuable.
Your great startup idea most likely did not evolve from your dream of becoming a professional fundraiser. While it is easy to get caught up in going from funding round to funding round, remember what your primary focus is, your business. First and foremost focus on making your business a success and the funding may just come to you.