Fundraising is key to the success of a startup but few founders are experts on raising capital.
Raising capital is a core part of building a successful business. After all, having sufficient capital can mean the difference between success – a new product or expansion into a new market – or failure.
For better or worse, this critical task usually falls on the founder. Even though the job of fundraising is important, the process is often confusing. There’s a good reason for that.
“Few, if any entrepreneur starts a business as an expert in fundraising. They just haven’t done it before,” said Alejandro Cremades, an entrepreneur, fundraising consultant, and author of The Art of Startup Fundraising.
Even though few founders start as experts in fundraising, some do eventually get a hang of it. “Armed with the right framework,” the whole process of fundraising “can be far swifter and more predictable than you might imagine,” Cremades said. Here’s a primer on some of the basics to get you started.
Funding rounds: from pre-seed to IPO
Fundraising is a process. Startups need to fund themselves through a series of investments or capital raisings. As the business grows, its capital requirements grow as well. Each round of funding serves as a stepping stone to the next round or stage of development. Depending on your industry, the time between each round can vary between six months to a year.
In the initial stages, founders typically rely on self-funding, friends and family, business plan contests, or crowdfunding. When Ty’lisa Summers started Spendebt, a fintech company that helps people pay off debt, she had no choice but to dip into her retirement savings. Once she got started, she found local sources for funding as well as resources for new entrepreneurs. She started joining and winning business plan competitions.
One concern she had early on was giving away equity. “When you’re early on, you don’t necessarily know how big your company will be or your true value early on. If you give away 25% early on when you are figuring things out …you may not have much equity left to give away,” she said.
Funding rounds usually start with initial pre-seed or seed round from early funding sources such as incubators, accelerators, angel investors, or microlenders. These rounds can vary anywhere from USD 10 000 to USD 2 million. Early funding rounds help companies finance things such as market research or market development.
Investor expectations change with each fundraising round. Learn about later stages of startup funding from both founders and investors. Feature: Growth capital: getting funding as a later stage startup
From there, companies raise larger amounts in series A, B, C and beyond. Investors may include family offices, venture capital, hedge funds, or other investment firms. As companies grow even bigger, they may need to raise more capital to acquire companies, expand into new markets or create new products. Investors at this stage include private equity, strategic partner, or an initial public offering.
Understand the investor
Different investors have their own different set of criteria you need to understand before seeking funding from them. To get funding, you not only need to articulate your own vision, you also need to understand the investor, their concerns, and what they’re looking for.
In addition to honing your pitch, research the potential investor. Know if they’ve already invested in a company very similar to yours. If that’s the case, they may have a hard time investing in you as well.
With family offices, alignment is important, said Alice Chen, co-founder of a multi-family management platform FDP & Co. Chen and her co-founder Simran Kang, have experience on both sides of the table as investors and entrepreneurs.
“It’s important to understand how your startup fits in with the family’s overall investment thesis and to tailor your pitch accordingly,” Chen said. Mature multiple family offices have clear mandates, investment theses, and valuation metrics. By contrast, younger single-family offices tend to be less formal and have a more entrepreneurial style of investing, Chen said.
Build your network
Because fundraising is a long game, investors and entrepreneurs say the best time to meet investors is when you are not actively trying to raise capital.
“Build a network before you need your network,” said Divya Kakkad, director of marketing at the Female Founders Alliance, a networking group for female and non-binary founders, said this is a common difficulty.
“If you ask for money, you get advice. If you ask for advice you might actually get a mentor who could turn into an investor for you or introduce you to prospective investors” she said. Kakkad suggests making a list of investors in your industry, doing research on LinkedIn and working on getting warm introductions to key people.
Summers said she grew her network by networking in local groups and winning some competitions. The investing ecosystem “is big but also really small. Once you’re in, it’s good to continue nurturing those relationships,” she said.
Networking is most often done in person through local or industry-specific groups but technology, including crowdfunding and social media, has opened up more opportunities.
“The shift to online has strengthened the resources and ecosystem for startup founders and has provided both entrepreneurs and investors with more access,” said Cremades. Some founders have even been able to raise seed money directly from notable investors via Twitter, LinkedIn, blogs, email, and crowdfunding platforms, he said. But, this is the exception and most fundraising comes down to who you know, but “the internet may just make it easier to expand your connections, get introductions, and get noticed.”
Fundraising takes a lot of time and sometimes it can take over. Patrick Leung, program director at LimeHK, a Hong Kong-based acceleration consultant, says he sometimes has to warn founders not to let fundraising take priority over daily work. “Investment is so important but you need to build your business well to prove to somebody that you are worth investing in.”
- Fundraising is a process. Each round of funding is a stepping stone to the next round or stage of development. Depending on your industry, the time between each round can vary between six months to a year.
- Investors have their own different set of criteria. In addition to honing your pitch, research the potential investor.
- Fundraising is a long game. The best time to grow your network and meet investors is when you are not actively trying to raise capital.