Raising capital is one of the hardest tasks a startup founder can face. It is often said that the title “company founder” is just another way of saying chief fundraising officer, because it feels like most startups are in continuous fundraising mode.
For most startups, a new round of fundraising usually takes place every 15 to 18 months, with the expectation that each round will help the company achieve new milestones and a higher valuation. Funding options available to the entrepreneur depend on the stage in which the company is in. For example, pre-seed comes before seed, which comes before Series A. Series A is followed by Series B, C and so forth.
One of the most common mistakes founders make when raising capital is underestimating the time and effort necessary to raise money, while also not fully understanding the amount of capital needed. Remember, it is not the amount of capital you want but rather the amount of capital you need to achieve certain milestones. Before you talk with potential investors, you need to fully understand how the requested capital will be deployed and the specific milestones this capital will help you to achieve.
Determine your options for raising capital
There are several sources of capital that can help turn your idea into a profitable business.
1. Fund it yourself: If you have the financial wherewithal, use your personal savings to “bootstrap” your business.
2. Ask friends and family to invest: However, if you take money from your friends and family and you unfortunately lose their investment, those are very difficult conversations to have.
3. Apply for government grants: A government grant requires the applicant to fill out a somewhat lengthy application. Government grants are a form of non-dilutive financing that does have to be repaid.
4. Find an angel investor: Angel investors have become very active investors in pre-seed and seed stage startups. Angel groups are comprised of many high net worth “angels” who pool their capital together to invest in companies. Angel groups typically invest through convertible notes or simple agreements for future equity (SAFEs), but they also might participate in priced rounds. A SAFE note entitles investors to shares in the company if there is a future valuation event.
5. Utilize institutional venture capital: Institutional venture capital is the last source of early-stage capital. It is more common for VCs to invest in Series A and future rounds rather than earlier rounds.
Speak with investors who bring added value in addition to providing capital. Don’t overlook whether the capital provider has experience in your space or has contacts with potential suppliers or customers in your industry. Finally, make sure the reputation of the capital provider will help, not hurt, you in future capital raising efforts.
How do I approach investors?
When initially approaching investors, try to get an introduction through someone in your network (e.g., accountant, lawyer, banker). A warm lead will certainly yield better results than a cold call. Make sure your potential investor list only includes those groups whose investment criteria match what you seek. With the amount of public information available about investor groups, there is no excuse for approaching investors that are not interested in your space or whose preferred check size far exceeds your needs.
Before seeking investor capital, have a comprehensive and convincing business plan for your company. It should be realistic, not overly optimistic, and include financial projections, cash needs and a detailed schedule of cash deployment. Ensure your estimate of the total addressable market is accurate, realistic and large enough for your startup, perhaps with room for competitors. The most common reason startups fail is a lack of market need.
Getting an investor interested in your company is not the first step in your journey. Pursuing investors should occur after the startup has achieved some level of product/market fit and has acquired some early adopters.
Want to learn more? Start the conversation here.
EisnerAmper, one of the largest business consulting firms in the world, is comprised of EisnerAmper LLP, a licensed independent CPA firm that provides client attest services; and Eisner Advisory Group LLC, an alternative practice structure that provides business advisory and non-attest services in accordance with all applicable laws, regulations, standards and codes of conduct.
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