Fundraising Options & Strategy
First things first – fundraising isn’t easy and can actually be quite complicated if you’re not familiar with the ins-and-outs of it. Which is why I highly recommend Brad Feld’s Venture Deals course. He hosts it twice a year – in Spring and Fall – and it’s free. I’d also highly recommend his book Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist.
Brad Feld’s book and the Venture Deals course cover critical aspects of startup financing, including:
Valuation of the company
Amount of the investment
Form of the investment (typically through convertible preferred stock)
Liquidation preference of the equity investment (the right to be paid back first on sale of the business or its liquidation)
Board of Directors composition and any Board observer rights
Approval or “veto” rights of the investors, covering items such as future equity financings, sale of the company, or changes to charter documents
Rights to participate in future financings (“preemptive rights”)
Rights to receive periodic financial reports and other information
Vesting requirements for any founder stock
Anti-dilution protection, protecting the investment from dilution if future rounds of financing occur at a reduced valuation (there are different types of formulas for this)
Redemption rights (if any)
Rights of first refusal or co-sale/tag-along rights on sales of any founder shares
Drag-along rights (giving the company the right to force all shareholders to vote for a sale of the company if the sale has been approved by a specified percentage of shareholders)
Registration rights (giving the investor the right to require the company to register their shares with the SEC in a public offering)
The Venture Deals course truly is a game-changer, and I couldn’t recommend it enough. AND IT’S FREE. It’s best to participate live (it’s a live course versus a self-guided course), but even if you can’t participate live, you get access to all of the modules and resources once you sign up. The spring session isn’t open yet, but I’ll be on the lookout and will send it your way as soon as I find out when it’s open!
Funding options for early-stage startups
Entrepreneurs are known for being scrappy and resourceful. They get by with what they have, and they just make things work. At some point, however, early-stage founders will determine that they can’t afford to maintain the status quo. They need capital to grow and scale their business. Below are the various funding options for early-stage startups.
1. Angel financing:
Angel investors are individuals who invest in early-stage companies in exchange for an equity ownership interest. They often invest in pre-seed and seed rounds, and sometimes in Series A rounds. The typical angel investment is $25,000 to $100,000 per angel, per company, but it can go higher.
What do angels care about?
Angel investors aren’t a monolith, so it would be inaccurate to make a blanket statement about their behaviors and tendencies. However, angels are much more likely to invest in companies that are within industries and sectors they know well. Additionally, most angels particularly care about:
The quality, passion, commitment, and integrity of the founders
The market opportunity being addressed and the potential for the company to become very big
A clearly thought out plan, including a go-to-market strategy and any evidence of traction
Technology or intellectual property that is defensible, valuable, and differentiates the company
An appropriate valuation with reasonable terms (angel investors are investing at an early stage when risk is highest, so they typically require lower valuations to compensate)
The viability of raising additional rounds of startup funding if progress is made
There are a variety of ways to find angel investors, including through:
Websites like AngelList and F6S
Angel group networks like Angel Capital Association
Coworking spaces or innovation hubs
Other entrepreneurs and mentors
Lawyers, accountants, and other service providers
2. Venture Capital (VC)
Startups seeking financing often turn to venture capital (VC) firms. Typically this happens after startups have already raised money from angel investors. VC firms provide capital, strategic assistance, introductions to potential customers, partners, and employees.
The stage at which a VC firm invests is dependent upon the firm. Some VC firms target early stage companies and will invest at the Series A stage. Other VC firms prefer later stage companies and will only invest in Series B or Series C and beyond.
Venture capitalists (VCs) typically want to invest in startups that are pursuing big opportunities with high growth potential, and that have already shown some traction; for example, they have a working product, early customer adoption, some form of revenue, etc.
VCs firms’ strategies vary tremendously; however, they typically focus their investment efforts using one or more of the following criteria:
Specific industry sectors (software, digital media, semiconductor, mobile, SaaS, biotech, mobile devices, consumer, etc.)
Stage of company (early-stage seed or Series A rounds, or later stage rounds with companies that have achieved meaningful revenues and traction)
Founders of minority and/or underrepresented groups (gender, race, ethnicity, sexual orientation, etc.)
Geography (e.g., San Francisco/Silicon Valley, New York, etc.)
Investors perform their due diligence on you, and you should be doing the same on them. Before approaching a VC, do research to learn what their focus is and if it aligns with your company and its stage of development. You’re choosing investors as much as they’re choosing you.
Another point to make is that VCs get inundated with investment opportunities, many through unsolicited emails. Almost all of those unsolicited emails are ignored. The best way to get the attention of a VC is to have a warm introduction through one of their trusted colleagues, or another professional acquaintance of the VC, such as a lawyer or fellow entrepreneur.
Mark Suster, entrepreneur and VC, wrote this great blog article called “Invest in Lines, Not Dots”. I’d highly recommend the read.
Crowdfunding is the practice of raising funding through multiple funders, often via popular crowdfunding websites. Startups have been able to raise thousands to even millions of dollars via crowdfunding campaigns.
Crowdfunding provides startups with the opportunity to raise startup funding for their business, while promoting the startup’s product or service. How it works, typically, is you set up a profile on a crowdfunding site, describing your company and its business, the amount of money you are trying to raise, and create a compelling story about your product or service. People who are interested in what you are trying to do donate to your campaign, typically in exchange for some kind of reward for their donation (one of your products or services, a discount based on how much donated, or some other perk), or for some form of equity or profit share in your business.
There are different types of crowdfunding:
Rewards-based crowdfunding: is a particularly attractive option for startups with physical products, as you are not giving away equity or part ownership in your company—you are just offering some of your product, or a discount on those products. Rewards-based campaigns are not burdened with interest or principal repayments the way small business loans are. Think Kickstarter and Indiegogo.
Equity crowdfunding: is a scenario in which instead of a startup offering products or perks, funders receive a percentage of ownership, a financial stake in the company, or the right to future revenues or crypto-assets with an aim to earn a return. Equity crowdfunding includes accredited crowdfunding and open-access regulated crowdfunding.
Accredited crowdfunding allows companies to raise funds from high-net worth individuals and institutions. AngelList and FundersClub are two of the best examples of these platforms.
Open-access regulated crowdfunding invites anyone to invest in a company in exchange for a slice of the financial pie, or the right to money or future crypto-assets (you may get perks too). Think Republic and StartEngine.
Donation-based crowdfunding: is when a funder contributes to a campaign without expecting any perks or value in return. This is mostly used to fund charitable causes, like funding to build a well in Kenya, or personal expenses, like helping to pay a friend’s medical bills. Think GoFundMe.
Additionally, startups can apply for small business loans and small business credit cards. However, oftentimes technology startups are denied these resources because banks consider them to be high-risk and wading through unknown, unproven waters.
Creating a Fundraising Strategy
Now that we’ve discussed the different types of fundraising, let’s talk fundraising strategy.
Regardless of the stage of your startup, your goals, and your valuation, you need to create a fundraising strategy.
A fundraising strategy outlines how you plan on raising funds, and it is ideally a written document (although it doesn’t have to be too long or elaborate). The very process of writing this document will invite valuable conversations and encourage important thinking processes.
A good fundraising strategy clearly responds to these five questions:
Why- Why are you raising capital?
Who- Who are you raising the capital from?
How much- How much capital will you raise? (Now and in the future)
When- When are you raising capital? (Now and in the future)
How- How will you go about raising the funds? (Process)
What- What do you intend to use the funds for? (Now and in the future)
Set Goals and Make a Plan
An all too common mistake that many early-stage startup companies make is going into fundraising blindly.
Knowing why you’re raising funds is quintessential to raising funds. And ‘Because isn’t that what startups do?’ isn’t a good enough answer, obviously.
Take time to understand what you need the money for? What are you going to accomplish with the money that you raise? What are the milestones it will help you hit (e.g. speed to market, grab market share, hire critical team members)? And don’t forget that investors don’t fund capital shortages, they fund opportunities.
Setting clear, specific, achievable, measurable and time-bound goals is invaluable to creating an effective fundraising strategy.
It’s also important to be strategic about when you raise funds. Timing matters.
It is typically recommended to raise as much money as needed to get to your next “fundable” milestone, which will usually be 12 to 18 months later. In any event, the amount you’re asking for must be tied to a believable plan.
One way to look at the optimal amount to raise in your first round is to decide how many months of operation you want to fund. As a note, early raises usually range from a few hundreds of thousands of dollars up to two million dollars.
Your fundraising strategy should clearly outline how you’re planning to reach out to every investor – through which channel, when, and how.
It will make your life easier if you automate some of the processes and prepare as much as possible. Create a system that words for you that contains all the information you need on each investor and where you’re at with them in the process (emails, meeting notes, reminders, etc.)
Have all the necessary documentation that investors are looking for ready at all times (KPIs, cap table, term sheets, financial model, contracts). Not only does it make it easier for you, but the investors too.
Fundraising is a long, often grueling process.
Y Combinator is one of the first accelerator programs, and a wealth of knowledge for early-stage startups.
Raising Money for a Startup, free course on Khan Academy about startup fundraising
A Guide to Seed Fundraising, discusses why raise money, when to raise money, how much to raise, financing options, convertible debt, SAFE, Equity, Valuation and more
A Fundraising Survival Guide, techniques for surviving and succeeding at fundraising
How To Raise Money, detailed thoughts on fundraising. A must read.
The Equity Equation, how to decide if you should accept an offer from an investor
Venture Hacks: Debt or Equity, discussion on debt vs. equity
Venture Hacks: First Time, advice for first time fundraisers
Clerky Guide, docs and guides. A great place to start.
(1) Start thinking through your fundraising strategy. Do you want/need to raise funds? If so, which fundraising option would you want to pursue? Work through the five questions: why, who, how much, when, and how?