How To Align Your Startup’s Funding Needs With The Right Investors

Knowing how to align your startup’s funding needs with the right investors is a crucial step when considering external capital. Bringing in investors is an important milestone for a young company. You’ll select the right capital source according to the value it contributes, aside from the money.

However, before working on a list of investors to approach, you’ll conduct an internal assessment. Evaluate the company, its growth stage, and the milestones you hope to achieve with the capital. These criteria will help you estimate the amount of funding you need.

Note that each investor class is significantly different from the others and comes with its pros and cons. The funding source that makes sense for the company should align with your long-term and short-term objectives. It should also bring your company invaluable credibility and prestige.

The lead investors you bring in at this time can set the tone for success and growth. Your choices will influence further funding rounds and how later-stage investors perceive the company. Potential dilution and the loss of decision-making rights and control are crucial concerns at this time.

Your fundraising strategy should start with understanding how different investor classes operate and align them with your startup’s needs. Remember, you’re entering into tactical partnerships and not just securing capital. Don’t make the mistake of accepting funding from wherever you can get it.

Is Your Startup at the Pre-Seed Stage?

At this stage, founders typically have an excellent business idea and maybe a blueprint for a product to build. You should be researching a potential market and a customer base that might be interested in purchasing the product. Essentially, you’ve identified a problem and are trying to find a solution.

Founders, particularly first-time entrepreneurs, often lack concrete metrics to present to initial investors. When you need money to start exploring the business concept, you’ll rely on bootstrapping and diverting personal funds to start. Your first investors are informal entities who believe in you.

Informal Capital Sources

At this time, you’re only selling your credibility as an entrepreneur. Accordingly, you’ll approach friends, family, or colleagues to back your venture. These individuals are unlikely to require controlling rights in the company or equity, nor do they demand assured returns.

Even so, you must draw up the necessary paperwork with the assistance of a qualified attorney. Also, ensure you create a cap table. Include all your informal investors in the list and diligently record all the personal funds you invest in the startup. You’ll need this data when calculating ownership.

You’ll use the capital from these early investors to build a product prototype and develop a business plan. Refining the initial product-market fit, hiring a founding team, and developing the basic infrastructure are part of the pre-seed stage.

Since you’ve approached informal investors, due diligence is not an issue. At the same time, the check sizes are small and just enough to give you a kickstart. If you have a disruptive idea and an impressive prototype, you can also reach out to investors like:

Incubators

Earning a spot in these programs is a highly challenging task, with an approval rate ranging from 1% to 2%. This percentage also depends on the specific program you’re applying to. If you successfully enter the program, you’ll have the perfect launchpad for your startup.

In addition to initial funding, you’ll get assistance with building the Minimum Viable Product (MVP), mentoring, and networking opportunities. The prestige and credibility your brand earns thanks to its association with the program set it up for success.

By the time you exit the program, you will have presented the MVP to accredited investors who will provide capital. As for compensation, you need not offer much equity to incubators since non-profit organizations typically back them. They support startups in the pre-seed stage.

Is Your Startup at the Seed Stage?

A seed-stage startup is ready with a Minimum Viable Product (MVP) and a customer base that is ready to purchase. You’ll likely have regular sales and generate some revenue. Although the product has only the basic features, you’ve tested it for product-market fit, and it has demonstrated traction.

When you set out to raise funding at this stage, your objective is to develop the necessary framework for acceleration. The funding you raise from investors goes toward expanding the team, increasing production capabilities, and improving the product’s features. You’ll also invest in marketing.

While you do have a competitive edge, market reach, and presence, you need capital to take the company forward. Securing investment is easier since you have a proven business model and initial reviews and feedback from satisfied customers. So, who would you approach?

Angel Investors

Look into angels when you align your startup’s funding needs with the right investors. Angels are typically high-net-worth individuals interested in giving back to the community by supporting startups. They may also be veteran entrepreneurs who have successfully built and/or exited mega companies.

Securing capital from angel investors is streamlined, and you can expect short approval times with simpler due diligence requirements. Although their check sizes are also small, they’re content to allow founders to run their startups with minimum interference.

However, you can expect to give up some amount of equity in exchange for assured returns. Although their terms and conditions are less aggressive, finding the right angels can be challenging. You’ll need an extensive personal network to connect with these individuals.

Furthermore, these angel investors typically prefer to invest in sectors where they have some amount of expertise. While they might provide you with guidance and mentoring, they won’t require a board seat or controlling rights.

Keep in mind that storytelling is everything in fundraising. In this regard, for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.

Remember to unlock the pitch deck template that founders worldwide are using to raise millions below.

Angel Syndicates

When working out how to align your startup’s funding needs with the right investors, you’ll consider angel syndicates. Since approaching individual angels can be challenging, you may want to connect with syndicates instead. These organizations comprise angels who pool their resources.

The syndicate is structured as a legal Special Purpose Vehicle (SPV) that invests in a single startup. Securing investment from a syndicate is beneficial since it keeps the cap table uncluttered and neat. You can list the SPV as a single investor and work out terms and conditions with a sole entity.

Accelerators

Seed-stage companies can benefit from a partnership with an accelerator, as its sole purpose is to propel rapid growth. You’ll get the necessary mentoring, training, and technical assistance, along with funding. The best advantage is that you do not need to relocate to their facility.

You can continue to run the company while participating in the program. It condenses training in business building, worth several years, into a few months. At the end of the program, you’ll present to a network of accredited investors and walk away with a check.

This funding can set the company on a growth trajectory, as it also gains credibility. Getting accepted into the program validates your business model and your acumen as a skilled entrepreneur. Expect more doors to open for you thanks to your association with the accelerator.

As for compensation, expect to give up some amount of equity since the program is backed by for-profit organizations.

Micro VCs or Seed-Stage VCs

If you’ve been eyeing the venture capital class of investors, your startup may not be ready yet. Larger VC companies have stringent evaluation criteria when assessing investment opportunities. Then again, you may not be ready to offer high interest rates, equity, and board seats.

How about getting venture capital on more favorable terms and conditions suitable for your startup? Micro VCs could be an excellent alternative. These investors have been shaping the early-stage startup ecosystem over the past few years with their valuable expertise and mentorship.

Capital in small denominations that you need is only a small part of the package. You’ll also access networking opportunities and assistance with accelerated growth. Some micro VCs may require a board seat, but unlike their larger counterparts, their objectives are different.

Micro VCs are keen on supporting startups with disruptive concepts that have the potential to trigger radical shifts in their sector. Know that these investors have smaller funds and AUM, or assets under management. But unlike traditional VCs, their investment horizon is not limited to 10 years.

Micro VCs are likely to maintain their holdings until the startup is ready for an Initial Public Offering (IPO). Or, if it is sold or enters into a merger or acquisition (M&A) deal.

Family Offices

Since you want to align your startup’s funding needs with the right investors, consider approaching family offices. These organizations manage the estate for high-net-worth individuals and families. Their objective is to identify and invest in lucrative opportunities that will grow their clients’ wealth.

Family offices are typically open to funding startups with disruptive ideas. Statistics indicate that at least 31% of their investments are made in upcoming startups, of which 83% are structured as club deals. They typically invest in specific sectors but won’t offer you industry-specific expertise.

This funding option is suitable if you’re looking for bigger checks than those from angels and micro VCs. You need not worry about giving up board seats and decision-making rights, but access to their networks is an advantage.

Corporate Venture Capital (CVC)

Large corporations often set up a corporate venture capital arm to invest in emerging startups. Their objective is to nurture the startup ecosystem and disruptive technology within their sector or in an adjacent industry. Essentially, the company sets aside a portion of its capital to promote its sector.

Partnering with a corporation brings you multiple advantages, and capital is just one of them. You’ll get access to expertise, know-how, and its established infrastructure for manufacturing, sourcing inventory, and sales and distribution channels.

Some companies may also set up production units within their facilities. You’ll negotiate the specific terms and conditions on which you can secure capital. However, their typical objective is to acquire the startup and integrate the technology it has developed.

Understand that large corporations are hampered by their size, making agility a significant challenge. Particularly, when it comes to adapting to the rapidly evolving business landscape. Acquiring new companies and their innovations is a strategic workaround they leverage.

Now that you have an understanding of the different investor classes, here’s a quick look at how to build a target list of investors. Check out this video I created explaining how it’s done.

Is Your Company at Series A and Beyond?

If your company is at the Series A funding stage and beyond, it’s no longer a startup. Instead, it is a well-established brand with a proven business model, product-market fit, and dedicated customer base. By now, you probably have historical data to demonstrate viability to investors.

Companies at this stage require substantial capital infusions to facilitate accelerated growth. They can offer assured returns and are stable enough to provide stock in exchange for funding. Since you’ll need large check sizes, you can organize funding roadshows and approach big-ticket investors.

Series A, B, C, and later-stage companies also offer board seats to investors since they can benefit from the expertise. Accordingly, you’ll add venture capitalists (VC) and private equity firms to your list of investors. Expect aggressive negotiations for the terms and conditions.

When choosing the right investors, also consider their investment horizon. Both venture capitalists (VCs) and private equity (PE) firms operate within a 10-year framework, though PEs may extend their investment cycles.

When estimating your funding needs and approaching investors, don’t overlook their lifecycles. Ensure that they coordinate with your exit plan, whether through an M&A deal or an initial public offering (IPO).

How to Align Your Startup’s Funding Needs with the Right Investors

Finding the right investors for your startup and running a fundraising campaign is a complex and time-consuming task. However, you can shorten this time and raise the chances of success by approaching the campaign strategically.

Before compiling a list of targeted investors, it is essential to understand your internal structures and funding needs. Be sure to determine the exact amount of capital you absolutely need and the level of dilution you can accept. Also, align the terms and conditions investors will expect with your needs.

Create the right balance by understanding the different investor classes and their structures, as well as the value they can offer your company.

You may also find our free library of business templates interesting. There, you will find every single template you need to build and scale your business completely, all for free. See it here.