Are you wondering how to raise startup capital?

Whether you’ve just had your “eureka!” moment and have seized on a great business idea you need to fund and you are working on your business plan, or you’ve already been putting in the 100 hour weeks and know you need an injection of some kind to make the next leap, how do you go about raising capital for your startup?

Do you know what you need to raise money at your stage in business? Have you explored all of the potential options? Do you have the right pitch and timeline? Are you pointing your business in the right direction?

Here’s what you need to know…

Bootstrapping Vs. Fundraising & When To Make The Switch

As I explain in detail in The Art of Startup Fundraising, many successful startups start out bootstrapping. Sooner or later, if you really want to scale and give your mission the best chance of its maximum impact you are probably going to raise capital. 

You may need to do this out of the gate if your upfront cash needs are truly great just to make this idea work. Others raise in advance to bring in great advisors and backers, or to create buzz, credibility and hit the ground running fast. 

Starting out bootstrapping can still have its perks. Just don’t sacrifice the impact you were really inspired by out of being stubborn and wanting to do it all yourself. 

Several good reasons to start out bootstrapping include:

a) Preserving equity for later rounds, when you can raise more capital for fewer shares

When thinking about how to raise startup capital you need to be strategic. The earlier you raise the higher the risk for the investor. They will want to take a bigger share of your company and give you less money for it because your valuation is low. Raising later when your company is worth more means getting more money for a smaller slice of the pie.

b) Being in a stronger financial and negotiating position when you do go out to raise

The best time to raise is when you don’t need the money. Just like any loans or credit. When your startup can operate fine without extra capital, that’s when more investors will want in. Then they will compete with each other. You are doing them a favor with the privilege of investing in your company.

c) Proving the business model so any money put in gets a better return

A lot of extra money can actually be detrimental to early-stage startups. You feel like you have the luxury of time, spending and branching out. Most of the early money can be wasted on these things. Once you have a proven business model that works, you can raise and invest more money for predictable results and returns. 

d) Staying focused on the mission and business versus the distraction of fundraising

Fundraising can take up 30% to even 50% of your time as a founder. Then subtract another 30% of your time for recruiting and hiring, and that doesn’t leave you much to actually work on and grow the business. Unless you are going to have someone else run the fundraising process for you, beginning by bootstrapping can give you more time and focus to really make the business work.

e) Preserving the ability to make the best decisions for your customers and team

Bringing in new owners in exchange for capital also dilutes your decision-making ability and control. You are now committed and legally and morally responsible for working in your investors’ interests. Those are generating the greatest return on their money and providing an exit on their timeline. These priorities can be in direct opposition to what you might think is best for your customers and the mission. Without great traction in these areas early, your startup may not last long.

Below is a nice recap.

Bootstrap vs Raising Capital

Startup Capital Sources

When most people think about startup funding, they think about venture capital. In reality, this is just a small part of the market, startup ecosystem and investor pool.

You may raise money via the following sources:

  • Business partners and cofounders
  • Friends and family
  • Angel investors
  • Angel groups
  • Venture capital
  • Strategic corporate investors
  • Startup accelerators and incubators
  • Startup competitions
  • Grants
  • Business loans and lines of credit
  • Crowdfunding platforms
  • Direct marketing to individuals that are qualified, accredited investors

To help you understand the pros and cons below are recaps of each one of those so that you can decide what suits better the needs of your business.

Bank Loans

Equity Crowdfunding

Donation Crowdfunding

Friends and Family

Angel Investors

Startup Accelerators

Venture Capital

What Stage Are You At?

The stage of business you are in will dictate the right type of investors to pursue or let in, as well as what you’ll need in order to close on the money. It will also dictate which investors will be best for getting you to the next stage. 

  • Pre-Seed Rounds: It’s all riding on you and your team, and the idea
  • Seed Round: It’s about you, the strength of your team, and the proof of concept you’ve achieved
  • Series A Round: It’s about demonstrating your abilities and achievements, and getting the money to perfect it
  • Series B: You’re raising money to scale on a proven product and business model
  • Series C & Beyond: You are consolidating the space, building more value in your company, and making last-mile sprints before heading for the exit

Below you will be able to find the different expectations that investors will have.

Funding Rounds

How Long Does It Take To Raise Startup Capital?

How long it takes to land investors and actually close the round can vary significantly by stage. A lot rides on how much you are rising and who from.

In the early stages, there isn’t much for investors to check out. It’s all about you and the idea. The checks are far smaller.

Of course, with no track record, the hard and time-consuming part is going to be crafting the pitch and finding the right investors. When you do, banking the money can be fast. Still, this may be the result of months and years of building relationships with these people. 

As you progress through later funding rounds you are dealing with more sophisticated investors who can have whole teams to do their dealmaking. The checks are bigger. So is their risk.

They are often pooling money from others they are legally responsible too. They have to do a lot of due diligence. This can take months to a year. 

Below is a good recap of things look like from start to finish when thinking about the timeline.

Fundraising timeline

The Steps in Raising Startup Capital

a) Research, research, research, know the capital markets

The better you know the current fundraising marketplace, the better equipped you will be to efficiently raise money on the best terms, from the best fitting investors.

Is the market contracting? Is it highly liquid with investors desperate to deploy their money? What types of returns are they expecting on convertible notes? Who are the most active investors and institutions in your space? What threats or bumps could be coming to help or detract from the appeal of investing in your startup, industry and model?

b) Decide on which method of fundraising you are going to pursue

Which approach is best for your startup at this stage? There is no one size fits all answer. It could be crowdfunding, venture capital firms, loans, large strategic investors, getting on TV, joining an accelerator, or simply talking to friends and family. Pick your method and focus.

c) Make a shortlist of your ideal target investors

Within this type of fundraising, who are your ideal investors? What boxes should you be able to check before letting someone invest and becoming a part of your company? Is passion for your mission a top priority? Will being easy to work with be more of a priority than how much money they can bring? What type of experience and help should they be able to deliver beyond the money? Do you need someone with specific connections? What introductions should they be able to make? Is it important that they can participate in the next round too?

d) Know the most important metrics you’ll focus on and present

Don’t get lost in all of the metrics and numbers. Don’t make them glaze over with too much either. Or raise more hard questions than you need to. You should be honing in on no more than one to three main metrics. Use those you know you can keep on performing well on. This probably includes the size of your market and either customer count or revenues. 

e) Get help telling the right story about your startup

Raising money is really based on three things about your startup. I recently interviewed Derrick Fung on the Dealmakers Show, and he said it is all about people, progress and product. What stories can you tell around these factors to really help you stand out? In the beginning you may only be strong in one of these areas. Drill into that. Expand on the others as you march toward new fundraising rounds.

A great story will really hone in on your compelling why. It will resonate with your investors as people. If your team is very technical, it can be hard to see and bring out your own best story. Consider recruiting a pro copywriter to interview you and weave together the best story. 

f) Craft the right pitch deck and presentation for these investors

Getting funded is going to heavily rely on your pitch deck. In most cases, your pitch deck is your key to get into meetings and have real money conversations. Even if you already have great relationships with VC and angel contacts, they need you to deliver a great deck that they can show their partners.

Who your investors are, and the stage you are at may somewhat dictate what depth and type of deck you need too. If you are publicly crowdfunding, you may want to start with a very short and sweet deck to move them onto the next phase of the conversation. If you are presenting to very technical investors, they may expect a little more depth and meat on the bone.

g) Start networking like crazy and build relationships

Success in raising startup capital is still very much about who you know and who knows you. There is a lot of trust required in these deals. You are asking them to bet millions or more on you. As well as their careers and reputations. You are betting on finding an investor who will really help and won’t sabotage this company you are so passionate about. It can take months to reach this level of comfort with each other. Ideally, you want to be out there making connections and nurturing these relationships for 3-12 months before you need to ask for money.

h) Get pro help from a fundraising advisor

You can DIY the whole process. It will take a lot of hustle, grit and trial and error. It can take a lot of your time and significant financial investment to get funded too. Or you can take the short cut and raise more efficiently by hacking the system with the help or a fundraising expert who already knows all the steps you need to make and the investors you should be presenting to.

Heading For The Exit

Once you starting accepting capital from investors in exchange for the equity you are really committing to pursuing an exit. Your shareholders may not all agree on the decisions to take to get you there, which offer or route you should take, and the price and terms.

Yet, you are heading for an IPO or get acquired. It’s never too early to start strategizing your exit and learning everything you can to ensure a great one. If you don’t you could barely walk away with a penny, or be stuck working for someone else in a cubicle for years.

Once you’ve tasted entrepreneurship, this probably isn’t going to be something you can stomach very well anymore. 

Summary 

Know when to raise startup capital, your options for doing it, the steps to a successful round, and get out in front of the exit to make sure it ends well too.

Remember that storytelling plays a key role in fundraising. This is being able to capture the essence of the business in 15 to 20 slides. For a winning deck, 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 is being used by founders around the world to raise millions below.

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