The Hidden Costs Of Startup Fundraising: How To Budget For Success

Estimating the hidden costs of startup fundraising is a crucial first step before you start reaching out to investors. Most founders and senior executives working out the nuances of bringing in investors tend to focus on key aspects. These include possible dilution, interest, giving up equity, and more.

You may also be concerned about giving up board seats and voting rights or negotiating convertible notes and SAFEs. But, side by side, you need to think about the costs you’ll incur to get money in the bank. Before pitching to investors, you’ll estimate the final amount at the company’s disposal.

Regardless of the funding source you tap, you’ll have to cover the hidden costs. Understanding these additional costs is always advisable so you can make informed decisions about the best strategies to adopt. Read ahead to understand how they work.

Hidden Costs of Startup Fundraising–Who Pays Them

Before reaching out to investors and creating a pitch deck, you’ll estimate the company’s funding needs. The amount you need to raise depends on how you intend to spend the capital. For instance, research and development, product upgrades, tools and machinery, or high-grade talent.

Also, factor in the fees you’ll pay to get money in the bank. For starters, account for attorney fees, the fundraising consultant fees, broker-dealer fees, legal fees, and due diligence costs. You may also pay the fundraising professional an upfront or monthly retainer fee to secure their assistance.

Other fees can include legal costs to ensure compliance with applicable regulations, administrative costs, and filing fees. Expect the legal costs to consume a big chunk of cash since you’ll also cover the charges for the investors.

If its initiatives are successful, the company raising capital typically covers the costs. However, if the deal fails, the investor must cover the expenses. You’ll iron out these details when negotiating with the investor to avoid the possibility of a dispute.

Setting a cap on the maximum fees is also advisable so you don’t lose a large portion of the money. Startups in their early stages may not be stable enough to carry the expense. If this is you, evaluate the different sources of capital before making a choice.

Considering your expected ROI, carrying the costs and paying for the capital in interest and/or equity has to make sense.

Hiring a Fundraising Consultant–Does it Make Sense?

Founders often ask the question–is hiring a professional fundraising consultant a practical choice? The hesitation is understandable, considering their fees. Typically, professional consultants charge a success fee ranging from 3% to 5% of the total capital they help you raise.

This fee depends on the professional’s expertise, years of experience, and the funding round size. Other factors also come into play, such as the vertical where you work, company size, and product category. That’s because they influence the complexities and details the expert must manage.

However, the fee is payable only if the capital-raising initiative is successful. Also, expect to pay a retainer or fixed monthly fee for ongoing tasks the consultant performs. These tasks include developing funding strategies and building your pitch deck.

Many founders partnering with an angel investor may prefer to rely on their assistance. Angels have a robust network of other investors and are willing to invest time, resources, and expertise in helping them. This assistance extends to further funding rounds, but they may not have a specialized team.

However, retaining the services of a dedicated professional is always a better choice. They will work closely with your founding team to understand how the company works and its funding needs. You can also expect a customized pitch deck highlighting the best assets that make your company viable.

Founders Fundraising Themselves is Never Advisable

Don’t make the mistake of thinking you can handle the fundraising on your own. For starters, not all founders have the expertise to convince investors they are worth backing. Further, you’ll invest man hours and divert your focus from the company’s growth.

Involving your founding team isn’t a great idea either. Considering that funding processes could take months, the lack of focus could spell disaster for the company’s momentum. That’s something you don’t want to risk.

Experts estimate that founders typically lose over 30% of their growth momentum over six months. When you’re ready to connect with interested investors, your company’s valuation could have taken a significant hit. You also risk losing some of the core talent.

Hiring a professional consultant can more than cover the hidden costs of startup fundraising since they have extensive experience. Further, they’ve built a robust network of contacts across the industry, and strategic partnerships can help lower costs.

Top consultants will leverage their relationships and connections to find the best investment deals with favorable terms and conditions. At the end of the funding round, you’ll not only have capital in the bank but also a stable company.

You’ll maintain valuation since your focus will remain on its operations. The capital you’ve raised can be put to good use to bring you the maximum return on investment. This is why investing in a top consultant is always a win from the long-term perspective.

Fundraising Consultant vs. Broker-Dealer

In the US, founders can retain the services of a fundraising consultant or a broker-dealer. Both professionals provide assistance; however, consultants offer tactical guidance and support through the capital-raising process. They are not directly involved in managing the transactions.

Consultants may assist you with creating the pitch deck, building a list of targeted investors, and negotiating terms. Their services are typically payable by the hour. Broker-dealers offer a broader scope of services, acting as intermediaries between the founder and investor.

Unlike consultants, broker-dealers register with FINRA and work under SEC regulations. Considering the kind of services they perform, consultants don’t need to register.

As for compensation, broker-dealers may have different packages, such as:

• A pre-determined percentage of the total capital you raise. The higher the capital amount, the higher the fee you’ll pay. Consider negotiating for economical fees if you’re raising an exceptionally large funding round.
• Alternatively, companies can hire broker-dealer services on a fixed fee basis, paid out at regular intervals. This charge is payable regardless of whether you’re actively raising funding or are between rounds. Experts will tell you that the right time to start planning a funding round is after the last successful fundraise.
• Expect to reimburse broker-dealers for expenses they incur during the funding round. For instance, traveling to meet investors or creating promotional materials. Discuss these charges when hiring their services to ensure complete transparency. Setting limits is also advisable.
• Some broker-dealers may negotiate for a bonus you’ll pay at the end of the successful funding round. This is like an extra reward for the exceptional efforts they dedicate toward your company.

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.

Breakdown of the Hidden Costs of Startup Fundraising–What to Expect

Estimating the possible costs of raising capital helps you prepare for them. On average, expect to pay anywhere from $50K to $300K, though you can economize with an extensive network. Using personal connections, digital tools, and aggressive negotiation can help lower costs.

As mentioned in the foregoing sections, you’ll plan for the fee payable to the fundraising consultant or broker-dealer. Aside from these fundamental costs, you’ll estimate legal fees, due diligence fees, and other overheads. Also, work out who will be responsible for paying the charges.

Legal Costs

Legal assistance can be expensive, and the charges are part of the expenses that most founders tend to overlook. Startups should always have access to a top-notch legal firm to assist them with staying compliant with typical regulations. You’ll also need their services when raising funding.

• If you’ve retained the services of a legal team, you’ll cover their fee on a regular schedule. This is essentially a retainer fee ensuring access to their assistance when you need it. The cost is also calculated in anticipation of the services you might need in the future.
• Companies that don’t need regular services can choose to pay the legal team on an hourly basis. The charges will depend on the firm’s expertise, the type of services it offers, and its location.
• Some legal firms have fixed charges for specific tasks, such as drawing up contracts or term sheets. This approach takes away the guesswork, so you know exactly what to expect.
• In addition to the regular legal fees you’ll pay, factor in the regulatory fees you’ll pay for official filings. For instance, when you take the company to IPO.
• Legal fees can depend on the deal’s complexity–for instance, if the transaction involves multiple investors.

Legal costs vary according to the funding round and the capital amount raised. Remember that the company covers any legal costs investors incur. Here’s a quick estimate of the charges to expect.

• Pre-seed round: ~$10K
• Seed round: ~$15K for one party to the deal.
• Series A round: ~$40K, but can go up to $75K for one party to the deal.
• Series C round and beyond: from $250K to $1M.

An essential aspect of the fundraising process is knowing how to navigate the due diligence process. Check out this video, where I explain how it’s done. It will also help you understand how to estimate the costs.

Due Diligence Costs

Fundraising involves meticulous due diligence, as investors must learn everything about the founder and company. They want assurance that the investment is sound and will bring good returns. Due diligence is part of the hidden costs of startup fundraising that you should plan for.

That’s because the company carries this cost if the investment deal is successful. Due diligence covers financial audits, company performance, team, and founder background. When calculating the final money you’ll have for achieving the company’s objectives, deduct this cost and focus on the net.

Add the fee paid to third party service providers such as industry experts, market analysts, and risk analysts. Investors will also likely hire legal teams to assess compliance risks, IP ownership, and potential liabilities. Legal will also examine contracts and agreements the company may have.

Be open to investing in the best teams to conduct due diligence to reassure investors. It indicates your commitment to building long-term relationships and potential for further funding rounds. Building trust and transparency goes a long way in the business ecosystem.

Overheads

Several other hidden costs of startup fundraising may come up that you haven’t anticipated. Here’s a quick look at them:

• Digital age founders rely on secure data rooms to share sensitive and confidential information. Using data rooms allows you to restrict access to the people to whom you want to send the data. It will also help you protect business secrets from reaching competitors.
• Several digital tools are now available to help you not only create compelling pitch decks but also present them. Leverage the best options like Skype, Canva, Attach, and Prezi. Don’t forget to bring the pitch saved on USBs to hand out to interested parties.
• Although pitching the deck remotely via Zoom conferencing is doable, in-person meetings tend to have a bigger impact. Keep in mind that investors invest in founders and how to present the pitch with the right body language works well. Factor in travel expenses to meet investors and the costs of giving product demos to display how the MVP works. Think, air tickets, hotel room fares, and entertaining investors with dinners and drinks.
• Even if you’re organizing local meetings, add up the costs of traveling to meeting sites, gas, parking, food, and more.
• Plan to attend industry trade fairs and roadshows, where you can interact with potential investors and partners. Account for entrance tickets, which can be expensive, as well as travel and accommodations.

Before We Sign Out!!

Capital is, undoubtedly the lifeblood of a company and you’ll need it for long-term scalability. Before you start strategizing how to approach investors, work out exactly how much you need to meet the next milestones. Side-by-side, factor in the hidden costs of startup fundraising.

Calculate exactly how much the funding round will cost you and weigh the different sources before making the final choice. Hiring an expert consultant or broker-dealer is also preferable since they will help you economize and derive the maximum value from your efforts.

Considering the multiple benefits of the assistance they can provide, paying their fee is well worth the costs.

You may find our free library of business templates interesting as well. There, you will find every template you need when building and scaling your business completely for free. See it here.