Last Updated on June 7, 2023
You need money to keep the lights on, the staff happy, and the momentum moving, no matter where you are in the startup life. Raising funds may not have been your first priority when you started your business, but your ability to do it will influence how far it can go.
Understanding the various requirements at each level of funding will give you the confidence to approach investors with a clear picture of what you both stand to gain from the transaction.
Developing tactics to attract cash and approaching angel investors, venture capitalists, making presentations to promote your firm, and impressing some key individuals to join your organization as an investor would likely consume the majority of your time, energy, and efforts. You’ll spend a lot of time thinking about a strategy and continuously tweaking your business ideas in the hopes of getting some funding.
The Steps to Raising Funds
Step 1: Do the Math
After opting to fundraise, the first step is to know your numbers inside and out. You must determine your cash-burn rate, capital structure, and capitalization table in particular.
The amount of money you spend each month to keep your business functioning is known as your cash-burn rate. This number will assist you in managing your startup finances and will effectively tell you how long you have till you run out of cash.
In terms of debt and equity, the capital structure shows you to who you owe what. In the event of a liquidation, purchase, or IPO, the order in which each of those stakeholders is paid back is also important (Initial Public Offering).
Due to the fact that debt must be paid off before equity, a debt-heavy startup financing structure is less appealing to investors. A capitalization table is needed to see how your company’s stock has been allocated.
Step 2: Know Your Fundraising Options
After you’ve established your cash burn rate, capital structure, and cap table, you should have a good idea of how much you should aim for when fundraising, and you can define your precise startup funding targets.
Many entrepreneurs assume that when it comes to raising capital, there are only three options: savings or personal credit (Bootstrapping), investments from friends and family, or bank loans. However, these will only take you so far.
To obtain approval for a bank loan, for example, you must have the required collateral, which varies by bank. Even if your loan application is approved, the hefty collateral requirements can impose a lot of stress on you. It can also stifle your startup’s growth because you’re more concerned with keeping up with repayments than with reinvesting earnings.
As a result, it’s critical to become familiar with the many funding options available to you. VCs, Angel Investors, Angel Syndicates, Family Offices, and Crowdfunding are all options. The latter (crowdfunding) is particularly intriguing because it circumvents traditional lending institutions and allows accredited and non-accredited investors to invest in companies.
Startups are also eligible for incentives from many towns, states, and companies. This leads me to my last funding option: accelerators and incubators. These resources offer not just a monetary investment but also coaching and mentorship to help you turn your idea into a viable business.
Different types of investors are active at different stages of the startup funding process and each of them has
Read: What is Asset Allocation and How to Apply It
Step 3: Get Your Foot In The Door
One thing, though, will never alter. People who have money are constantly looking for new ways to spend it. And, fortunately for you, they frequently opt to invest in companies that have a high return on investment potential (Return on investment).
Unfortunately, there is one thing that will never change. It’s not so much about what you know as it is about who you know. When you know someone or have someone introduce you to an investor, it’s a lot easier to get in touch with them.
Most early-stage investors won’t look at you unless the deal was introduced to them by someone they know and trust. As a result, it should come as no surprise that your personal relationships are the most precious currency you possess, and you should cultivate and expand your network as much as possible.
It’s simpler than ever to find the personal details of almost everyone you want to communicate to thanks to social media, email, and prospecting tools.
As a result, personal information has become more precious than oil. It’s more about figuring out who you need to contact and how to contact them. When compared to a cold introduction, a warm introduction will always provide you with a better chance of pitching.
Step 4: Find Expertise, Not Just Money
Three-quarters of startup owners believe that their failure was due to a lack of skills. When you’re looking for investment, you’re compelled to think carefully about every area of your organization. You must analyze the fundamentals to ensure that they are sound.
You’ll have recognized your strengths and limitations after you know where you stand in terms of concepts, marketing, finances, processes, and execution. You can begin your search for “Smart Money.”
A wise money investor is someone who can help you strengthen your weakest connections using their experience. Bringing on a seasoned advisor is likely more significant than a money injection. You can enlist their support in improving and developing your product by utilizing their broader commercial skills.
Step 5: Know That the Odds Are Slim
It takes trust to persuade investors to dig into their wallets. They’re just as interested in you and your staff as they are in your company. However, the number of investments that yield positive returns on investment is limited. According to research, 21.5% of startups fail in their first year, 30% in their second year, 50% in their fifth year, and 70% in their tenth year.
As a result, it’s even more critical that you do everything you can to put your startup in a strong position. To get warm introductions to prominent leaders in your field, you’ll need to tap into your network. However, before you go out looking for investors, you must first construct a funding blueprint.
Step 6: Create Your Funding Roadmap and Stick to It
You’re ready to create a strategic roadmap for your startup’s current stage to present to investors. This process will become a major focus for weeks or months as you gather funds. Just like in marketing, sales, and product development, schedules and benchmarks will guide you. Choose one co-founder or CEO to lead the fundraising, allowing the team to focus on growing the company.
Startups typically go through several investment rounds. The first, the seed round, may follow a pre-seed round involving bootstrapping and investments from family and friends.
At the seed stage, you’ll likely approach Angel Investors and early-stage Venture Capitalists. Your startup is probably pre-revenue now, so communicating your mission, story, and showcasing your team are crucial.
After the seed round, some entrepreneurs opt for an early-stage round, also known as an Angel Investment. Your business, still not generating enough revenue to cover expenses or growth, needs more funds. You’ll aim to reach your financial goal in six to eight months, as you’re raising more than in the previous round.
However, many companies skip this stage, heading straight to Series A. By this round, you should have a proven business model and have validated your main premise. Investors want a working product, high growth potential, a growing customer base, confirmation of achieved milestones, and some profitability. Your fundraising goal now ranges from $2 million to $5 million, or more.
Summary
Make the fundraising process as efficient and organized as possible when you begin your journey. Have data and figures on hand to demonstrate your company’s ROI potential. Create a roadmap to show prospective investors how their money will be put to good use, with defined milestones along the way.
Finally, seek out the investors who are most suited to your company’s demands – always keep an eye out for smart money. Remember that, despite the odds, perseverance is the key to success. When it comes to finding and engaging with investors, be proactive.
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