Startup Funding: Crash Course to Raising Funds for Your Startup.
Before taking your brilliant tech startup idea from inception to reality, you need to secure some funding.
This quick guide will teach you everything you need to know about raising money for your startup.
We’ll cover the most common funding sources and provide tips on what to do when seeking investment.
So whether you’re just starting or are ready to take your business to the next level, read on for all the info you need!
What is startup funding, and why do you need it?
Startup funding is a startup company’s money to finance its initial operations. This can include everything from paying for office space and employee salaries to developing the product or service.
Many startups rely on venture capitalists, angels, and other investors to provide this initial funding and loans and government grants. However, there are several ways to get startup funding, and it’s crucial to find the option that’s best for your company.
There are a few key reasons why securing startup funding is so important:
- It allows you actually to start building your business.
- It shows potential investors that you’re serious about your venture and has the ability to execute.
- It helps you grow your company more quickly and achieve profitability sooner.
The first step is to understand the different funding sources available to you.
The most common sources of startup funding:
1. Venture capitalists:
Venture capitalists are individuals or firms that invest in high-risk businesses in exchange for a share of the company’s ownership.
They typically have many experiences with startups and look for companies with high potential returns.
These guys are the big wigs and are considered the holy grail of startup funding. They come with the biggest cheques, networks, and pool of resources to fund, grow, and scale your startup to achieve credibility and visibility. But all of this comes at the cost of ownership, and they often deal in preferred stock or convertible debt as they are rightly taking a high risk by investing in your business.
So, if they align with the vision of the founder and the investor and the terms are agreeable, then this is a recommended path. These investors often invest in follow on rounds if the startups succeed and grow with the first round of capital.
2. Angel investors:
Angels are wealthy individuals who invest their money in early-stage businesses in exchange for equity. They’re often passionate about helping young companies grow and can provide valuable mentorship and advice.
As the name suggests, these may be high net worth and generous individuals or a group of individuals who fund startups in exchange for equity in the early stages.
They are well-connected people who can leverage their network and help you beyond just the money, which as if not more important than the cash. Here is a resource to help you get connected to them
Bootstrapping is the process of funding a startup with your own money, either from personal savings or from family and friends. This can be a slow but effective way to get started, as it doesn’t require giving up any ownership of your company.
Many Startups have Grown organically using money received from customers by selling their products and services.
The government announces various types of schemes for startups to get easier access to capital.
These are generally specific to the development, research, or social sector.
In addition, even private foundations provide grants to socially beneficial startups from time to time, and it may either be in the form of equity or debt.
Grants are financial options that don’t require you to give up equity in your company. They can be a great way to get started if you don’t have the funds to bootstrap your startup on your own
Crowdfunding is a newer way of raising money for a startup. It involves soliciting donations from individual investors or groups of investors through online platforms.
6. Family and friends:
One of the most common sources of startup funding is family and friends. This can be a great option if you have people in your life who believe in your business idea and are willing to invest.
7. Corporate partnerships:
Corporate partnerships are another option for startup funding. This involves partnering with an established company in your industry to help finance your operations.
With the rise of VCs and startups, banks have also jumped on the bandwagon across the country have come up with various types of short- and long-term loan options for startups.
As far as loans go, the most significant advantage is that the founder gets to keep complete ownership and control of the company as long as they are confident of the re-payment terms.
However, Karan Shinghal, a fellow entrepreneur (Co-founder @haazri), tells us that despite the schemes, this form of funding is still in its nascent stages in India and more readily available for startups with a proven track record of profitability or the founders are from well off backgrounds.
9. Accelerators and Incubators:
Accelerators and Incubators are organizations that help startups accelerate their growth or innovate with their product and business model, respectively.
They may provide a small seed fund in exchange for a minority stake in the company. But, more importantly, they open doors to many investors as they bring their network and add a stamp of credibility to your company.
So, this is also a recommended route to follow in your infancy. Here are a few examples.
Each of these sources has its advantages and disadvantages, so it’s essential to do your research and find the best option for your company.
Stages of Funding:
Let’s get a grasp of the different stages of funding:
Keep a thumb rule in mind; the earlier, the better, the more desperate you get, the lesser leverage you have on the negotiating table. So always start looking for funds much before you need them.
This is the stage when you may have just taken the plunge and convinced a friend or two to start the business.
Way before product launch and in the ideation stage the funds required generally come from personal savings, personal credit cards, and family/friends.
These are the funds you may require to conduct market testing, build an MVP (Minimum Viable Product), and explore feasibility. In some cases, funds can be raised via crowdsourcing as well.
This round’s funding amount is generally the lowest amount of capital required to start a business in a particular industry. In the case of tech, it may range from anywhere between Rs.10,000 to 5 Lakhs.
This is the second stage of your startup.
After you build an MVP and get preliminary validation, these are the funds you require to launch the final product (after beta testing) and build traction.
The funding amount may vary from 10 Lakhs to 5 Crores. The types of investors who come in at this stage are early-stage VCs, angel investors, and crowdfunding platforms.
3. Series A:
By the time a startup reaches this stage, it has gained traction, built a critical team, and has a working business model.
Funds are now required to scale the business to reach new markets, further develop the product, and hire senior management.
The investors who ordinarily lead a Series A round are:
- Larger VCs.
- Private equity investors.
- Maybe a group of angels who support the round.
VCs who have come in the seed round often do a follow-up Series A.
4. Series B:
This is simply the round that follows after Series A considering the plans have gone as per plan.
These funds are used to beat competitors and even buy smaller startups. These rounds are much larger and bring your startups onto the map.
Either sizeable VCs alone participate in this round or a group of investors.
5. Series C and beyond:
These are the rounds that lead the startup to become a Unicorn (1 bn valuation) or to an IPO as the startup has captured a sizable market share.
When a startup has reached this stage, it has created a national or international footprint.
It may be acquired by large corporates or receive investments from them in some cases.
These rounds are may also be used to diversify the product line and reach newer markets. If not acquired and successful the startup will do an IPO (which I will not be getting into).
Now that we are familiar with the basics of the funding spectrum of investors and stages of investment, it is imperative to know the pros and cons of funding.
This is crucial to know before you approach investors and close a deal.
The Pros and Cons of Raising Funds for your Startup:
I asked for some advice from Karan (the co-founder of Haazri), who has had first-hand experience in dealing with a VC in a seed round.
So, he gave us some advantages (except the cash) and disadvantages from his dealings with investors. We are focusing on VC funding as that constitutes the majority of startup funding.
1. The Network:
VC’sVC’s constitute a team of highly skilled and experienced individuals who come with a network from diverse backgrounds and industries.
These networks can be leveraged to step up from competitors and get inlets into the market.
These networks can also assist your startup to get connected with other entrepreneurs from the VC’sVC’s portfolio for mutually beneficial partnerships and ancillary services.
2. Strategic Industry Expertise:
When VCs look for startups and vice versa, they are typically aligned to a specific industry.
Many VCs also invest in companies from various industries, but they come with strategic expertise for your industry in both cases. This valuable advice helps startups avoid mistakes when scaling.
3. HR & Recruiting:
Since this is a significant challenge for startups when they are growing and having a skilled team is a crucial part of the recipe, some VCs use their networks to help startups with hiring.
VCs also have an initiative called Entrepreneurs in Residence, which helps the founder find a co-founder/s if the need is in some cases.
When a funding deal is a success, the VCs use their PR connections to announce the agreement, which creates a lot of buzz in the market.
This can open many doors for your startup and get other VCs and investors to start noticing you.
The PR plays a crucial role when the startup hits milestones such as a significant partnership or a million downloads.
1. Interference in Decision making:
During the early stages, VCs might get a board seat or at least voting rights along with the preferred stock due to the high risk they are taking. Therefore, their advice may not seem welcoming at times as it may not be in sync with the founder/s line of thinking and decisions. So, this could sometimes cause delays in making decisions and, therefore, performance.
The best way to deal with such situations is with a cool head and logical data-backed view to the contrary.
Please beware that fundraising is not a walk in the park and will take a significant chunk of your time — both pre-funding and post-funding.
Once the term sheet has been signed, due diligence begins, and all the legal and financial paperwork comes into play. So be sure to manage your time and resources wisely so it doesn’t affect your startup’s performance. Post funding also requires you to dedicate time for investor reports and regular meetings.
When startups raise via VCs, especially in the early stages, they may have to dilute a considerable share of the company.
Be careful not to dilute too much too early as this makes it challenging to raise further rounds and lose control of your company.
This happens if founders get greedy, run after more cash than they need, and let the VCs drive the valuation. So only ask and take what you need to get your business next to the stage.
As I mentioned before, this is not to dissuade or push you to go for a fundraise but to arm you with the knowledge required to make the right decision for your startup.
Now that we have weighed out the significant pros and cons, we have come to the crux of the matter. How do I approach investors, find one suitable for me, and close the deal?
How to Choose the Right Investor!
Research which investors are the best fit for your company and target them accordingly.
When reaching out, be clear about your business plan and what you’re looking for in an investment.
Be prepared to answer any questions they might have about your business. It’s also a good idea to have a solid understanding of the market and your competition.
Remember that not all investors are created equal. Some will be more interested in your company’s long-term potential, while others might be more focused on making a quick return on their investment.
Therefore, it’s essential to find the right investor who shares your vision and is willing to support you along the way.
So there you have it: everything you need to know about startup funding! By understanding the different sources of financing available to you and being prepared when seeking investment, you’ll be well to take your company to the next level.
“Three Cs” of Investment:
1. Confidence — Investors want to feel confident that you have a solid business plan and can execute it.
2. Capacity — Investors need to believe that you can grow your company and achieve profitability.
3. Clarity — It’s essential to be clear about what you’re asking for and offering in return. Investors want to know that they’re making an intelligent investment.
How to Approach Investors?
Once you’ve chosen the funding source that’s best for your business, it’s time to start pitching your idea to potential investors.
It can be a daunting task; here are a few tips to keep in mind when approaching investors:
- Educate yourself — Learn the terms and processes used in the world of VC funding. Here is a resource you can use to brush up on your glossary.
- Make sure you have a clear and concise pitch deck that explains your business and its potential.
- Be prepared to answer questions about your business model, financials, and team.
- Always be respectful and professional when pitching to investors.
- Remember, investors, invest in teams and not just the idea because only the idea will not bring success but an able team that executes it with precision and skill.
- Your company must dedicate either a founder or CFO (ideally someone who is good with financials) to prevent miscommunication since it takes a significant chunk of time.
- Do your research — Know your investor before emailing or calling them. An uninformed entrepreneur reflects a weak impression of the start-up.
- Remain Updated: Firstly, be sure to keep yourself and your team updated on the latest funding news, especially in your sector; this helps you understand the active VCs and angels. Secondly, keep your and the team’s LinkedIn updated as this is the first impression of your team that the investor gets.
- Be Prompt: When you start getting investors’ replies, do not take eons to get back to them. The more prompt you are, the more interest the investors will show.
- Be Lean: I mean by keeping your business model cost-effective with quick turnaround time and low CAC (customer acquisition cost) where and when possible. This helps gain investor faith as it reduces risk.
- Know your Value: Try and get a valuation done for your company so that if and when the conversation arises, you are a step ahead.
- Be personal yet professional: Investors invest in teams, so they would like to get to know you. So be friendly with the investors as that builds trust, but remember to maintain professional boundaries.
Also, these are a few learnings on what NOT to do during a fundraise:
1. Salary: Be careful to be humble when asking for founder salaries, be ready to receive salaries that may be lower than industry standards.
An exorbitant salary number in the financials can lead to a direct rejection by the investors.
2. Be Cautious with Communication:
Investors often offer “constructive” criticism; remember not to take any feedback personally even though it may hurt as you are passionately attached to your start-up.
Reply as professionally as possible with your reply and thank the investor for taking an interest in your company. This displays maturity, and investors appreciate entrepreneurs who can look at their businesses objectively when required.
3. Don’t agree to restrictive terms:
We will elaborate more in the term sheet section, but be sure to get a lawyer for guidance and negotiations. And don’t agree to any terms that restrict founder freedom in decision making or give too much internal power to the invest.
The Pitch Deck!
Now that we have established the points to be kept in mind when approaching investors, it brings us to the most crucial part of your process, the PITCH DECK!
A Pitch Deck is a start-up’s presentation to get an investor interested enough to have a meeting with you or at the very least write back with a positive response.
Here are the 11 points checklist that are the must-haves for a strong startup pitch deck.
The objective of the pitch deck for a start-up in its seed or Series A stage should be to cover the following bases:
The problem you are solving is your product and the market opportunity of your solution. Then the business model, how you plan to bring that model to market, and how you are different from your competition. And lastly and more importantly, your team slide gives a brief background on your team and their roles.
Remember to keep your pitch deck simple, clean, and graphic. Reduce text as much as you can. Here are a few sample pitches decks you can look at for reference. (Airbnb is considered the standard in pitch decks).
Once you’ve put together your pitch deck and business plan, it’s time to start pitching to investors.
This can be a daunting task, but there are a few things you can do to increase your chances of success.
First, make sure you’re familiar with the investor’s portfolio and what kinds of businesses they typically invest in.
Next, tailor your pitch to fit their interests and make sure you have a clear understanding of what they’re looking for.
Finally, be prepared to answer any questions they may have.
Ideally, the person who has communicated with the investor should be pitching the deck or at max two team members.
Just be confident, well-prepped, and be aware of the risks that your start-up may face in the future so that you can answer any questions regarding the same.
Put it all in one place.
Remember, Finding an investor is not different than Sales.
Only in this case are you selling yourself, your idea, and your startup to the investors.
So it’s better to think like a salesperson here and be organized.
Create a list of investors filtered by industry, stage, and size.
Since you have understood the various stages and types of investors, do your research to know who you want to target; ideally, target investors who work in the same sector as your company and invest in your business’s stage.
Mark your ideal to low-priority investors and work your way from the bottom up, so you learn and improve as you go based on their feedback,
any firms or investors you have a personal connection with should be put higher up the list.
P.S. You can do all the above steps in an Excel sheet or a Google Sheet if you are a newbie.
If You want to use professional software to manage your pipeline for investors and fundraising, then here are a few recommendations:
List of CRMs for Startup Fundraising:
Once the list is ready, start cold emailing them(with your pitch deck — explained below) and calling them if you can find a connection.
Start-up and pitch competitions are also great forums to find investors. Keep a lookout and attend networking events organized by co-working spaces and VC annual days.
Try and attend some of your industry events and conferences as well. You never know where you will find your best fit.
Also, remember that fundraising comes at a cost, such as valuation fees, lawyer fees, accounting fees, etc. However, some of these expenses get covered when the fundraising is successful.
To conclude, I would like to leave you with some golden advice.
Don’t create businesses that only impress investors and chase high valuations, as that rarely guarantees success.
Remember that funding is not the final sign of victory but simply a stepping stone that gets you closer to success.
Funding provides your start-up with the required ingredients; you still have to prepare the meal yourself. As a result, entrepreneurs who build great businesses that focus on product and customer satisfaction more often experience success (in the true sense of the word) and last longer.
Remember, good investors recognize well-built business at first sight. As Rancho (from 3 idiots) famously said, pursuing excellence and success will follow.
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