Fundraising Overview

Methods for Raising Capital

As you are growing a business, the need for capital will be an ever-growing critical piece in ensuring your success. There is a natural flow through the stages of funding entrepreneurs can consider along the way.

Bootstrapping

As you are starting out, it is widely advised to initially build your business by your own means for as long as possible. This is done with using the entrepreneur’s personal resources, emphasizing the need to generate revenue early by getting customers to pay, and by operating on a tight budget. If you can make it to success and scale bootstrapping, you keep all ownership and control, and will ultimately have a larger payout. However, most companies fail because of not planning enough ahead and run into a cash flow shortage. So be sure you map out your finances and are prepared for less than ideal scenarios.

Friends & Family

In the early stages of getting your business off the ground, the people who care the most about your business are typically the people who care the most about you — your friends and family. Having these early conversations with the people you’re the most comfortable with can help work out the kinks before approaching professional investors. Money from your personal network can be somewhat easier to get, but can lead to negative feelings if the business fails. Friends and family will give you money out of their care for you and desire to support you — do not take advantage of this.  And be wary not to put your valuation too high at this point, for it will make raise money in subsequent rounds much more difficult. It’s advisable to keep these transactions as professional and well documented as possible.

Crowdfunding

Startups have the option of raising money using online platforms from many individuals in smaller amounts. There are lots of easy to use platforms available with built in marketing for your campaign — like GoFundMe and Indiegogo. There is often an exchange for a range of products in return for a range in dollars. This can be effective in validating there is interest in the product, identifying the market, spreading the word about the startup, and building an initial customer base.

Accelerators

There are thousands of accelerators around the world. These are basically investors with educational programs that go along with them. There is risk in that there are no requirements for entrepreneurial success for the people who run them. Be sure to look at the program’s track record and credibility of the program managers.

Competitions

This is one of the best ways to raise money because there are no expectations to pay it back. Getting involved on University campuses and bringing on students to your team can offer you access to resources like desk space, education, and competitions for cash.

Grants

Grants are another great way to bring in funding that isn’t required to be paid back. The government funds the Small Business Association (SBA) with Small Business Development Centers (SBDCs) across the country. Visit sba.gov/sbdc to find your local center. The center will help orient you to available resources. Grants are typically between $5k and $25k.

Angel Investors

These are accredited wealthy individuals who invest their personal money in exchange for equity in the business. They can be experts in the industry and/or have had some entrepreneurial success. These investments can range widely, anywhere from a couple thousand up to several hundred thousand or even one to two million in some industries, depending on the startup’s need and the Angel’s investment strategy, risk tolerance, and financial situation. The amount invested is a generally calculated by the percentage of equity and the valuation of the startup. A good Angel Investor is a valuable partner for a startup business as these individuals often take on a mentor role with the entrepreneur, offering guidance and introductions to strategic partners. Be wary of individuals posing as though they will invest just to waste your time. Do you research to find out if they are active, or have invested in last year.

Seed Funds

Seed funds are professional firms with outside capital raised, often investing on behalf of Angels. These rounds can range, typically they’re a couple hundred thousand, but can be up to a million or two. These firms constantly are meeting startups. They are focused on getting a return fast so they can continue investing.

Bank Loans

Startup Bank Loans are similar to traditional bank loans, but are designed to evaluate the deal based on potential and collateral instead of financial history. Banks will look for a solid Business Plan and Revenue Model, assets to offer as collateral, and the Entrepreneur’s credit score.

Venture Capital

When the company has everything dialed in and is ready scale operations, it will likely find the need for more money.  At this stage it’s generally a million and up — raising Venture Capital from an Institutional Investment Firm. VC Firms use a team of Fund Managers to select and conduct due diligence to add startups to the firm’s investment profile. VC Firms need profits to be big, and often provide support with financing, technological expertise, and managerial experience. The invested capital is made in exchange for equity from the startup, and often a seat on the startup’s Board of Directors. These firms are often flooded with startup interest, so warm intro’s are best.

Initial Public Offering (IPO)

An IPO, or ‘going public’, is when ownership of the startup is offered on the open market on a stock exchange and sold to the public in the form of shares. This requires regulatory compliance and financial reporting requirements, however it can supply the company with a large amount of capital, allow the company to offer stock options to employees, and gain the company notoriety and credibility with the public.

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If you are here at PitchDeckHQ, ready to build your pitch deck — probably your first one — you’re likely interested in raising Seed Capital from an Angel Investor or an institutional seed fund.  Or would like to in the near future.  The content of this course can be applied from the earliest stages all the way to raising Venture Capital.  Expectations on what is included will be very different, but the general flow and content outline applies to most.