Startup Capital – So, you’re ready to raise capital for your startup. Are you sure?

I am a serial entrepreneur who has successfully started, managed, and exited from several companies. I am going to share my advice on the fundamentals of raising capital, whether it be for a seed round, a series A, or beyond. In this article, I am going to provide you with a roadmap of my 29 years of experience with this critical step in developing a successful business.

Let me begin by saying that fundraising is a time-consuming and often daunting process. It is rarely quick or simple, but you will learn a lot throughout the process that will help you become a better business owner and manager.
One thing that I have seen change during my time as an entrepreneur is access to capital. Twenty-nine years ago, this was a significantly more challenging step than it is today. There are hundreds and likely thousands of funds and private investors spread around the globe today, but the competition for this capital is stiff. So, being prepared is more important than ever before.

Be prepared for this process – do your homework!

There are many great resources readily available to assist and advise you along the way. One thing to strongly consider is to find an experienced mentor or advisor, even if you have done this before. This can help to avoid pitfalls, save time, and generally make the entire process easier. It will also add credibility to your pitch if you have an advisor on your team, especially one who has a proven track record. The advisor I brought into my recent venture is not only a very seasoned and successful entrepreneur but also experienced in my space, which has been a big help with networking.

Do you have a co-founder for your startup?

This may seem like an unusual question or piece of advice, but it can be a game-changer. My first venture was done solo. I simply did not understand the value of a co-founder at a young age. While there are many very successful solo entrepreneurs, many of them will tell you they have regrets about going it alone. Being a founder and CEO is a lonely job that can easily become overwhelming. Unless the venture you are working on is intended to be a truly small business over its lifetime, you may want to think deeply about a partner.

There are obvious downsides to having multiple founding partners, but if the chemistry is there, go for it! This will make your venture more attractive to investors, provide a balance of skill sets and experience to your management team, and enable valuable collaboration.

Startup Capital – Document Creation

There are several critical pieces of information you will need to create before you begin engaging with potential investors. Do not underestimate the importance of these documents. Most of the content you will be compiling will be used and referred to for many years to come. It will also provide the foundation of your venture. The most likely ones you will need to create are a financial model and/or business plan, a pitch deck, an intro deck, a one-page investment summary, and possibly a term sheet.

The financial model you create will be one of those documents that get carried forward throughout your venture. Put diligent attention and detail into this! It must be detailed enough for your own planning but be easily consolidated into a summary for investors. There are many examples readily available to guide you on this. Make sure the model you choose is suited to your endeavor.

A full-blown business plan can also be an important element for any startup, although I am generally not a huge fan. Thankfully, the investment community today does not always demand one. Nonetheless, I do suggest that if you are working on your first venture, take the time and effort to put one together. It will certainly be an eye-opening, valuable exercise!

Now that you have compiled your financial model and/or your business plan, you will need to develop a pitch deck. There are many examples available to reference as you put yours together. It is highly suggested that you make this very visual and high-level. Take time to create illustrations and important snippets. But, whatever you do, DO NOT create wordy slides. Investors are busy people and will not want a “deep dive” into content on the first pass. Make sure your pitch deck has a logical flow, is descriptive, and clearly conveys the opportunity.

After you have the full pitch deck complete, you may want to create a shortened “intro” or “teaser” version of this deck. Generally, the intro deck will be used for the initial correspondence to potential investors. The intro deck typically excludes deep details and the specific investment “ask”. Based on the decks, you should also create a single-page summary of the key points you want an investor to immediately understand about your venture. This summary should include the investment highlights and capital ask.

A term sheet is another document you may want to consider putting together even prior to serious discussions with investors. These are generally simple, one-page summaries of the investment terms and conditions. A few typical elements of term sheets are investment amounts, valuations, voting rights, and board-of-directors composition. A term sheet is not mandatory and will be provided by the investor if their interest gets to the letter of intent (LOI) stage, but it can be helpful to have one pre-crafted that identifies terms that are important to you. It should help to set the negotiations in your favor and speed the discussions along.

Startup Capital – Investment Sources

At some point soon, if you have not already started, you will want to begin researching potential investment sources. The types of sources will depend largely on the stage and/or size of your funding requirements. If you are at a very early stage of a new venture, this is referred to as the angel or seed round. Suitable investors for this stage will include angel investors, such as individuals, angel groups or venture capital funds that focus on early-stage, pre-revenue companies. The size of seed rounds is usually somewhere in the $50k to $1m range but can go higher depending on the type of opportunity being offered. Make sure you focus on funding sources and types relevant to your venture. It will be a huge time drain if you don’t.

In addition to the seed round examples listed above, other sources include family, friends, and acquaintances. If you’re lucky enough to have relationships with people with money to invest, this could be a very easy way to get your startup funded. My first startup was funded by my mother and without any cumbersome steps. While using friends and relatives for fundraising has an upside, it also has potential pitfalls and should be considered very carefully. There are instances where mixing business and family can harm relationships should the business not succeed or, in some instances, if it’s successful. If you choose this route, I do not recommend you skip any of the steps I have mentioned in this article as they are still highly important. Ultimately, you want any potential investment from your inner circle to have the same legally binding agreements in place as you would with a third-party investor.

If your startup has already gone through its seed stage and you are working on a series A round, congratulations! Many ventures don’t make it this far. The size of a series A investment round will largely depend on the comprehensiveness and nature of the startup’s requirements. A typical range for a series A round is $2m to $10m.

While you’re identifying the type and stage of your investment sources, also make sure they invest in your vertical space. Most venture capitalists (VCs) focus on specific types and stages of companies, such as software, fintech, manufacturing or more specific verticals such as renewable energy, cleantech, etc. Regardless of whether you are doing a seed or series A round, create a list of your potential funding sources. This way you can keep notes about each funding source you have contacted and check off sources that are not interested. This step will help a lot as you may find yourself with a list of a hundred-plus investors, VCs, etc.

So now you’re ready to begin connecting and pitching your opportunity

You may have thought that things would get easier now that your homework is done and content created. Wrong! It’s just beginning. Pitching is usually a very time-consuming effort and can be frustrating. There are several platforms that may be useful for your fundraising, such as LinkedIn, CrunchBase, and AngelList to name a few. LinkedIn should be useful no matter the size or type of your venture. It can be a great way to make warm introductions and connections with your shortlisted sources.

A potential time saver I recommend is creating pre-drafted message templates, especially if you are sending connection invites or unsolicited inquiries. It will also help you to define a uniform, consistent message. In my current fundraising project, I have five or six messages to work from. I simply cut, paste, tweak if necessary, and send. Make certain that your messages are short, professional, and inviting, even if you are attaching a document such as your intro deck or one-page summary.

As you begin contacting troves of investors, funds, etc., you will be in full networking mode. Try your best to get introductions wherever and whenever possible. This will be key to getting serious attention. Keep in mind that investors are inundated with startups daily. I found it very surprising and frustrating how often these people do not reply or acknowledge your reach-out. Don’t be offended; it’s sadly the nature of their industry. An introduction, however, will be quite different and at least generate a round of communication between you and them.

Don’t walk into this stage thinking the first serious conversation will lead to funding. The stars must align for this to happen. You can think of this as a form of speed dating. Often you have competition for those funds ahead of you, your venture simply doesn’t fit an investor’s investment criteria, or the investor is not inspired by your concept. Don’t be offended or alarmed. It’s normal and part of the process. Also, and very importantly, on the occasions you are turned down, always ask for feedback. Many investors will be happy to provide this, and it can be invaluable as you perfect your pitch and content.

Startup Capital – Making the pitch

Make certain you know your pitch inside and out and practice it at every available opportunity. Having a partner or advisor can also be helpful in this regard. My partner and co-founder of my current venture has been a huge help during this process. We have varying backgrounds and different insights, which has led to great collaboration, a faster fundraising time frame, and a significant credibility boost for the venture in general.

Anticipate hard, uncomfortable questions, and be ready for them. Knowing the details of your venture is key, as well as being able to talk to investors in an articulate manner. It’s normal to be a bit nervous when you first present your opportunity, but practice will refine this process. Eventually, you will be able to do it in your sleep!

Startup Capital – Making a deal

Once you have a term sheet in front of you, there are a few things to consider. First, is this investor or fund a good fit? Don’t simply take the first offer, even if the financial terms are acceptable. I learned this the hard way many years ago. I brought in a private equity company to recapitalize one of my companies without fully understanding or thinking deeply about this. Sadly, it was a train wreck from day one. In the end, it was a painful but priceless learning experience.
You will understandably be excited with an offer in front of you, but if you have not already vetted the investor or fund, take a deep breath and a close look at their core values and investment model. I also suggest asking to speak with founders of their existing portfolio companies. If they balk at this request, it’s not a good sign. If you manage to get a few of their portfolio companies on a call, ask deep questions about their experience with the fund. You will find other founders very willing to be candid about their experience.

If the term sheet is acceptable and you’re comfortable with the alignment of the investor, you will need to get your attorney and accountant involved, if you haven’t already. I do suggest having these relationships established early on in your process as they can be part of the advisory element I mentioned previously. Not every attorney or accountant is qualified for what you are getting ready to do. Do not make the mistake of a wrong choice with either as it can cost you dearly. In addition to qualifying their experience in capital raising, mergers and acquisitions, etc., make sure they are an appropriately sized firm. Not every startup needs a large, expensive firm representing it. Your budget will need to accommodate this, and it can be very expensive, depending on the complexity of your venture.

A good legal and accounting team can get your startup off on the right foot and be instrumental in successful operations for many years to come. As mentioned above, make sure you have an adequate budget in your financial model to accommodate these firms. You will likely need them on an ongoing, post-raise basis.

Raising capital is not easy. Take your time, do your homework, be persistent, stay positive, believe in yourself and your venture, and you will achieve your funding goals.