How to raise capital for a startup? What principles should you follow before, during and after this process? How to leverage the experience of other founders to this process with the least possible time and energy?
The current article is to answer the above questions and more. It results from studying the experience of several entrepreneurs and venture capitalists in attracting and injecting capital.
Different Approaches in the Startup Capital Raising Process
The founders usually have one of the following two approaches, depending on the startup development phase:
Taking Charge of the Whole Process
Some founders do and enjoy the following:
- The process of raising startup capital and its prerequisites
- Networking with key characters and companies
- Preparation of financial model and growth
- Trying to meet and present the plan to different investors
- Phone calls, emails, meetings, etc.
Outsourcing a Part of Process
Other founders hate the prerequisites and elements of the startup capital raising process. They prefer to outsource this process in exchange for a percentage of the capital raised or, in some cases, a portion of the startup’s stock to another expert team. They prefer to spend their time managing a startup.
Usually, the founders that have gone through the early stages of development choose the second approach. This preference is rooted in the difficulty of attracting large amounts of capital for these startups. Furthermore, the founders prefer to devote time to startup management.
Reading this article is recommended to the founders who take the first approach.
How to Raise Capital for a Startup? Suggested Steps for Capital Raising
Begin the startup fundraising process before the Runway cell displays the number 6 (month) in the startup financial forecast file. However, depending on the amount of capital required, the general state of venture capital, and each startup’s conditions, this process may take a short time (for example, three months) or a long time (for example, one year).
Accept from the beginning that you are going to hear “no” from venture capitalists. I suggest you read this article and remember the number 173.
Mentally prepare the team for this time-consuming and challenging process.
Define the Exact Purpose of the Startup Fundraising Process.
Do you want to make the first version of the product? Conquer another market? Develop the current product? Gain more market share in the current market? Move your office to a better location? Speak about the success of your startup at entrepreneurship and startup events?
Set a Time Frame to Achieve the Above Goal.
Specify the actions to be taken during this period and at weekly, monthly and seasonal intervals. In addition, specify the resources to be allocated.
Before each month. Update the list of actions and resources needed (financial, mental, etc.) to achieve the goal. Schedules and monthly lists will not be accurate, but they will give you a good understanding.
Plans Are Worthless, But Planning Is Everything
Dwight Eisenhower
Provide/Update the Basic Information Needed to Provide the Investor.
Venture capitalists care a little about the founders’ ardent passion for changing the world and infinitely about startup numbers and metrics.
Prepare/Update the Startup Financial Forecast File (for the Next 3 or 5 Years).
Translate all the resources required for the startup by month and in the language of numbers. In other words, estimate the cost of providing these resources.
Startup expenses can range from current employees’ salaries to probable new staff, servers, paper, dishwashing liquid!!, office rent and recharge, digital and offline marketing campaigns, legal advice, attending the El Campo exhibition, etc.
Include revenue forecast in this file as well. Also, calculate and analyze critical financial metrics of startups and make decisions based on them.
As the startup gets started, dates will help increase the accuracy of your financial forecasts.Make a prediction for the three possible scenarios (optimistic, average, and pessimistic) if the startup history is not significant or the historical startup data is unreliable for some reason.
Don’t forget to analyze the sensitivity of critical variables and the startup’s essential and specific financial ratios. Go beyond profit margins, customer acquisition costs, customer lifetime value, and, to put it better, stereotyped financial ratios. Measure and monitor (and even define!) ratios that reflect how the key elements of your startup’s success are performing.
Make a List of Venture Capitalists (Companies/Venture capital funds).
You can get information about this list in any way you can.
Has the venture capitalist already invested in your startup? What startups does it have in its portfolio? Can you talk to the founders of these startups? Which member of the fund/company should you refer to? Does the decision-making process in this fund/company have a specific framework? Is the investment committee’s decision based on a consensus, or is the final decision based on personal opinions?
Based on your research results, categorize the investors who seem suitable for investing in your startup into three groups.
1: Expert and savvy investors that you are likely to partner with.
2: Investors who are not as skilled as the first group but will undoubtedly have added value.
3: This group of investors does not create added value, but they are honourable and respected people that you can refer to.
Before meeting with investors, your judgments are based on what you hear and read. Thus, you may find out that you need to move some investors to another group after a face-to-face meeting. For example, you may conclude that your dream investor belongs to the second group or that an investor in the third group is actually an expert investor.
We can say that the best investors in a startup are people who, in addition to the knowledge and successful experience of venture capital, have entrepreneurial experience in the field of startup activity or similar areas.
Add more Columns
Now add two more columns to the file you have already created which consists of adventure capitalist names and groupings. The new column headings are “Investment Scope” and “Invested Startups”.
After completing this file, meet the people who can introduce you to the desired investor. But remember to start with the second group. By starting from here, you will get acquainted with the common questions of investors. In addition, you will find problems with your presentation file and arguments. This way, you can use each investor’s most minor feedback and questions to improve the presentation to future investors.
This is also a positive point if any of these investors have expressed interest in investing in your startup. In other words, you can raise this issue when you meet your dream investors and create competition among investors.
After ending with the second group, start the same process with the first group.
If your startup has passed its infancy and needs huge capital, it may be possible to raise startup capital with two or more investors.
If the capital you need is more than the total capital provided by interested investors in the first and second groups, refer to the third group. It is also clear that if someone in these two groups did not participate with you, you should refer to the third group
Think deeply!
After going through the previous steps, review and record your experiences and insights to refer to in the next steps of raising a startup.
- How much time did you spend on this process?
- What mistakes did you do that makes this process take longer?
- How many venture capitalists did you refer to?
- What did you learn about each of these investors?
- The reason for rejection by any of the investors
- What were the common questions of investors?
- What was wrong with the submission file and other submitted documents?
- In the next step of attracting startup capital, what points will you observe?
Prepare Yourself to Hear No!!!
Venture capitalists typically ignore 80 to 90 per cent of their offerings. The reason for saying no and ignoring is not necessarily rooted in the value proposition, market size, competitive environment, potential exit options, or the startup team. Sometimes “no” is rooted in the nature and strategy of the company/investment fund. The investor may have used all of its 1-year investment capacity. It is also possible that the scope of the startup or its development phase is not in line with the fund’s investment strategies. Or, for example, they are through negotiating with another startup, and so on.
I suggest you read this article by Brian Chesky (co-founder and CEO of Airbnb) regarding emails from five investors in Silicon with the subject “No”. Airbnb was valued at $ 1.5 million at that time, and the startup is now valued at more than $ 31 billion!)
At the end of the article, we will discuss other ways to raise capital for a startup (in addition to venture capitalists):
Other Ways to Raise Capital for a Startup
The Personal Wealth of the Founders and then the Startup’s Income
In this method, which is usually used in the very early stages, the founders provide the required financial resources from their own capital. Of course, as a startup enters new stages of development and scale, personal money will not be enough. Thus, if the founder cannot raise the capital from the gained profit, he should consider other financing options.
Financing Startups through Bank Loans
Being a newcomer startup founder, risks ahead, the challenge of providing collateral, etc makes it difficult for startups to obtain bank loans. Even if the founder receives a loan, nobody can ensure the startup income is enough for repaying the loan’s principal and interest at identified maturities.
Of course, this financing will also have benefits if possible. For example, unlike venture capitalist financing, the ownership of all the startup shares belongs to the founders. The bank has no involvement in startup management. If successful, the startup will pay off its debt at a meagre cost and retain 100% of its stock.
Financing a Startup through Close Relatives
Another option for financing a startup is to raise capital from people willing to provide such money simply because of the personal relationships and interest in the founders’ success.
Even if you can provide the money you need through this method, you have to change your strategy later.
