1. Are you ready to raise money for your startup?
Note: this is Part 1 of Fractionalist’s Startup Fundraising Series for Early Stage Companies.
Why and what you give up when you raise funding for your startup
You’re busy building your company. You’ve got a few customers using your product and several more in your pipeline. You’ve gotten your first few checks in from your paying customers. You feel like you have a solid team. You’ve got something interesting that might need a cash infusion to help it scale.
Seeking private capital from angel investors, or even family and friends, brings new considerations for your business.
Control versus investment
Founders sometimes mistakenly think that if they raise money they are immediately giving up control of their company to their investors. That couldn’t be further from the truth.
The tl;dr version is this: Companies are run by their board of directors.
An early board includes the founder(s). As investors come on, they also get board seats depending on the size of the raise and if they led the round. In the simplest terms, the job of the board is to hire, train and fire the CEO. Even if that CEO is a founder. Yes, taking investment means you might take on a board member, but the board member will be one vote on your board and they will not have veto power.
Outside board members can be really helpful as well. When it comes to hiring people outside of your strengths they often can give you advice and intros to people that can help. If something major in your industry happens like one of the big players announces an acquisition or there are regulatory issues, most times those board members will have experience they can bring to the table to help navigate those times.
The other thing to consider is that if you raise a seed round in an industry that looks to be worth multiple billions of dollars, it stands to reason that this round won’t be the last raise you do. That’s fine but just know you’re starting the hamster wheel of always being in fundraising mode and that you need to temper each raise with pragmatic plans on how you’ll deploy that capital and where it will get you.
Raising money from venture capitalists or experienced angels is no joke. You cannot just start spamming people with your pitch and hoping you’ll get in with someone. You need to understand the fundraising game. Get good at it, or at least good enough at it to get to the next level. Finding a trusted advisor or someone who has done this before is really helpful when mapping out your fundraising strategy. We can help too.
Every time you close a round of funding, the learning curve starts over again across the entire company; fundraising, hiring, sales, scaling, engineering and product.
Seven questions to answer before you start fundraising
Do you have product-market fit?
Your early customers are clamoring for your product and not just the 1st degree, “friends and family” connections that started paying for it.
Do you have traction?
This is different from product-market fit. Traction is multiple customers in production, paying you for your software or service. Ideally, you have at least 3+ months of revenue with 30% month over month growth before you talk to investors.
Do you have a business model?
Pricing and packaging will evolve over time.
Do you have a model today that is easy to understand, repeatable, and high margin?
Who are you competing with?
Is the space crowded and heavily funded? How are you differentiating against your competitors?
How much should you raise?
The size of investment you seek will depend on a few factors:
Current rate of growth/traction of your business.
Market opportunity and costs associated with growth. Software companies are far cheaper to scale than hardware or other physical products.
The investment “stage” that you’re at. If you’re at pre-seed, you’re looking at up to $500k. Seed rounds are ranging from $1-$5M. Series A starts at $7M and increases quickly from there.
There is a bit of an art and science to figuring out how much you should raise. Again, always seek advice from those that have been down this road before and know the current terms and don’t hesitate to reach out to us.
How will you efficiently deploy the capital you raise?
Many founders gloss over the use-of-capital slide in their pitch. I wish they wouldn’t.
So you’re going to take on an industry that is worth over $100B and you’re telling me you’re going to hire three engineers and a business development person? Does that even remotely sound credible?
“Use of capital” is an opportunity to show that you really know how you’ll grow your business. Don’t just pick a random amount to raise. Be able to validate how you’ll spend the money and the milestones you’ll meet in the next 16-18 months of runway.
What if you fail at fundraising?
This one is easy. If you fail at fundraising it means you’re not ready. Go back to square one and make sure you have the pieces above in place.
I remember fundraising in the Fall of 2009 for our then 4-month old startup. We had traction, revenue, marquee brands and a solid team. I pitched at least 30 investors that Fall and by the week of Thanksgiving in late November, we got the call that it was a no from the last one. It was too early. We didn’t really know what our product-market fit was. We had been lucky with our initial customer base. I was green when it came to fundraising and I know it showed. We just weren’t ready.
Hat in hand, I returned to the team and asked them what they wanted to do. “Keep going,” they said. And we did. Each check that came in we divvied up with each other to make sure we could all cover our expenses. I went back to the drawing board on the investment pitch and narrative. We hunkered down and went back to square one.
We did exactly one pitch in January of 2010 and it was to the firm that led our Series A. It sounds super easy; just one pitch and you get funded? Try again. I was officially one for thirty-one. But guess what? It only takes one to get the ball rolling.
What’s next?
This is part of the Fractionalist Fundraising Series for Early Stage Founders. We always appreciate feedback on the series and we're always here to help you with your fundraising efforts.
Fractionalist helps early stage companies navigate the challenges new companies inevitably face with a team of experienced CxOs you can leverage at a fraction of the cost.