Updated: Apr 15
Taking you from idea to acquisition.
In the article below, we've provided an overview of the startup journey of raising capital. We have also created a free infographic to make the information easily digestible.
Good news: all you need to embark on your startup journey is an idea, or IP that you’d like to commercialize, to solve a problem. And fall in love with that problem.
Additionally, we recommend you come into the process with an entrepreneurial mindset. What does this entail? According to Hayden Blackburn, Executive Director at TechFW, the entrepreneurial mindset is made up of the following components:
Maturity - Ensure that your mental and emotional states are in a good place
Lifetime learner - Maintain a limitless but guided thirst for knowledge
A willingness to validate - If anything feels like an assumption…it is. With this comes humility - a chance that you could be wrong.
Big picture thinker - A commitment to set aside dedicated time daily to get out of the weeds.
Don’t go alone - Build community who you trust to poke holes and find blind spots
Big listener - Listen to potential customers, current customers, former customers, staff, partners… everyone.
Measure what matters - Know your key performance indicators (KPIs) and don’t get lost in everything else.
Just do it - Remember the moment you first took action and self-identified as an entrepreneur? Good. Now, repeat that every day.
Forward-thinking - Plan to scale. capacity-building can reap big rewards when you do it before it is even needed
Delegate effectively - Hand it to the people smarter than you
Eliminate Silos - They create in-fighting and deter cross-departmental work
Become an idea machine - Flex this muscle on the regular
Care about self-care - Build a self-care plan before you start your entrepreneurial journey
Don’t panic if you don’t possess some of these characteristics. Start with a new one and start building them over time into your daily and weekly habits.
Ok so you have your idea and your mindset, but how will you fuel your idea into reality? Well, get ready, because you as a founder will need to put in a lot of sweat equity and you’ll need to get really adept at bootstrapping. It is around this time that you’ll decide if you want a co-founder and start building a team. It would also behoove you to find an entrepreneur support organization, like an accelerator.
Join an Accelerator
Non-Seed Accelerators have a competitive application process, have mandatory attendance and include a culminating event at the end of the program. Pre-accelerator participants are accepted into the 3-6 month program in a cohort that is very similar to seed accelerators.
Make sure to choose your non-seed accelerator wisely, as this is where you will formulate and test your business model, decide if there’s a market for your business and put a team together.
Seed accelerators have a highly-competitive application process and will invest equity capital in selected companies. Accelerator programs are typically short-term, ranging from 3-6 months. They accept companies in cohorts and provide learning opportunities and intense mentoring to each company, with a culminating graduation event at the end of the program where companies are able to pitch their concept or product in front of investors and other key stakeholders. Space is usually provided to companies for the duration of the program, although some seed accelerators run cohorts virtually with required attendance at educational or networking events.
Viable Business Model? Great! Now we can talk funding rounds.
The promise of big, easy and fast money to build business ideas has inspired countless entrepreneurs to throw their hats in the ring to try and make their dreams a reality. Funding rounds are widely known, but what isn’t known is the pits that you can fall into along the process. In this article, we hope to explain funding rounds as well as shed light on these potential pitfalls.
What is a Funding Round?
Funding for startups is not ‘one-and-done’. In fact, the number of times startups are going back to the market to raise more capital has been growing. Each of these capital raises is known as a ‘funding round’.
Each round is designed to give entrepreneurs and their businesses enough capital to get to the next key milestone or stage. This ‘runway’ between rounds can be as short as 12 months or as long as 6 months.
At each round, founders are looking to trade equity in their company for capital they can use to level up. Convertible notes are also often used in earlier series of fundraising when investors face more risk or in the event founders need a bridge round to extend their existing runway to get to the next financing round if there is not enough traction to do an equity round.
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How Do Funding Rounds Work?
The process of raising funding in each round typically includes the following steps. There may be exceptions if startups receive unsolicited inbound offers, or if an auction-type situation is established. Many entrepreneurs find it beneficial to recruit the help of investment bankers and fundraising consultants to help them in this process.
Steps involved in fundraising rounds:
Gather your data
Create a winning pitch deck and hone presentation
Attend investor meetings and pitch
Field term sheets and offers
Survive due diligence
Close the round with wire transfers and executing the paperwork
One skill that entrepreneurs must master if they want to succeed is this: storytelling. For the most part, investors are not investing in your past or your present. They are investing in your future… your vision and your confidence in it. For this reason, having a pitch deck that conveys where you are coming from and where you are heading with your business is critical.
Non-dilutive funding refers to any capital a business owner receives that doesn’t require them to give up equity or ownership. In other words, any chance you have to secure this type of funding, take it! You should seek to exhaust all possibilities of non-dilutive funding before giving away a piece of your company.
Contributions from donors, tax credit programs, vouchers, grants, competitions, and even family constitute forms of non-dilutive capital. Non-dilutive funding is often considered most helpful during the establishment of a company, yet businesses of all sizes rely on it at different stages of growth. Some grants, especially in biotech, are sizable and given further down the road after FDA approval or something of the like.
One example of a common startup grant is the SBIR (Small Business Innovation Research) grant. Each year, 12 federal agencies set aside a minimum of $3.2 billion for SBIR grants to fund research and development (R&D) to support their missions. The program provides grants ranging from $50,000 to $750,000 for up to two years.
Another type of startup grant is the STTR (Small Business Technology Transfer) grant. STTR grants are awarded to small businesses conducting R&D in partnership with a nonprofit research institution such as a university. STTR grants are awarded by five federal agencies: the Department of Defense (DOD), Department of Education (ED), Department of Health and Human Services (HHS), National Aeronautics and Space Administration (NASA), and National Science Foundation (NSF).
In non-dilutive funding, even though the founder doesn’t relinquish any shares, it isn’t exactly free money with no strings attached. Similar to how some loans accrue interest, specific grants can incur additional restrictions, oversight or other organizational costs.
Pre-seed is the first real stage of capitalization for a startup. It is often referred to as the ‘friends and family’ round. It will also include an initial investment from you as the founder, often referred to as your ‘skin in the game.’
Crowdfunding campaigns are frequently tapped into at this stage. They are a way for small businesses or startups to raise money in exchange for equity, rewards, debt, or sometimes, nothing at all. Business crowdfunding can provide you with fast access to cash, but it requires a strong promotional strategy, increased transparency and the possibility of giving up a piece of your business.
Crowdfunding your next business venture can be a fast and relatively easy way to raise money. However, you should know which type of crowdfunding is best for your business and what it requires.
Here are the most common types of business crowdfunding:
Equity crowdfunding: The most traditional type of funding in this list is equity crowdfunding. You sell a piece of your business to an investor or groups of investors and they provide you with the funding (capital) to move your business forward.
Rewards crowdfunding: This is likely the most well-known type of crowdfunding. Made popular by sites like Kickstarter, funders are offered products, services, or other gifts in exchange for a set donation amount. For example, if I'm trying to fund my dog walking business, I might offer one hour of puppy snuggles to anyone who donates $50. For those donating $100, I might offer one hour of puppy snuggles plus a free grooming session.
Here are 2 examples of great rewards-based crowdfunding platforms:
Kickstarter helps artists, musicians, filmmakers, designers, and other creators connect with the resources to bring their ideas to life. Since their launch in 2009, the company has helped 15 million people pledge $3.7 billion to successfully fund more than 143,000 projects. Funding is all or nothing, so you must meet the goal you set within the allotted time or everyone gets their money back. Price: It’s free to create a project on Kickstarter, but if it’s successfully funded, Kickstarter applies a 5% fee to collected funds. There will also be processing fees between 3-5%.
Indiegogo offers both live crowdfunding campaigns and a marketplace for innovative products. It’s helped entrepreneurs raise over 1 billion dollars for more than 650,000 projects. Acquire starter capital and find out quickly whether your idea has legs with Indiegogo’s “global network of early adopters.” And with this platform, you don’t have to stop raising money at a specific time. There are no fundraising targets or deadlines. Plus, you can apply equity, offer securities, revenue sharing, and even cryptocurrency sales.
Here are 2 examples of great equity-based crowdfunding platforms:
Wefunder allows you to browse investments and participate for as low as $100. It also allows you to become a part of an investment club and follow lead investors with domain experience into various deals. It charges 4%, only if your fundraiser is successful and a $195 fee when you want to enable fundraising. They also provide investment contract templates and help you draft Form C. If you’d like to raise between $20,000 to $5 million with WeFunder, you’ll need to have credibility, meaning the endorsement of an investment club or an experienced investor who has agreed to your terms. You’ll also need a prototype and traction.
Finally, WeFunder has a program where you can earn money by referring companies to their platform. If they successfully raise funds, you’ll get a cut. You will have to do some hand-holding with these companies though. You have to sign them up and make sure they go through the entire process.
This platform lets you invest in both Regulation A+ offerings and Crowdfunding offerings. Entrepreneurs can also do a test the waters period to gauge the public’s interest in their offering.
For those entrepreneurs raising under Regulation D, the “SeedInvest Selections Fund is currently investing $200,000 alongside each company that successfully raises capital on SeedInvest1 under Regulation D.” They are aiming to invest in 50 companies in the next 2 years.
Fundraising duration: 60 days minimum
The costs include a 5% – 7.5% placement fee; charged on the total amount raised on SeedInvest in the round, paid only upon the successful completion of your offering, 5% warrant coverage or equity; based on the total amount raised on SeedInvest in the round and up to $0 – $4,000 in due diligence, escrow, marketing and legal expense reimbursements.”
If you’d like to raise between $100,000 and $50,000,000 on SeedInvest, you’ll need a minimum viable product, traction, a US incorporated business, and at least two full-time teammates.
Finally, SeedInvest has an auto-invest feature, where you can invest in 25 stage startups through their automated investing capability. You’ll be notified of new startups that launch on the platform and have access to lower invest minimums.
There is very little solid data or hard financials to base investment on at this stage. It is more selling the idea and investing in the founders themselves.
A Need for Seed Funding
The seed round is where startups really begin bringing in the capital they need to make a go of their business idea. Funding at this stage may come from angel investors, targeted funds and even seed accelerators and incubators who may provide $10,000 to over $100,000 in startup capital.
These funds are often used for further research, testing product-market fit, key hires and product development.
Seed investors tend to be angel investors and larger seed venture capitalists that normally have under management up to $50 million in capital. They tend to be willing to invest much larger amounts than their micro seed equivalents.
Seed investors take risks, and many of the investments they make may not work out, but a well-managed venture capitalist group or angel investment portfolio, for example, will still see profits due to the start-ups which do work out generating substantial returns.
A strategy used by seed institutional investors is the spray and pray type of model in which investment funds are invested in a number of companies and see which ones pick up traction. Once the start-ups they are taking on are identified then you allocate additional capital to invest in follow-on rounds of financing. Some of the firms that operate with this model and have achieved success include 500 start-ups and SV Angel.
Making it to this stage typically requires having gained some proof of concept. Investors are beginning to look at real data to see what the startup has to show for money previously invested. This may not be revenue, but they want to know what key metrics are being improved on and get a real handle on the potential for this to become a valuable money-making machine.
Capital from this round is typically about optimizing what has been done and discovered so far. It is for honing the business model into something which can then really be scaled.
Earlier investors may participate. Though at this stage startups will begin to require the partnership of investors who can really help with taking the venture to the next level.
Series A investors are usually venture capitalists or angels. If taking place after a seed round of investment, potential series A investors will evaluate how any seed capital was used and whether this would bode well for their capital. Other profiles of investors that may participate in these types of rounds include family offices, private equity firms, hedge funds, and corporate venture arms.
By a Series B round startups are definitely looking for VC-level participation. This stage is about building out the company and building on existing successes. Capital may be used for expanding teams, geographic expansion into new markets, and generally scaling.
A Series B round probably involves and raises in the tens of millions of dollars range. Profits may still be scarce, though the startup should be firing on all cylinders and demonstrating traction and a business model that works. Investors at this stage need to be chosen carefully in order to make the leap to enterprise levels. Potential acquisitions are probably already being eyed.
Series C or more
If you make it to this stage you are probably really getting to the big time. You likely have a company valued in excess of $100 million. You’ll probably be raising in the range of $50 million-plus. Some like Magic Leap have raised nearly $1 billion at this stage.
From here it is likely going to be a sprint to an exit. Or at least to supersizing market share and position. There is a high likelihood that strategic acquisitions are on the menu. This may be for talent, eliminating competition, instant leaps in users and geographic coverage, and/or packing multiple companies together to prepare for an exit through a buyout. At this point, you will be working with the biggest venture capital firms and maybe even corporate-level investors.
However, this can also be one of the toughest rounds for founders. Investors are likely to be even more demanding and expect the due diligence process to be grueling, intensive and suspenseful.
A liquidity event is an acquisition, merger, initial public offering or other event that allows founders and early investors in a company to cash out some or all of their ownership shares.
1. Initial Public Offering (IPO)
The company’s shares become publicly traded after an IPO. The company’s founders and investors may sell their shares and monetize their initial investments.
2. Direct Acquisition
Instead of going public, the company or a stake in the company can be sold directly to an interested party (e.g., private equity firm). This is another method of monetizing an initial investment.
Pros and Cons
The financial benefit of going public is the most distinct advantage. Capital can be used to fund research and development (R&D), fund capital expenditure, or even used to pay off existing debt. Becoming an IPO is an expensive and time-consuming endeavor—the benefits to going public can be numerous but so can the drawbacks, especially for smaller businesses.
Another advantage is an increased public awareness of the company because IPOs often generate publicity by making their products known to a new group of potential customers. Subsequently, this may lead to an increase in market share for the company. An IPO also may be used by founding individuals as an exit strategy. Many venture capitalists have used IPOs to cash in on successful companies that they helped start-up.
Even with the benefits of an IPO, public companies often face several disadvantages that may make them think twice about going public. One of the most important changes is the need for added disclosure for investors. In addition, public companies are regulated by the Securities Exchange Act of 1934 in regard to periodic financial reporting, which may be difficult for newer public companies. They must also meet other rules and regulations that are monitored by the Securities and Exchange Commission (SEC).1
More importantly, especially for smaller companies, is that the cost of complying with regulatory requirements can be very high. These costs have only increased with the advent of the Sarbanes-Oxley Act.2 Some of the additional costs include the generation of financial reporting documents, audit fees, investor relation departments, and accounting oversight committees.
If you do decide to go public, these are the three stages:
The first stage, the pre-IPO transformation, is a restructuring phase when a private company sets the groundwork for becoming publicly traded.
The second stage, the IPO transaction, usually takes place right before the shares are sold.
The third stage, the post-IPO period, involves the execution of the promises and business strategies the company committed to in the preceding steps.
Fundraising has now become the way to startup and fuel business development. More information and capital has become available for startup entrepreneurs. Yet, there can be more steps in the process than many entrepreneurs anticipate.
Fundraising will take up a serious portion of your time if you choose to lead a high-growth startup that attracts the big money. Understanding the process of how a round works, and how each intersects with and sets up the next can make all the difference in getting to the size you envisioned and realizing an equally significant exit.
Must the road end here?
Thankfully, no. If you manage to successfully launch a company, you can stay in the ecosystem by becoming an angel investor, launching another startup, joining the board of directors of a startup, and/or mentoring startup founders.
Want to take a cheat sheet of this article home with you?
Want more resources to help you on your entrepreneurial journey? Visit the Angel Capital Association.