No matter how big your company, there’s one essential skill you need to master as a start-up founder: How to raise funds.
We’re here to help you.
We’ve designed this comprehensive guide to walk you through the whole fundraising process for a growing start-up: From pre-seed funding to closing larger rounds later on in your start-up funding process.
You’ll learn how to prepare yourself and the company for fundraising, find potential investors and make the most out of these valuable meetings.
Let’s not waste time. Jump straight to the section that’s most useful to you:
Part 1: What is start-up funding?
Part 2: How does the start-up fundraising process work?
Part 3: How you can prepare yourself and your company for the fundraising process
Part 4: Finding potential investors
Part 5: What you can do to make the most out of your meetings with investors
Start-up funding is the process of obtaining money from external parties to start or grow an existing business.
Speed is crucial for start-ups.
Closing a funding round means an upfront cash infusion to scale your business. Quickly get the resources to hire the right talent, invest in product development or expand into a new market.
When an investor is willing to give you a large sum of money to build your business, it’s a vote of confidence that your start-up is on the right track. Being linked to prominent investors gives you credibility and usually leads to significant media coverage.
Investors come with their professional expertise and networks that can help you grow your business even more beyond the cash injection.
These investors can serve as business advisors, and introduce you to business development or talent acquisition opportunities. They can also make warm introductions to other investors.
Start-up funding rounds typically involve two parties.
“Investors evaluate start-ups the way customers evaluate products, not the way bosses evaluate employees.” Paul Graham.
Let’s have a look at the advantages and disadvantages of some common start-up funding methods.
What: People you know with some money on the side.
Pros: Easy to access
Cons:
How to find them: Personal introductions
What: Individually rich people
Pros:
Cons:
How to find them: Personal introductions, warm introductions, network with other successful founders.
What: Seed firms invest small amounts at early stages. They invest as a company and not as individuals like angel investors. Seed firms are also known as start-up incubators or accelerators.
Pros:
Cons:
How to find them: Search for curated lists and databases like Map of the Money and Aspire’s investor glossary.
What: Venture capital funds pool investment money from private investors to invest in high-growth companies.
Pros:
Cons:
How to find them: Warm introductions, cold pitching, participating in start-up incubator programs.
Extra funds are always useful but generally, investors aren’t waiting to give you their money. That’s why timing is crucial. Look out for these four indicators to smoothen the fundraising process.
Source: Lenny’s Newsletter
With each funding round, you should aim to raise enough money to get to the next phase of your company’s growth. To figure out how long that’s going to take, think about what company milestones you need to hit before your next funding round. On average, it takes 12-18 months.
Aim for a growth milestone like customer acquisition, or a product development milestone like a product launch in the next six months.
You could also aim to raise enough money to reach profitability. Doing so increases the time between funding rounds to focus on growing your business.
A start-up goes through multiple funding rounds, typically securing more funds as they grow.
Investor type: Angel investors, start-up accelerators, crowdsourcing, friends and family
Product stage: Pre-product
Spend on: Prototyping and minimum value products (MVP).
Investor type: Angel investors, early-stage VCs, start-up accelerators
Product stage: Early signs of traction and product-market fit
Spend on:
TIP: Pick your seed funder carefully. They lay the foundation for future funding rounds by making the proper introductions or steering your business in the correct direction.
Investor type: VCs, super angels
Product stage: Accelerating initial growth and initial product-market fit
Spend on: Improving sales and marketing processes, catering to an ideal customer
Consider going for this round after you’ve found a few key customers in your market and once you’ve demonstrated you have an initial product-market fit.
Investor type: VCs & late-stage VCs
Product stage: Scaling
Spend on: Expensive hires, expanding into other markets and experimenting with different revenue streams
Investor type: VC, banks, private equity firms
Product stage: Large-scale operations
Spend on: Acquisitions, moving into new markets
An average funding round involves about 50 meetings with investors. To increase your chance of success, prepare to reach out to 60 tailored investors and funds with relevant industry backgrounds.
Get ready to hear a lot of “no’s”. If you aren’t ready to hear at least 50 rejections, you should think carefully about whether you’re ready to fundraise.
Fortunately, there are ways to reduce this number. Work on getting to know investors early on in the process, prepare a strong pitch and ensure your business traction excites investors.
Don’t worry, you won’t be doing this forever. Each funding round should be sufficient to help you realise your next business milestone and provide enough financial runway for the next 12-18 months of operation. Every stage of fundraising denotes a new stage of company growth, more capital raised and a more mature organization.
As a startup founder, fundraising successfully gives you a money injection to quickly grow your business. You and your co-founders also have a stake in the company (also known as equity) which dilutes as you bring more investors on board during fundraising.
Besides your ongoing salaries from company profits, you and all other shareholders eventually make a profit when they sell part or all of the ownership in the company.
There are two common scenarios:
Consider how you want to ‘cash out’ on your company and build your company in that direction. For example, if you’re targeting an acquisition, you need to think about building a company that’s a valuable asset to an acquirer.
Now you know why you need the money and where to get it, it’s time to get you ready for some action. First of all, you need to prepare well, because a successful fundraising cycle always starts with thorough preparation.
How long it takes for you to get funding, depends on how well-prepared you are. Below, you’ll find some of the items you should take care of before you start reaching out to potential investors.
Why do you want to move to the next funding round? How will the investment help your business capitalise on its current growth?
Having a compelling reason behind your fundraising campaign will put you in a stronger position.
TIP: Look at the typical ways start-ups spend their funding round money according to the stages above to get inspired.
To have a clear idea of what you want to achieve with each funding round, ask yourself these three questions:
Assuming your next fundable milestone is in 12-18 months time, look at your average monthly burn rate, or how much you’re spending to stay in business. Include six months as a buffer for unexpected costs and marketing costs to both grow your business and close the funding round.
Also think about how much you need to spend to achieve your next business growth milestone. Include costs for hiring, research and other operational needs.
Use the development stage valuation approach as a quick and easy way to give yourself a target valuation. This model assesses your business’s valuation based on your progress.
The typical start-up fundraising process takes about three to six months. But depending on the round you’re raising, add extra time to sort out paperwork, legal agreements and other documents. Set a timeline based on your available financial runway, internal priorities and the time you have for fundraising.
Think like a project manager and commit to the process. Build a tracker to measure your progress. See example trackers from Notion and investor Lenny Rachitsky’s Google Sheets template.
When trying to raise more funds, it’s not just about your business and product, it’s also about you. During your pitch, potential investors look for specific features. Be aware of the energy you’re projecting during all communications with potential investors.
Certain qualities indicate a start-up’s future success for investors:
Can you communicate your business model to your employees, customers, partners, and investors? Are you capable of fielding challenging questions while being respectful?
Serial entrepreneur and investor Nick Grouf acknowledges achieving this conciseness is difficult. But achieving this clarity helps you identify potential challenges and avoid million-dollar mistakes later in your company’s life cycle.
Investor Marc Andreessen wants to understand why the founder created the product.
“Usually the first question I ask is "What inspired you to create this product?"—I’m hoping that it’s based on a personal problem that that founder had and this product is the solution to that personal problem.”
(Source: How To Raise Money)
Nick Grouf also looks for academic integrity and self-awareness. He prizes people who can introspect, understand their strengths and weaknesses, and aren’t afraid to be vulnerable in professional situations.
Yes, your vision, product and personality are crucial. But investors also care about numbers. They invest in a start-up’s potential, and the best way to gauge that is with metrics.
Find data points that will get your investors excited about your business.
You’ll want to continue showing business traction during the fundraising process as investors can ask you for updated numbers towards the end, and you want to avoid shaking their confidence. Here's how you can create a data room for investors.
As we’ve seen, the chances of receiving a round of funding are pretty slim. There’s a good reason for this.Each partner at a fund only makes 1 to 3 early-stage investments per year.
Their career is tied to how well these investments perform. That’s why investors are typically skittish about any start-up that comes to them asking for funding. You need to show that you’re confident about using their money to bring your business to a new level.
Pitches delivered as stories can be up to 22 times more memorable than just facts.
When pitching, your audience doesn’t remember data and figures, especially when presented with cold data points multiple times a day. They do, however, recall a compelling story with critical characters, drama, and emotion. Use the materials you’ve prepared to weave storytelling elements into your pitch.
Explains what your product does in one sentence to help the investor picture the product in their mind
A great example structure from The Founder Institute:
“My company, name of the company, is developing a defined offering to help a defined audience solve a problem with secret sauce.”
Start a conversation about your company in three sentences:
The 2-minute pitch is similar to the 30-second pitch but with a few additional components:
Other things you want to mention here:
1. How many founders your team has.
2. How long you and your founders have known each other.
3. What’s your ask? How much money are you raising, and what form does that money take? Are you raising on a convertible note or a simple agreement for future equity (SAFE)? Do you know your minimum check size?
Spend at least a month building out your presentation deck and supporting materials. You will need time to tweak your start-up’s narrative and let your points materialise.
Include the one-line summary of what your business does and highlight your crucial impact metrics in a clear, bold manner that shows your business is doing well.
Send this to your potential investor ahead of a meeting. Be careful not to share everything with your VC before meeting your lead partner.
Use this as your main deck for in-person or virtual meetings.
What happens when you do get the money? Show your business projections post-fundraise for your potential investor.
Investor Lenny Rachitsky recommends you take time to test your pitch with live audiences. Prepare your materials to 70% completeness, then find people to practice your pitch.
Speak to fellow entrepreneurs, friendly investors or other people in your network to test your materials and pitch. It’ll build your confidence and provide helpful feedback on how to improve your pitch before going into real meetings. You may also get introductions to relevant funds.