Figure Out Which Fundraising Route You Want To Go:
There are dozens of routes to go to finance your startup; here are some of the most common:
Bootstrapping your company (or, funding it through your own capital, taking no outside investment), is probably the most desired and arguably hardest to achieve as far as funding goes. Those who have a significant amount of money saved up, or have a product that is already generating profits usually take this route.
Merchant Cash Advance:
Though merchant cash advances aren’t for every company, it can be a lifesaver if yours fits the bill. Essentially, a merchant cash advance is a lump-sum payment to a business in exchange for a percentage of future credit/debit card sales. These types of financing structures are great for companies that are selling hardware, have a brick-and-mortar store, or establishing an e-commerce website.
Another option is to offer up equity to investors who give you money. This route is usually taken by later-stage companies (those who are post-seed), as early valuations are typically quite low. An equity-financed funding round establishes a valuation for your company (i.e. if someone invests $100k and values the company at $1 million post-money, then you would give up 10% of your company for that $100k).
A convertible note (also known as a convertible bond or a convertible debt) is a type of bond that converts into a specified number of shares of common stock in the issuing company, or cash of equal value. Essentially, it allows the holder to invest early in a company without declaring a hard valuation for the venture. The holder then obtains stock at a discounted price for their good faith and early investment. The benefits of issuing convertible debt notes is that it allows your company to forego establishing a specific valuation early on (and thus, likely giving up a significant portion of equity early). Many Seed and Series A investors enjoy these deals, as it allows them to have more flexibility while drafting up the structuring of their investment.
Another option that’s been on the rise lately has been leveraging the power of the crowd in order to get an investment. Websites like Angellist, Gust, Kickstarter, and Indiegogo all handling crowd funding, you could make a killer profile and use these marketplaces to find your investors. With the passing of Regulation A+ within Title IV of the JOBS Act, investors no longer need to be accredited to invest in your startup, which also opens the door to receiving smaller investments from several non-accredited investors.
Small Business Loans:
You could also take a more institutional route and apply for a small business startup loan. These can take the form of either lines of credit, or equipment financing. Getting a line of credit is similar to a credit card, but the deal is tied to your business instead of your personal credit. Many of these deals are interest-free for the first 9-15 months (that is, if you only take out $10k on a $50k credit line, you will just need to pay back the $10k + interest, not the $50k), so it gives you a manageable way to get off the ground without offering up any equity. Receiving equipment financing is just what it sounds like; you would receive a loan to purchase equipment, which can be used as collateral if you default on the loan. This allows you to pay off the equipment as you continue to generate more revenues with your business.
Another route that you may take is to apply for an accelerator program. Though the real value of these programs come in the form of the network that you will be tied into as well as the mentorship you receive, they also often offer $25k-250k for 0-10% equity stake in your company. Many teams look at this capital injection as a ‘bridge round’ to help them prepare for the next major round of financing.
Pick A Number (valuation and how much equity):
First and foremost, you should have a target number in mind for the total amount of equity that you’re willing to give up for this round, as well as what you value your company at. Keep in mind that angel rounds tend to be around $250-500k, seed rounds are roughly 500k-1M, and Series A rounds are typically 2-5M. A good way to figure out how much you need to raise is to ask yourself, ‘what amount of money do you need to take the business to the next level of financing (this typically involves 12-18 month runway). Most attractive angel/seed stage companies have at least some sort of MVP/working product, a small but growing user base, possibly some revenues, and most definitely a solid founding team. If you’re missing more than one of these, it may be difficult to raise an angel/seed round.
The old adage goes ‘you need to kiss a lot of frogs to find your prince,’ and when it comes to investors, this couldn’t be truer. When starting out the fundraising cycle, volume is key (so never put all of your eggs into one investor basket). In order to raise funding, you’re going to want to compile a list of potential investors to reach out to. For this, I would leverage Crunchbase and AngelList’s robust technology to help narrow down the list. Focus on investors that are nearby (try to find investors that are in the same state as you), active (making at least four investments per year), and people who focus and invest in a similar domain to your company.
*Pro tip: Separate this list of investors into people that you really want invested, and people that are less ideal. When you start doing your investor reach out, focus on the people who are less than ideal so that you can refine your pitch and how you articulate the deal.
Prepare Your Documents:
This is probably the most daunting aspect of the entire fundraising process. Simply put, if you don’t have professional-looking documents to offer your potential investors, you’re starting off on the wrong foot. You should have a one, five, and ten-minute pitch ready to go as well as a ‘presentless’ slideshow (a slideshow that gets across everything you want without the need to walk the investor through it all). You should also have your Cap table available for them, as well as all of your financial accounting documents.
If you are planning on raising a round that falls under Regulation D exemptions (namely, a round with less than $1M of securities up for sale within a 12 month period for Reg D 504), then you may want to consider writing a PPM (Private Placement Memorandum). PPM’s contains term sheets explaining the terms of the investment, legal disclaimers, risk details, cap tables, dilution of stock that capital raising will cause, and a subscription agreement. These allow your company to raise private investments without having to go through the detailed paperwork of registering with the SEC.
*Pro Tip: With very few exceptions, NEVER ask for any potential investor to sign a Non-Disclosure Agreement. I understand that it’s scary to explain your company to people without the assurance that they will not steal the idea, but I promise you that asking an investor to sign an NDA is the fastest way to lose a deal and make yourself look like an amateur entrepreneur at the same time. Also, I wouldn’t bother with writing a formal business plan (one that is 30+ pages). Due to tendency of startups pivoting at least once after inception, your time is better spent putting together a killer slideshow instead of spending hours of your time writing the equivalent of a book just to change it a few months later when your value proposition changes.
Y-Combinator and 500 Startups have offered their boilerplate funding documents for anyone to review and download. This will at least get you going in the right direction, but you should ALWAYS consult with an attorney when dealing with this kind of money.
Reach Out For Warm Introductions:
Once you have your documents and potential investor list together, it’s time to reach out and set up some meetings. Cold emailing/calling should be an absolute last-resort, so always try and find warm, respectable introductions to investors. An awesome way to find out who can introduce you to that perfect investor you’ve had your eyes on is to use Conspire, which shows you who’s been emailing who. If you have a connection between someone you trust and that investor on Conspire, reach out to your friend and ask for an introduction. Another way to accomplish the same goal is by using LinkedIn’s tiered connection feature, which shows you who of your friends is connected and how.
Have The Meeting and Soft Close:
One of the most important lessons I’ve ever learned was how to properly conduct a ‘soft close’ with an investor. David Cohen of TechStars was the first that I heard of this technique from, and basically, it allows you to remove any barriers to closing the deal while simultaneously get an itemized list of things that you must do in order to get the investment. David goes into it more during this video, which I highly recommend every entrepreneur watch. At the end of each meeting, regardless of how it goes, always ask if the investor would like to be added to your update list: you never know, that one person who hated your company the most might absolutely love your next pivot!
Send Regular Updates:
Getting investors in the funnel early is the easy part, keeping them interested is what differentiates good companies from great ones. Once you have a list of investors involved who have agreed to receive your updates, its time to start executing and blowing their minds. As Nicole Glaros of TechStars says, investors are looking for lines, not dots, meaning that they want to see continual progress over a few months rather than get updates every half a year with no way to gauge growth. These updates should be at least bi-monthly, and should absolutely include any progress that you’ve made, as well as downfalls that you’ve experienced since the last update. Being transparent is essential in these updates, as investors are often looking for a team that they would like to work with as much as they’re looking at the company.
Close the Deal:
As TechStar's David Cohen likes to say '[he's] never invested in a company that didn't ask him for money.' Assuming that you've followed the steps above, this should be the 'easy part' of the fundraising process. Your investors will ideally have a full understanding of the potential of your company, and have been following your updates to see your progress and speed of growth. At this point, all you have to do is ask for the check!