What Are The Key Elements Of Startup Fundraising?

As financial professionals we often get asked how can I attract funding and other sources of outside capital?

Having had the good fortune to provide nearly 20% of all the privately-funded, venture-backed companies nationwide with our services we know the path to fundraising well. The key elements that you need to consider cover several options around funding, including the option of not seeking outside funding.

To Bootstrap or not? That brings us to the first element, bootstrapping.

For more see: Why You Should Bootstrap Your Startup
Before you seek outside investment you should consider what is your business, your product and your field and can you make a go of it financially solely on your own? Whether it is from personal savings, time invested or other self-generated resources bootstrapping is an option early on.
There are three reasons why you should be pursuing outside investment and those are the main signals that fundraising is worth pursuing.

Reasons for Seeking Funding

There is the meta reason and the specific. The meta being to ask yourself if funding can substantially move your company forward in a way that you couldn't otherwise. The specifics are one of the following three ways:

1. To accelerate growth
2. Network expansion
3. Timing

All of these are heavily dependent on how far along you are, what you've done so far, and where you're going.

Investor Stages

If after checking that one or more of those areas is ripe with possibility that an outside capital infusion could greatly enhance then here are the levels of investment and what you can expect of each.

Friends and family

At this personal stage it is exactly what it sounds like, seeking investment from your close network, friends and family. Maybe even a friend of a friend who is a high net worth individual.
Some things to consider: You will have a low valuation at this stage, there is quite realistically a 90% chance of failure this early on. Every entrepreneur believes this doesn’t apply to them.
Our advice to you is because of the personal nature of this round and the high failure probability make sure to not take any investment from a relationship that would be heavily jeopardized by that possibility.  Protect your relationships first.
On the financial side we would recommend avoiding putting a valuation to the firm at this stage and opting to take any capital as convertible debt rather than giving an equity stake.

Angels

Angels are traditionally high net worth individuals who invest at early stages. There are also growing groups of angel networks that co-invest. They are heavily active in the LA, SF Bay and NYC areas as well as elsewhere. In every market that EGFS has operations there is one that we work with.
The advantage of working with an angel network is it will get you in front of a large group of investors sharpening your pitch as well as vision.
The cons are that it can be like herding cats, also expect lots of questions on due diligence. To offset challenges, we recommend finding one-point person within the group to minimize heads to coordinate.
Also in the last 4 or 5 years’ super angels have been part of the fundraising scene, they are sophisticated and savvy.

Micro VC

Micro VC’s are also new, emerging within the last few years. They usually manage funds of 10 to 15 million for seed and series A, usually opting not to participate in later rounds.
Because of their smaller fund size, they will have a strong focus on singular areas rather than a spectrum. As mentioned previously convertible debt is usually the case at this stage. One variation on convertible debt is SAFE documents, seed financing agreements launched from Y Combinator (YC).
For more see: SAFE and Sound? A Primer on the new YC Docs

Traditional Venture Capital

These are the old guard, many having decades of experience to offer with funds in the 100’s of millions. You have in this category firms such as Sequoia and Kleiner Perkins Caufield Byers.
The best strategy here is to study the various interests of the partners. Understand the partners and work towards getting a personal introduction to the one who is best for you. This is where your network and seeing how you can connect matters.

Venture debt

One final arena for consideration is venture debt providers. These come in two forms either specialty providers of venture financing known as venture debt shops or commercial banks with a lending arm focused on venture/startup needs.
Some notable banks in this arena are Square one bank and BridgeBank. They offer a way to increase burn rate without losing equity, the debt provided though will usually have warrants bundled for equity later.
For more see: Debt Funding Options for Growing Companies