This guest post was contributed by BJ Lackland, CEO of Lighter Capital.
Recently Lighter Capital and VentureBeat teamed up to host a Fundraising Roundtable webinar examining fundraising options for tech companies. The webinar featured Lighter Capital’s CEO, BJ Lackland, Silicon Valley Bank’s Head of Early Stage Banking, Claire Lee, and Voyager Capital’s Managing Partner Erik Benson.
We compiled the top audience questions and answers:
How is getting funding from VCs different from obtaining financing from other types of investors? How does it affect my long-term funding strategy?
VCs seek to put large sums of cash in businesses that have a realistic possibility of gaining significant market share. If your company needs $20-$30 million and you anticipate needing two to three years to reach
your market share goals, VC funding is pretty much your only option. This means giving up a large chunk of equity and potentially ceding a lot of control over your company’s management. While losing control may seem like a significant downside to some entrepreneurs, it can be a worthwhile compromise if your goal is to IPO or be acquired in the next five to seven years.
However, the VC path doesn’t necessarily make sense for everyone. What if your capital needs are lower? What if you don’t need to disrupt an entire market to reach your goals? What if your vision is to own and head your company for the long-term? In cases like these, it makes more sense to explore debt-based financing options, which allow you to maintain control of your business.
Debt-based startup financing can be difficult to obtain for early-stage companies who lack hard assets to pledge as collateral and/or a significant revenue stream. Traditional banks typically only lend to well-established companies. Tech banks, including Silicon Valley Bank, are more willing to lend to somewhat smaller companies (annual revenues of $5M) and are also willing to work with businesses that are simultaneously pursuing VC funding.
Whatever funding direction you choose, make sure it aligns with your long-term company goals. Equity investors will be a permanent part of your company, so before you chase VC cash, be sure it’s a choice you can live with.
Is it better to raise money early to grow fast and grab market share or is it advantageous to hold off until the firm has a strong revenue base?
One perk of raising capital early is that it can enable you to quickly seize opportunities that come your way. This can be a significant business advantage. It might mean getting your product to market faster than your competition, allowing you to grab market share. Bottom line: strategically working your war chest can lead to higher revenues, increasing your company’s valuation.
The downside: securing cash early is often difficult and expensive.
If you try to obtain VC funding at an earlier stage when your company has a lower valuation, you’ll have to give up more ownership for a given amount of money than if you seek the same amount of capital later. But if you try to secure funding through a traditional loan, you’ll find that banks are unwilling to open their purses for early-stage companies.
If your company is generating a minimum amount of revenue you’ll be able to pursue revenue-based financing, which can help a business grow and scale quickly. This will increase your valuation, which may help you raise equity in the long run.
I run a SaaS company that has recurring revenues. What debt-based financing options do I have?
Banks only want to lend to well-established companies with significant collateral and/or a history of annual revenues of at least tens of millions of dollars. Even tech banks won’t lend you money until your business is bringing in at least $5 million dollars each year.
So how can an early-stage company with limited revenues and minimal hard assets fund its growth?
Besides bootstrapping or pursuing angel investors—the main way to fund early-stage growth is through revenue-based financing. Lighter Capital’s RevenueLoans are a good option for SaaS companies because they work well with companies that have recurring revenue and relatively high margins. Unlike with VCs or angel investors, this model doesn’t come with the cost of loss of equity and control. It’s also easy to determine if you might qualify for a RevenueLoan.
We have developed technology that is very clearly going to disrupt the market and has incredible potential. Is $1 million of financing sufficient and ambitious enough?
At first glance, it may seem like playing Goldilocks is your best strategy for deciding how much money to raise—find that sweet-spot that is neither too low nor too high. Surprisingly, this strategy can be the hardest to execute. Take $1 million dollars, for instance. It’s too little for VCs, and it’s likely too much for angel investors, who lack such deep pockets.
So how should you decide on an amount? Be sure to secure enough money to take advantage of the market opportunities. However—and this is key—don’t raise more than you need. The more you raise, the more it will cost you in terms of interest or equity and control, and the longer you will be burdened by repayments.
Because of the cost of capital, it’s unwise to raise more money than you can put to good use. So as you’re envisioning how you want to grow your company, be sure that you already have a team in place and the infrastructure to quickly scale.
Start by designing a thorough business plan and fundraising strategy to determine how much money you really need—and can use well—in the short to medium term. Your business plan should include realistic milestones for the next six months, one year, and three years. Map out your action items to get from one milestone to the next, and calculate the associated costs.
How much equity do I need to give up if I go the VC route?
Depending on your company’s valuation, you will likely need to give up a 25-45% stake in exchange for $2-$5 million dollars in series A funding. When you are raising a series B round, you will likely need to give up 10-30% for an investment of $5-$45 million dollars.
Because growing your company increases your valuation, the best strategy is to first focus on funding growth with your own money, or through friends and family’s, before pursuing VC money. The more your company is worth when you seek VC funds, the less equity you’ll need to cede for a given amount of capital.
How can I best position my firm to attract startup financing from investors?
There are a few key things equity investors want to know. First, they look at the problem the company’s product solves. How does it compare to competitors’ solutions? Is there a sufficiently big market for the product?
Second, investors want to know about the founding team. Do the cofounders have the right mix of startup experience and industry knowledge to execute the business strategy? Does the executive team have the necessary skills to effectively develop, market, and sell the product?
Lastly, investors want to see that you have a solid fundraising strategy. That is, you have a realistic approach for how to raise the money and a concrete plan for how to spend that money in a way that will best increase your company’s value.
Compared to VCs, banks are much more risk-averse. Longevity and stability take precedence over rapid growth and potentially large rewards. If you’re a proven entrepreneur with a disruptive product idea, VCs may rate you as a reasonable risk while banks only care about how you’re going to pay them back. Unless you’re a very established business, borrowing from banks will require collateral and liens against your personal assets.
Compared to VCs, revenue-based lenders are less concerned with funding a disruptive product or service. Like banks, they want to see solid revenues, but their revenue threshold is much lower, and no personal guarantees are required. Lighter Capital funds tech companies that have as little as $15,000 in monthly revenues, provided that they have at least a 50% profit margin and aren’t burning too quickly through their cash.
How do I get funding when my company is not based in one of the regions where investors have their home base?
Unless your business is located in one of the top 12 venture capital centers, it can be difficult to make the connections needed to find funding. Ditto for connecting with angel investors, who are even more likely to confine their investments within their community. If your home turf lacks a healthy flock of angels, you’ll need to broaden your funding search. This is when it’s especially helpful to plug into online portals, such as AngelList, which allows you to reach investors on a national level.
While finding VC or angel investment outside of one of these investment hotbeds can be particularly challenging, it can still be done if the problem you’re solving is disruptive enough and you’re targeting a market that has enough potential.
Can I expect an investor to provide me with business advice?
One benefit VCs or angel investors bring to the table is advice and coaching. Venture capitalists will proffer advice on everything from market fit to overall strategy and day-to-day management. They can be especially instrumental in helping you recruit your team. In tech hubs, increased access to the best developers and marketing and sales people can be the key to success.On the flip side, banks don’t provide any mentorship or advice.
How can I create an optimal working relationship with my investor?
Make sure that the investors you pick are people you truly want on board, as they will be your business partners for a very long time. Having a strong relationship even before you agree on terms is paramount.
You need to be very clear who your point (s) of contact will be at the VC firm as well as their preferred mode of communication. Once you establish that baseline, you can concentrate on how to use their insights and connections to your advantage.
How did you decide which funding option to pursue? Tell us in the comments section below or contact us at Early Growth Financial Services for a free 30-minute financial consultation.
BJ Lackland is the CEO of Lighter Capital, an alternative-financing provider for growing technology companies. BJ has spent his career working with emerging technology companies as both an operating executive and an investor. He has been a venture capitalist, the CFO of a public technology company, an angel investor, and a senior finance and marketing leader at tech startups. Follow BJ @bjlackland.
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