From seed to series: Startup fundraising 101

While having a fantastic idea, a strong mission, and motivated employees is an excellent foundation for a startup, keeping it running requires so much more. Capital, at the end of the day, is the key your startup’s growth and operations, regardless of whether you sit in the seed stage or Series A, B, C, and beyond.

‍Startup fundraising is crucial. It serves as the lifeblood of your startup’s entire operations, from recruiting to research. In fact, close to 40% of failed startups attribute their downfall to either running out of funding or not being able to secure enough. 

But why is funding important for startups? Beyond sustaining your startup’s operations, fundraising also:

• Enables rapid growth and acceleration. 
• Establishes your business model’s credibility.
• Provides the means to retain and attract top talent.

Types of investors for startup fundraising

When it comes to raising startup capital there are various types of funding options available:

Self, friends, family

• Sometimes referred to as bootstrap financing.
• Utilized by early-stage startups (i.e. seed) to kickstart operations.
• While founders will maintain control over their startups, this option risks harming their personal finances and relationships.

Crowdfunding

• Crowdfunding is the process of getting multiple individuals to invest small amounts.
• Though usually used by early-stage startups, late-stage startups can also use it to build brand loyalty and for promotional purposes.
• The effectiveness varies depending on the product and industry, with consumer goods typically having larger customer bases and thus potential for greater success.

Angel investors

• Angels are wealthy individuals who provide funding (and sometimes expertise and connections) in exchange for equity.
• Typically invests in early-stage startups and has a higher risk appetite than institutional investors.
• That said, angels generally ask for relatively large amounts of equity due to the risk they take on.

Venture capital

• Established firms composed of experts who target later-stage startups that show potential for long-term success.
• Can provide access to large amounts of funding in addition to mentorship, networking, and more.
• Some firms may include complex and tough terms (e.g. high preferences that prioritize their payout) so it is key that founders have someone who can properly review such terms (e.g. a lawyer).

Hedge fund

• Investment funds that are usually only available for Series C+ startups.
• Provides access to a large range of assets but often demands steeper returns and tends to heavily scrutinize finer details during negotiations.

Banks

• Like hedge funds, banks only lend to mature, late-stage startups with meaningful revenue, and can provide a range of business loans (e.g. credit lines and SBA loans).
• However, they tend to focus heavily on corporate policies and rigor around financial management and may require collaterals and personal guarantees in exchange.

Stages of funding for startups

The path of a startup from seed to series and beyond is typically linear, with most startups going through the same stages. Here's what a typical startup’s journey would look like:

Fundraising best practices

Good and bad fundraising often separates successful startups from unsuccessful ones. To maximize your chances of success, always keep the following in mind:

Master the art of pitching

Pitching represents a pivotal opportunity for you to showcase what your startup is all about—from why it's unique to why your mission matters. Practice your pitch as much as possible, ensuring that you keep things clear, concise, and impactful. Additionally, tailor your pitch to your specific audience. For instance, when pitching to hedge funds, place more emphasis on the nitty-gritty of your finances whereas with VCs, you could focus on the wider picture and upside.

Understand general market conditions

There absolutely are good and bad times to fundraise. Times of economic prosperity might make investors more willing to invest in startups. Likewise, uncertainty and down markets would do the opposite, making traditional investors less likely to provide the same amounts of capital. In turn, this makes alternative sources more attractive (e.g. crowdfunding). Therefore, you must stay aware of economic trends and finetune your fundraising approach accordingly.

Choose the right fundraising option

Not all fundraising options are equal. From angel investors to accelerators to even banks, each option comes with its own set of requirements, pros, and cons which should be thoroughly vetted and weighed against what you hope to gain and are willing to give. Additionally, some options may be more appropriate for earlier-stage startups (e.g. angel investing and crowdfunding) while some may only be open to more mature startups (e.g. hedge funds and private equity firms).

Seek professional legal advice

Fundraising often comes with several legal considerations that must be carefully managed in order to avoid costly mistakes, from reviewing the terms of agreements to accounting for the complexities of legal structures for non-standard financing instruments. While upfront expenses for legal advice may be higher initially, it’ll ultimately help you save money and avoid headaches in the long run.

Pitfalls to avoid when fundraising

Fundraising is a tricky process that’s rife with pitfalls that can trip up even mature startups. Regardless of the size of your startup or how far it is through fundraising rounds, some of the most common pitfalls to avoid include:

Not enough networking

Ensuring that your startup has a presence at notable industry events and relevant communities is imperative to get your name out there. Startups that neglect the importance of networking will miss out on promising opportunities, finding doors once open either closed or entirely unseen.

Underestimating the effort fundraising takes

Fundraising is one of the most challenging aspects of running a startup. It will require a large dedication of time and effort to properly prepare for pitches, networking, negotiating, and more. Going into it unprepared is a recipe for disaster.

Raising too much or too little

Determining how much precisely to raise is as difficult as calculating how long is a piece of string. Raise too little and you risk running out of funds before hitting key milestones. Too much and you might face excessive dilution as well as unattainable goals. Carefully calculate and balance what you need against what’s offered before making any decisions.

Omitting key information

At its core, fundraising is all built upon trust—investors give you funding because they trust you to deliver as per expectations. Deliberately omitting key information during the process (e.g. expenses, intellectual property rights) will negatively impact how investors view your startup, leading to poor decision-making and a breach of trust that can permanently harm your reputation.

Forgetting to study your potential investors

Doing your homework before meeting with investors is essential. Not only will it help you better understand their suitability for your startup’s needs and help you tailor your pitch accordingly, but it can also demonstrate initiative to potential investors that you take fundraising seriously.

Why investors matter

Securing capital for your startup is certainly important but fundraising isn’t just about the funds. It can also be about securing investors who, if properly chosen, can help support your startup in several different ways:

They provide valuable financial and business advice

A good investor can be akin to a mentor. Along with capital, they should also support your startup with a deep pool of experience and expertise that can shape the direction of your startup. From helping you steer clear of pitfalls to ensuring that you are making the best strategic decisions possible, investors should always be a value-add.

They signal to other investors that your startup is worth it

Having even just a single, reputable investor on your side serves as a stamp of approval that signals to other investors that your startup is worth it. Investors are often cautious with their resources but having a well-known investor onboard gives your startup an air of credibility, legitimacy, and visibility which increases your chances of securing future funding.

They bring a network of connections

The value investors bring to the table shouldn’t just stop at providing capital. They also bring a rich network of relevant individuals, helping you connect with other potential investors, advisors, and more. Investors that bring value are called smart money and should be prioritized where possible.

Finding the ideal investor

Securing investors is a two-way street. It’s not just about you trying to convince investors that your startup is worth it. It’s also equally about whether the investors you’re talking to are appropriate for your needs. But finding the ideal investor is challenging and a process of trial and error.

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Question 1

Do they align with my mission?

Your potential investors’ views and goals must absolutely align with your startup’s mission. 

Nothing derails startups from their original mission more than disagreements between stakeholders. When your investors share your mission, you can better maintain cohesion.

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Question 2

What can they offer beyond capital?

While it is true that the goal of fundraising is to secure investors who can provide capital, focusing solely on this aspect when vetting investors is short-sighted. 

You should focus on their value beyond funding – do they have a deep business network? Have they worked in similar industries and can provide strategic guidance? These are all important things investors should be able to offer in addition.

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Question 3

Are they asking for too much?

Do not jump at any offer without carefully considering whether what they’re asking for is too demanding. For instance, for equity-based fundraising, potential investors could be asking for an excessive amount of equity that would lead to heavy dilution, forcing you to lose control over your startup. 

Likewise, even in non-equity-based fundraising, investors could set disproportionately high interest rates and excessive exclusivity clauses, which should concern you.

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Question 4

Do they have a track record of success?

The litmus test for a reputable investor lies in their track record. Meticulously comb through your potential investors’ portfolios and work history through online databases such as Crunchbase and PitchBook. 

By conducting this type of research, you will be able to identify experienced and successful investors, ultimately helping your startup make more informed decisions.

Fundraise with LTSE Equity

Going through fundraising can feel overwhelming. Startups have to meticulously track and manage their equity on top of negotiating with investors, ensure compliance with legal and regulatory requirements, and maintain accurate cap tables. It isn’t a stretch to say failing to juggle all of these has been the undoing of many promising startups.

This is where equity management platforms like LTSE Equity come into play. Bringing in a range of useful features that include scenario modeling to help founders predict the impact of future financing, straightforward equity management, and a range of founder-friendly pricing plans, we have something to offer all startups.

To get a better feel of what we can offer you, we invite you to try our fully-interactive demo or better yet, get in touch so we can best address your needs.