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 percent 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 alternatives to outside funding.
Before you seek outside investment, you should consider what your business, product and field are and whether you can make a go of it financially on your own. Whether it’s 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. There is the meta reason and the specific, the meta reason 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
All of these are heavily dependent on how far along you are, what you’ve done so far, and where you’re going.
Different investing 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’s 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 realistically a 90 percent chance of failure this early on. Every entrepreneur believes this doesn’t apply to them. My 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, I’d recommend you avoid putting a valuation to the firm at this stage and opt to take any capital as convertible debt rather than giving an equity stake.
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 Los Angeles, San Francisco Bay and New York City as well as elsewhere. In every market that my company 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.
Micro VCs 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.
Traditional venture capital
These are the old guard, many having decades of experience to offer with funds in the hundreds 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.
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 1 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.