When you’re seeking to raise money for your startup company, you need to target the right investors. Remember, not all investors are interested in the same kinds of projects. Some invest more significant amounts, some smaller amounts. There are those that prefer to invest at early stages, some at later stages. Others invest in complicated technology, and some keep it simple.
Finding funding for your startup, therefore, requires knowing which kind of investors to target and how to target those different types of investors. For example, your pitch deck for angel investors may differ significantly from one for venture capitalists.
Many startups attempt a one-size-fits-all approach to investors. They create a single pitch deck and expect it to work for all types of investors. The single-deck approach may be an easy way out, but it can limit the company’s capital-raising opportunities.
You can read more about creating pitch decks here.
Here are some different types of funding for your startup and how you might target them.
Friends and Family as Sources of Funding for Your Startup
Friends and family are the perennial source of early capital, or funding for your startup. Though your primary goal in accepting money from friends and family should be to preserve personal relationships. Make sure your relatives understand the risk of investing in your company, and make sure you’re giving them a fair deal.
One caution with accepting equity capital from friends and family is: “Don’t give them too good a deal”. Why this particular word of caution? When the time comes to approach angel investors or venture capitalists, and they think you gave friends and family too low a share price, they may simply decline to invest. Why? Because they don’t want to hurt feelings by offering an even lower share price.
Angel Investors and What Your Should Know About Them
Many startup companies raising relatively small amounts of capital, say, less than five million, consider angel investors their target. This might be correct, but it’s a tricky calculus. For most angel groups, the sweet spot for investment is approximately five hundred thousand to one million dollars. There are exceptions, but an excellent model to remember when seeking funding for your startup is this: If twenty angels invest twenty-five to fifty thousand apiece, you’ve raised half a million to a million dollars.
Here are some additional considerations relating to angel investors: It can be challenging to get twenty angel investors to agree on a project. This is especially true if it’s complicated. So, if your technology or business model is complex, angel investors may not be the best source of funding for your startup.
Also, angel investors do not like dilution. They don’t want companies that are likely to need considerable additional capital after the initial investment. So, if you are trying to raise one million from investors today but will need an extra ten million in the future, that can be a challenge for angel investors.
Other Challenges of Seeking Funding for Your Startup from Angel Investors
You might think you could raise initial capital from angel investors and then move on to venture capital investors for your next financing round. This strategy might work, but it might not.
Here’s the issue: some venture capitalists are willing to let angel investors be the first investors, taking the greatest risk. However, in my experience, some venture capitalists, especially top-tier venture capitalists, may not be willing to do this. Some want to source their deals and shape the company and the investment structure. Some don’t want to have twenty or more shareholders on the books. They prefer simply having one or two venture capital firms as partners. And some may feel that they can do a better job of shaping a company’s early stages than angels.
So, the notion of getting funding for your startup from angels and then switching to VCs can be problematic. It’s not impossible, but you may find a limited number of venture capitalists who want to play this game.
Because of this, you might want to go directly to venture capitalists. But their minimum investment is usually around five or ten million. However, they don’t have to invest all at once; they can do it in stages.
A Few Words About Venture Capitalists
If you do plan to approach venture capitalists as a source of funding for your startup, don’t present them with your one million dollar angel business plan. You will need to present a need for at least five million in initial capital. This probably means adopting a different strategy than you would for your angel plan. This approach might, for example, require a more aggressive product launch and market entry. While angel investors might be comfortable with a toe-in-the-water approach, venture capitalists are more likely to prefer a go-for-it strategy, which requires more capital.
In other words, don’t make the mistake of presenting the same pitch deck to venture capitalists and angel Investors.
Another reason for approaching venture capitalists is that most are experienced company-builders. They have worked with dozens, if not hundreds, of different companies and served on dozens, if not hundreds, of boards of directors. This breadth of experience can be invaluable. Also, venture capitalists have robust networks for helping you find corporate partners, a possible exit by acquisition, or an investment banker willing to take your company public.
Using Banks and Credit Cards as Options for Funding for Your Startup
Bank loans and loans backed by the Small Business Administration (SBA) might be an option for funding your startup. Still, in my experience, most banks prefer to lend money to companies after they have received significant equity capital. However, there may be exceptions for companies requiring less capital, or companies that can demonstrate attractive cash flows.
Credit cards are another perennial source of early funding for startup companies. Still, they provide a relatively small amount of money, and interest rates are punitive. This can quickly drain your borrowing power. Keep in mind, credit cards might help you build some small bridges, but you don’t want to jeopardize your credit or future ability to borrow.
Crowdfunding is Another Option
Crowdfunding is also a potential source of funding for your startup if you require a relatively small, single infusion of, say, one or two million dollars. Though if you need to return to the well for additional financing, and have met your objectives, your chances are probably better with a venture capital firm.
Ultimately, answer to the question, “Where do I go for financing?“ is that you must explore all your options. Fundraising is never easy, and you don’t usually understand specific investors’ goals until you meet them. So, it’s best to have a multi-pronged approach to fundraising, but make sure you have a pitch deck that is appropriate for each target.
A Caution About Getting Funding for Your Startup from Seed Capital Lenders
A few companies will lend money to startups, but be cautious about loans and be sure to get a lawyer involved. Because of usury laws, the interest rate on loans is not usually high enough to adequately compensate lenders for the risk they take in lending to startups. This means they often demand additional terms, such as ownership of your technology, if you default on the loan. You want to avoid this at all costs. So seed capital lenders may not be the best option for a source of funding for your startup.
Raising capital for startups is never easy. So, explore all your options and make sure your message is tailored to each potential investor. Try different strategies, and allow plenty of time. Keep in mind that it usually takes three to six months or more to raise capital. Also, raise enough money that you will have some cushion for the next fundraising.
Recent Comments