Updated: Mar 25, 2019
Main takeaways from this article:
1) There are different rounds of fundraising that generally take place in various growth phases of a company. These include: Friends & Family, Seed, Series A, generally followed by Series B, C and sometimes even D, E.
2) You can fundraise with equity (most usual), but other ways include convertible notes or even loans.
3) It is important to be respectful in this process, so make sure you respect the other person's time, send follow-up thank you notes, and such.
4) Don't rush to raise capital. Try to use the resources you have to at least get to a level where capital can help with growth of your business.
Fundraising is a very intimidating subject, especially amongst businesses whose livelihood depends on it. This article is aimed towards individuals that are thinking about starting a company, have started one, or simply want to learn about how startups raise capital.
Even though fundraising is both physically and mentally taxing, it's something that many companies need to do to exponentiate their company's growth. Here are some 'fun'draising facts from CBInsights, that may give you a better perspective:
1) Of approximately 1200 technology companies in 2010, the average seed round raised was $690,000.
2) Of approximately 1200 technology companies tracked, almost 40% failed to raise a follow-up round of funding after their seed round.
3)The odds of becoming a unicorn remains low, hovering around 1% (1.07%), with 12 companies reaching that status (out of approx. 1200). Some of these companies are the most-hyped tech companies of the decade, including Uber, Airbnb, Slack, Juul, and Docker.
4)30% of seed funded companies exited through an IPO or M&A, up by 2 percentage points from 2017.
5) Most companies that failed within the first year, failed because the market just did not need the product that they provided.
Realistically, you can start raising money at any stage of your company. From an idea stage, to post revenue. The earlier you raise, the more you will have to give (equity, interest, etc.). This is because of the simple rule:
The earlier stage the company, the riskier for the investor. Thus, investors take more equity due to this risk.
With my experience at VyB, fundraising has taught me to be extremely thick-skinned. Most investors have a polite way of saying "no", which is by saying "come back in 6 months". Investors don't want to miss out on the next Facebook or Amazon, and so this is their way of keeping the door to the investment always open. Nevertheless, as investment is more about creating a personal relationship with the individual, rather than taking money. I suggest you do not let the "come back in 6 months" get to you. Think of this as an opportunity to grow like crazy in 6-months, and re-update awesome people/mentors with your progress.
With over 50 investor pitches down (probably countless more to go), I have learned a little bit along the way from my own experience, and from other founders around me (some with 7 and even 8 figure investments for their young businesses).
Below are things that I wish I knew when I was starting out.
Here are things NOT to do while fundraising:
1) Ask people to sign an NDA before sharing your idea. If you are a person that won't even talk about your business idea without having someone sign an NDA, good luck - things might not go so well for you. It's important not to do this with investors. Investors hear so many ideas daily that signing 100's of NDAs a week would introduce quite a bit of liability. Lastly, if someone can simply hear your idea and replicate it to beat you to market, maybe it's not a great idea. In this particular case, try to build up your intellectual portfolio strategy and your company's defensibility.
2) Go raise capital as soon as you have an idea (too early stage). Fine wine and cheese mature in their notes and flavors with time. Similarly, so does your idea. Do not waste your "first impressions" looking for money, when you should be looking for product-market-fit.
3) Raise money till you have a set of mentors, advisors, or board in place. These individuals (if lucky), will truly help! There is so much to learn from their experience and ideas. Most importantly, for decisions related to fundraising, if you are put on the spot - make sure you respond by saying "Thank you, but I would like to discuss with my advisory team". People will respect you much more for saying this, and you will be able to take your time to get the proper advice.
4) Fundraise without knowing how much money you need. A long time ago, we tried to raise a 7-figure round in the first few months of starting our business. We thought we'd crush the world and raise trillions. You need to be realistic. Calculate all the resources you need to grow your MVP, or small team to where you want to take it. You need to know the market rate for engineers, salesmen, marketers. The VyB team is lucky to have an advisor (Matt Canning), who has helped us plan out how much we exactly needed in terms of proposed expenditure . His decade long experience in the industry helped us pinpoint our figure, and it turns out we simply need 1/3 of what we were originally raising.
If you are sure-shot going to fundraise, it's important to recognize that companies can fundraise in other ways besides the traditional equity route.
Here are a few alternatives businesses raise capital:
1) Equity Raise (Common trend, any stage)
2) Crowdfunding (Generally early stage)
3) Loans (Never take an interest loan to start a business)
4) Convertible Note (early to mid stag)
5) Angel Investor (early to mid stage)
6) Venture Capitalist (series A or B. They don't want to spend less than $4-5M depending on the type of business)
7) Private Equity Firm (late stage)
Now, if you are ready to go out and raise some money, here is how you can find the opportunities to grow your startup:
1) If you are in a university setting, make sure to tap into the universities resources. Many universities have pitch competitions, business meet-ups, etc. You will often find individuals who can give you general feedback and mentorship at these places.
2) If you are working on a physical product (non-software), you can often create a Kickstarter campaign.
3) If you plan to go to conferences like CES, SXSW, or Tech Crunch - email individuals who are in your industry and try to meet with these folks.
4) Angel.co is a great place to find angel investors and other startups.
5) There are always meetups, at co-working spaces like We-Work, 1776, etc. where you can find like minded people, entrepreneurs, and even investors.
The best way to get in touch with someone is probably going to be by LinkedIn. Try to send a brief message, or email. Make sure you do your research prior to reaching out!
If you are going to fundraise, there is some common etiquettes to follow. You need to know how to be professional. Being young is a good thing, but people associate a lack of professionalism and experience to the "yungins".
Experience can't be learned, but professionalism can. Here are things I learned, and picked up from others in VyB's Journey:
1) Always say "Thank you" and "Please". Be a nice and decent human, but be gritty.
2) Do not put people on the spot. Investments take time, maturity, and good relationships. Putting people on the spot will ruin relationships.
3) Do your research. Never show up to a meeting without an objective, and research on the person whom you are meeting.
4) Respect people's time. People are busy, so never schedule 1 hour meetings. You can get your point across in 15-30 minutes.
5) Don't take things personally. In business, you need to constantly learn, grow, and adapt. If you get stuck up on small things and take it to heart, you will endure more than necessary stress.
6) ALWAYS: Send a confirmation email, and a follow up "Thank you" email - You don't want people to forget you, so take 1 second to confirm. You also want to make sure to thank people for giving you the time of day. You can not take that for granted.
VyB's advisor, Mars Shah, goes above and beyond trying to make sure the team knows how to be prepared, strategic, and objective oriented. He has been a great source of knowledge and inspiration, from his extensive industry work and experience as a successful entrepreneur. I learned many of these qualities, stated above, directly from Mars. As such, this highlights the importance of role models and mentors in your team.
Lastly, below is a wonderful graphic I found on adioma.com, that adequately shows the dilution of a founders equity as the company grows:
The graphic states that 100% of nothing is less than 17% of a big company.
VyB Technologies, LLC. has the privilege of being a part of the Baiada Incubator, where companies in the past have grown to raise multi-million dollar fundraising rounds. The incubator is directed by Chuck Sacco, who mentors many of the startups overseeing their progress and growth. I had the opportunity to ask some of the fellow founders what questions they had, if any, about fundraising.
Below were some of the most asked questions that you might have wondered in the past.
Q) Which investors are right for my business?
There is capital around the world, however, there are only a few people that can help you with your venture. Before giving someone a part of your company, speak with your core team and advisors to see if this might make sense for your strategically. See if the investors have industry knowledge, a similar investment in the industry, or even connections that you could use in the industry.
Q) How do I reach out to investors? What's their language?
In short, use LinkedIn a lot! This will help you get in the sales pipeline, and you can then track these leads in some sort of CRM like Hubspot.
Keep in mind, at the end of the day, investors are humans too. A question I love asking to everyone is: "If you had a couple hundred thousand dollars lying around, would you invest in my company". Until you get to a point where most people say "YES", there is still some work to be done. Most decent angel investors want to help your team, and give back to society.
Q) Does every business need venture capital?
NO! In my humble opinion, you can last a long time without any capital. VyB has been living on only a few grand for the last 1.5 years. This is going to be different for everyone because some teams have internal technical talent, and some teams simply do not. Make sure you follow a lean startup methodology. Don't spend money unless you really have to.
Q) What's the some things that will piss off an investor?
Don't ask an investor to sign an NDA. Don't lose trade secrets. Don't waste their time by asking for meetings without an objective. Know the market, and your business's economics well.
Q) How much money should I raise?
This is extremely subjective. If you raise too little, your business will not survive, and if you try to raise too much you might give away too much equity (or simply fail in raising that amount). Generally, know how much money you need to raise (for example, $600k) and add slightly more to that for the "messups". So in this case you would raise perhaps $650-700K. Please note that this is an example, and does not reflect what you should raise. To summarize, make a spreadsheet of your most necessary costs (and projections), and try to create and amalgamation of these costs. Try to raise slightly higher than the total cost you come up with.
Written by Adit Gupta. VyB Technologies, LLC. CEO.