Capital Funding Spectrum for Start-ups
It is easy to get wowed by stories, Shark Tank and news about companies raising hundreds of thousands and millions from the capital markets. If you are part of a startup and plan to use outside money to fund the growth of your business it is key to first understand the capital funding marketplace to ensure you are growing your company strategically and thoughtfully to look attractive to outside investors.
Where are you and what stage is your company in the Entrepreneur or Startup Life Cycle? When you have just a Proof of Concept, you will have to self-fund. Once you have feasibility, you can raise pre-seed money through crowdfunding, government grants, and Friends and Family round. Once your startup is in development, you have raised a seed round, and can prove some traction, you can raise funds from Angel Investors and Venture Capitalists. Lastly when you are in high growth expansion mode, Venture Capitalists and Private Equity will help you grow. Regardless of your stage, consider putting off raising capital as long as possible. It is not the panacea startups think it provides. The sooner you raise money, the more of your company's equity you give away or have to pay back.
Before you decide to raise capital, know the answers to the following questions: investors will be asking as well. Be clear on why you are raising money and what is the use of funds. Is it for new hires, funding product supply, building a tech platform, beefing up your website and marketing? Does your startup have a unique selling proposition and marketplace advantage? Can anyone copy your idea or is your intellectual property protected? Can your company scale and grow to a larger level?
The first place most startups begin is Crowdfunding. This is done through raising small amounts of money from large number of people. They key players are: https://www.kickstarter.com/, https://www.gofundme.com/, https://www.indiegogo.com/, https://www.lendingclub.com/, https://angel.co/invest/start, https://www.justgiving.com/, https://www.fundingcircle.com/us/, https://plumalley.co/, https://ifundwomen.com/, https://www.sheeo.world/, https://circleup.com/. Besides raising money, this can also raise awareness, build your brand and start a following. Most of the time you don’t have to give away equity or borrow money. The downside can be the time and effort you put into the process if you are not able to reach your target dollar amount. Some sites do not let you have any of the money raised if you don’t hit the target amount. A savvy and well done video can be the difference between raising your target amount and walking away with no money raised.
Many startups go right to raising funds from Friends and Family. Most of these fund raises are specific amounts for specific milestones- such as manufacturing a prototype or creating a beta site. While it is an informal process, you still need to make it a formal transaction with a convertible note or issue equity shares. This also means you need to have a valuation for your company and a strategy on how to pay the money back. The Founders tend to invest at this time also. Will you give away equity or borrow debt? When will they get their money back? The repayment schedule is either a fixed time or tied to percentage of new product revenue or plan to convert the debt to equity at the next raise. You also need to put together projected financial statements at this time- specifically profit and loss and cash flow statements. After this round, be sure to list your pitch deck on popular Angel platforms if you have any plans of raising further funds.
After you have raised some seed funds, the next place to seek capital is through an Angel Investor or Fund. These are either wealthy individuals or angel groups which provide capital for business start-ups, in exchange for a convertible note or equity. They invest their own funds and must be an accredited investor (which means they have liquid assets more than $1 million or income greater than $200,000). These investors expect a 20-30 times return from their investment over a 5-7 year time period. For example, if they invested, $10,000, in 5 years, they would expect a ROI (return on investment) of at least $24,883 (20% ROI). In 2015, the average angel round was $500,000-725,000 per deal. The big issue that is hotly contested for startups at this stage is the valuation of their company. If they raise $500,000 and the valuation is $2 million, they are giving away 25% of company. Most startups are issuing convertible notes - which doesn’t give equity away at this time, but converts to equity at the next fund raising round. A key resource for learning more about angel investing and the key players is Angel Capital Association. In NYC, some of the largest Angel Funds are: NY Angels, Golden Seeds, ASTIA, 37 Angels, Empire Angels, HBS Angels of NY, Georgetown Angels, JumpStart Angel Network, Tri State Angel Network, Arc Angel Fund, SoundBoard Angel Fund, and Keiretsu Mid Atlantic.
The next stage in raising money for a startup is from Venture Capital firms in a Series A round. This is financing to startup companies and small businesses believed to have long-term high growth potential. At this stage, they only invest money in exchange for equity or ownership stake. The investment ranges start at $1M and can go as high as $75M per deal. If they do a second investment, it is typically considered Series B and usually for working capital before the startup is making profit but has traction. The VC firms make their profit or Exit through a sale to another company, acquisition or IPO. There are a growing number of VC firms, many with an industry focus or specific investment thesis. It's important for you to do your research to not just raise money but also put together a team of advisors that will help you grow strategically and make key connections. For example: Women's Venture Capital Fund invests in women entrepreneurs, while Union Square Ventures focuses on network companies and enablers of open data, and Great Oaks looks for CPG companies in the food industry.
For more information on the capital raising landscape, join us on Monday, February 27th from 5-6pm at The Farm Soho NYC, for a seminar that will cover the Capital Funding spectrum in more detail. Click here to learn more and register.
And for other start-up ecosystem related questions, feel free to reach out to us at It Will Bloom. It Will Bloom provides strategic planning services in marketing and finance, and hands-on operational support to fast-track the growth of emerging and growth stage companies. Our team's depth of marketing and financial expertise results in practical strategic advisory, and a true partner for your business. Whether your business is still proving out its concept, evaluating a new opportunity, raising capital, or is on a growth trajectory, we can help. Founders Andrea Feldman and Galia Gichon come with 20+ years of experience in brand marketing and financial services.
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