Money for your startup – this is what you need to know
STARTUP
Embarking on the journey of entrepreneurship often requires navigating the complex terrain of financing options. While some entrepreneurs bootstrap their ventures using personal funds, others seek external investments through fundraising. This article delves into various financing avenues available to startups, ranging from traditional venture capital to alternative sources like revenue-based financing and crowdfunding.
How to start: financing options?
The practice of an entrepreneur launching a company with own personal finances is called bootstrapping. Taking in external money is called fundraising. Usually, entrepreneurs start with self-funding a company and at some point, fundraise to fuel growth, build credibility, attract top talent and stay afloat. Capital to high-risk, high-growth-potential, early-stage ventures is called Venture Capital.
It is provided by professional investors (venture capitalists, corporates and family offices) and private individuals (business angels). Other financing options are, e.g., revenue-based financing, bank loans, grants and subsidies as many European governments want to support entrepreneurs, crowdfunding, startup incubator and pledges from peer-to-peer lending. To balance-out financing is individual and takes various parameters into account.
Is your startup VC-fundable: ambition to build a billion-dollar business?
Venture Capital is for the 1% outlier that have the aspiration and the potential to become a unicorn. Due to VC metrics early-stage investors seek 10x return on investment to give their portfolio an overall 3x return profile. That is to say, the company at the time of exit will have a return on money multiple that is at least 10X the size of the original investment that investors made at their point of entry. Companies capable of contributing to these types of returns potentially rapidly scale into very large businesses, and they need to be addressing a very large market.
How Venture Capital investors add to your business?
Getting VC money is a great opportunity and a competitive advantage. Investors come with networks, expert knowledge and support. They promise to add strategic value. Meaningful conversations can start as early as at first contact and last until exit. A (potential) investor might already actively use and test your product early in due diligence, spend time and truly engage.
VC money also comes with strings as part of their business model and LP promise. Consider all the pros and cons of venture capital before you pursue funding. Are high expectations on performance and a loss of control whilst gaining through a VC firm’s input, resources and connections okay for you?
When to start raising capital: nail it, then scale it.
While bootstrapping can take your company a long way, continuous growth and expansion often comes with outside funding. If you have an experienced team, launched an MVP, got early customers, and some level of product and market validation – then start fundraising. Plan in advance before running out of money.
Fundraising can take as long as six to nine months to finalise. A company’s first round is commonly referred to as its pre-seed round and is followed by Seed, Series A, B, C, and further growth-stage capital preparing IPO / Exit.
How much to raise in a seed round?
Look at your monthly cash burn and map out your company's important timelines and the cash you will realistically require to achieve them. A financial plan with a runway needed for 18-24 months seems to be realistic to accomplish the next key milestone(s). Add at least 6 months as a buffer for next fundraise. Valuable sources for validation are experienced investors and founders.
About the art and science of valuation and dilution
Valuation is a balance of setting a price that is acceptable to the founders but also agreeable to the investors. It is about assessment and negotiation. How much is or will your company be worth in the future? Find a valuation that will enable you to raise the amount you need to achieve your goals with acceptable dilution, and that investors will find reasonable and attractive enough to write a check.
The universal goal for any founder is to maximize valuation while minimizing dilution. With every round of funding do not give up more than 20 to 25% of the company's ownership to keep your startup fundable.
How to start fundraising as a founder?
Typically, fundraising consists of the following steps: define targets and timing, map target investors and prepare fundraising materials, have first intros and meetings, pitch to multiple investors, and finally, negotiate and sign. More than 107 German female founders successfully raised in 2022.
The good, the bad and the ugly: how to choose the right investor?
To build a startup is a tough ride – with unexpected turns, numerous years of hard work and many difficult conversations. That’s why you want to choose your partners wisely: co-founders, first team members and investors.
To choose the right investor ask yourself: What distinctive insights or network does an investor provide to support? Do they understand and embrace the kind of product and company you want to build? Does the investor share your values?
A good investor-founder relationship comes with aligning values and setting up the right expectations, communication, and working process like in any other relationship. Align on risks and opportunities - then off to creating value and winning the market.
My advice for female founders, who want to raise money from VCs
According to Atomico’s Tech Report female funding is down to 1%. That's why I want to share this three piece advice for female founders:
Gear up and come fully committed! Preparation is everything as you never get a second chance to make a first impression. Investors expect you to focus and dedicate 100% of your time.
You are never not fundraising! Fundraising is a people’s business and networking is an essential skill for a startup founder. Investors’ relations need to be nurtured. Be able to authentically articulate your edge and demonstrate momentum anytime everywhere. Convey your excitement, think big and tell your inspiring vision. At the same time have the details to back up your claims and awareness of risks and how to cope.
Be an optimist by heart! Expect the fundraising journey to be competitive and bumpy. You get 100s of no’s - and need only a few yes. Ask for feedback as each investor has a peculiar context. Resilience helps - and keep moving. Also speak to female investors. Female founded VCs have quadrupled within the past five years, e.g., Auxxo Female Catalyst Fund, Anthemis, Sie Ventures and Pink Salt Venture just to name a few.
About the author:
My name is Julia Dous, and I am passionate about diversifying cap tables. I accomplish this through talent advising Venture Capital firms and angel investing. As Chief of Evangelistas, a 250-member strong community of female business angels, I learned a lot about investors and founders.
Website: https://growdiverse.de