𝗙𝘂𝗻𝗱𝗿𝗮𝗶𝘀𝗶𝗻𝗴: 𝗛𝗼𝘄 𝗕𝗶𝗴 𝘁𝗵𝗲 𝗙𝗶𝗿𝗲?
Updated: Jan 1, 2022
Fires bring warmth and food.
They also cause damage and pain.
Your ideas are meant to be the spark to something big. Maybe you plan to use outside capital to blaze your business into a huge bonfire.
While there are alluring tales of startups getting funding on the road to huge success, recognize both the benefits and the hazards of adding logs to the fire.
Some founders raise money to launch or continue the business. Others perceive it as a rite of passage or even a sign of success. Raising funds is definitely an accomplishment, but it’s also a means to an end - not the end itself.
Raising money may solve some problems and simultaneously add new ones, including investors with opinions and requirements.
𝗪𝗵𝗲𝗿𝗲’𝘀 𝗬𝗼𝘂𝗿 𝗛𝗲𝗮𝗱
Be certain why you are raising and whether the pros exceed the cons with any decision. Some reasons to pull in funds:
𝘎𝘳𝘰𝘸 𝘌𝘹𝘱𝘰𝘯𝘦𝘯𝘵𝘪𝘢𝘭𝘭𝘺 – Customers willing to pay and renew shows further demand. You may need funds to now expand significantly.
𝘔𝘰𝘷𝘦 𝘘𝘶𝘪𝘤𝘬𝘭𝘺 – Taking money is often a tradeoff of time versus equity. If you want to expand or exit faster, you may need funds.
𝘌𝘯𝘵𝘦𝘳 𝘔𝘢𝘳𝘬𝘦𝘵𝘴 – If you need equipment, a long development period, or heavy marketing to reach many consumers, consider raising.
𝘍𝘪𝘨𝘩𝘵 𝘋𝘦𝘢𝘵𝘩 – You may need working capital to make the next payroll or to keep up with rapidly growing competition. (Beware: You may only be delaying the inevitable.)
There are many ways to raise funds for your business. Depending on your path, you potentially face lots of rejection as you prepare and deliver your message many times.
You will get lots of tough questions, and if you’re lucky, even some feedback from investors who passed. A growth mindset* allows you to learn and possibly even solve some unknown problems around how your business will operate.
Bootstrapping entails relying on your own funds and support from friends and family to launch and sustain the business.
Depending on your network, you may be able to raise hundreds of thousands. This process can be “relatively” easily and faster since you will need fewer documents, less legal advice, and fewer costs.
Your network may be flexible on interest rates and ask for few restrictions.
If you cannot raise sufficient funds through your own network, then consider starting your business as a side hustle until you have created a business plan and gotten traction.
This process may not capture the funds you need while you get a ton of unsolicited questions and advice.
Be cautious of overcommitting to investors, including unfavorable financial terms or your time to communicate with them.
Some individuals are willing and able to invest in upcoming startups, either by themselves or through networks to pool resources.
In addition to capital, they can offer mentoring or advice. Some angel investors are highly successful entrepreneurs and others have specific skills (finance, legal, or banking) which can help.
Compared to institutions, you may find that they are easier to access with faster to reply with more favorable terms.
On the flip side, you may have to talk with lots of people to raise enough capital. If you plan on venture capital later, talk with an expert about not hampering that effort in the contracts your give angels.
Managed institutions offer funds raised from limited partners, both affluent individuals and organizations. VCs seek a huge upside to satisfy their investors and to cover their bets in other startups (many investments will not yield a return).
VCs can provide expertise, mentorship, and connections to potential clients, opportunities, and strategic direction. Most VCs have worked with many startups and see patterns of success and failures and will share their insights from a high level.
Keep in mind that the VC is often a long-term relationship over many years. Consider interviewing the partner(s) who will spend time with your business and asking other founders about their experiences.
VCs want companies with high growth potential, a strong team (or advisors and fractional leaders at earlier stages), and solid product and traction, depending on the round of funding. Pitching them will require well-prepared and often-presented pitches that will require a lot of time and energy from you and team.
Any investing firms will monitor your progress and expect regular updates (e.g. monthly or quarterly meetings and reports). The scrutiny can vary but expect a strong emphasis on a 7-10x return in three to seven years, so plenty of pressure to grow quickly.
VCs often ask for a board seat and that may mean that investors outnumber founders in board meetings, thus in control. Even supportive VCs have a fiduciary loyalty to their limited partners and that may not align with you and your co-founders, the company’s values and culture, and ultimate company destination.
There are some wonderful stories of companies crowdfunding their way to success. However, they represent the extreme, not the norm. The platform is a great way to communicate your passion directly. If people believe in you, they can sponsor and share your work.
Crowdfunding may raise a lot, even more than expected. It helps to gauge interest in your business before launching, and can create buzz through free marketing and piquing investor interest.
It all may sound wonderful. A lot of other founders think the same. There are numerous founders vying for attention across sites. You may lose interest if someone else pitches a similar idea or if your vision, content, or imagery fails to resonate with users.
Keep in mind that projecting the right message and visuals may require professional services (e.g. writing, editing, video production). While some founders appreciate few demands on the money raised, others may benefit from more advice and support.
𝗜𝗻𝗰𝘂𝗯𝗮𝘁𝗼𝗿𝘀 𝗮𝗻𝗱 𝗔𝗰𝗰𝗲𝗹𝗲𝗿𝗮𝘁𝗼𝗿𝘀
Incubators and accelerators strive to nurture a newly formed business and normally run for 4-8 months. Business owners often receive useful mentorship and potential introductions to investors. You also connect with other startups.
The downside is that you may feel too little pressure (the pressure from outside investors often helps some founders despite being uncomfortable) or funding (you may need to keep a day job or another income source).
𝗕𝗮𝗻𝗸𝘀, 𝗦𝗕𝗔 𝗟𝗼𝗮𝗻, 𝗮𝗻𝗱 𝗢𝘁𝗵𝗲𝗿 𝗟𝗼𝗮𝗻𝘀
Rather than give up equity or approach individuals to help, you may turn to various types of financial institutions.
Banks can offer large amounts of capital and help in other ways, such as introducing potential clients (although rare) and investors. The more borrowed, the more diligence the bank wants. If the business lacks assets, or the recommendation of a large investor, then the bank may ask for a personal guarantee and covenants.
Small Business Administration (SBA) and other groups provide seed loans to businesses. They're relatively easy to obtain, demand fewer requirements and restrictions, and offer lower interest rates. They are usually not large but could provide enough to last a few months.
Some organizations provide funding quickly and easily. The cons include a personal guarantee, limited funds, owed in part or whole in short time frames, and debilitatingly high interest rates. This is only a good option if you need funds briefly so the business can continue operating and growing.
You don't always have to draw in external funding sources. Let's cover some other ways to maintain cashflow. Some are lasting while others are temporary in order to cover a dip.
𝘗𝘳𝘰𝘥𝘶𝘤𝘵 𝘗𝘳𝘦-𝘚𝘢𝘭𝘦: If you can sell your product to clients before incurring most of the costs, that could also help you gauge product interest, prioritize features, and receive other valuable feedback.
𝘗𝘦𝘳𝘴𝘰𝘯𝘢𝘭 𝘊𝘳𝘦𝘥𝘪𝘵 (Loan or Credit Cards): Some founders are willing to put themselves in debt for what they believe. While we hear incredible success stories with this approach, we never hear of most founders who ended up paying off that debt for years, so beware.
𝘚𝘦𝘭𝘭𝘪𝘯𝘨 𝘈𝘴𝘴𝘦𝘵𝘴: Whether a planned pivot or a necessary move to keep open, some founders sell assets (real estate, inventory, domain names, even intellectual property) to keep the business going.
𝘍𝘢𝘤𝘵𝘰𝘳𝘪𝘯𝘨: If you have a lot of reliable receivables and need the money sooner (e.g. seasonal business or SaaS companies where growth takes time), you can get a loan based on the receivables.
𝘗𝘢𝘺𝘮𝘦𝘯𝘵 𝘛𝘦𝘳𝘮𝘴: If facing a temporary cash crunch, you can work with customers to cover that gap. To bolster cashflow, try offering a deep discount for paying up front, lowering payment terms (e.g. 30 days instead of 60 days), and asking renewing clients to pay early.
𝘌𝘮𝘱𝘭𝘰𝘺𝘦𝘦 𝘐𝘯𝘷𝘦𝘴𝘵𝘮𝘦𝘯𝘵: You may already have employees with some tradeoff in compensation and equity. If you face a cash crunch, you can approach employees (some or all) and ask if they are willing to defer pay for a limited period. This could be enough to bridge a gap.
𝘊𝘭𝘪𝘦𝘯𝘵 𝘐𝘯𝘷𝘦𝘴𝘵𝘮𝘦𝘯𝘵: Occasionally, some clients are so excited about your business that they will invest in your success. Consider if their business and values align with yours and avoid exclusivity unless you’re willing to change from entrepreneur to employee.
𝗛𝗼𝘄 𝗠𝘂𝗰𝗵 𝘁𝗼 𝗥𝗮𝗶𝘀𝗲?
There are several lines of thinking here:
𝘔𝘪𝘭𝘦𝘴𝘵𝘰𝘯𝘦 – You want to raise enough to reach the next milestone, whether a next round, product stage, or sizable customer acquisition. In calculating your runway, include all expected costs (more team, overhead, new resources, etc.) to ensure you ask for enough.
𝘊𝘰𝘧𝘧𝘦𝘳𝘴 - Some founders like to raise more than is needed now to ensure against unexpected emergencies or a dried-up market. Realize that raising more will also increase your dilution.
𝘝𝘢𝘭𝘶𝘢𝘵𝘪𝘰𝘯 – You want to raise with a favorable valuation, one that does not dilute you too far 𝒂𝒏𝒅 leaves you with future options. Note: Some valuations are so high, it will be nearly impossible to raise again or to exit.
𝘗𝘳𝘰𝘧𝘪𝘵𝘢𝘣𝘪𝘭𝘪𝘵𝘺 𝘷𝘴. 𝘎𝘳𝘰𝘸𝘵𝘩 – If you have no limit on how much your business can grow, engage investors looking for a big return. If you only want enough to reach profitability, then consider money from non-investors which you can easily compensate.
𝙁𝙪𝙣𝙙𝙧𝙖𝙞𝙨𝙞𝙣𝙜 𝙬𝙞𝙡𝙡 𝙖𝙡𝙬𝙖𝙮𝙨 𝙩𝙖𝙠𝙚 𝙢𝙪𝙘𝙝 𝙡𝙤𝙣𝙜𝙚𝙧 𝙩𝙝𝙖𝙣 𝙖𝙨 𝙮𝙤𝙪 𝙩𝙝𝙞𝙣𝙠.
Fundraising takes time, figure at least 3-6 months. Fundraising happens in addition to maintaining and growing the business. You need cashflow now and want to have good numbers to present in future presentations.
You may even start fundraising before you know it’s necessary to ensure the option remains if you decide for it.
With all these options, consider the impact on co-founders, and current investors, and employees. And you. Starting, building, and growing a business is an incredible strain. Fundraising adds to your effort – nothing else magically goes away.
The process is a chance to learn and to reach your dreams but adds another layer of stress on you and other stakeholders.
𝙏𝙝𝙚𝙧𝙚 𝙞𝙨 𝙣𝙤 𝙧𝙞𝙜𝙝𝙩 𝙖𝙣𝙨𝙬𝙚𝙧.
Your needs, timeline, vision, and values are unique. Others may insist they know the right option for you (just like a surgeon may recommend surgery).
This is one of those times when you should get a lot of input and then decide what is best for you.
🔥 Fire can be used in many ways to make life better and worse. Fundraising is equally valuable and dangerous to reach your vision.
* This post talks more about a Growth Mindset: www.webuildscalegrow.com/post/5c07b7fc
Photo by Mikhail Nilov who can be found here: https://bit.ly/3EaRkPy