Raising Capital for Startups: A Complete Beginner’s Guide
It takes money to make money. Nowhere is this more true than in the startup world. Getting products developed, launched, and marketed requires significant funding. To get your products off the ground, you need a discerning plan for raising capital.
This guide provides the basis for the essential information you need when raising capital for startups.
Know the Different Types of Investors
Before you start pitching, you need to know the different types of investors—as well as their pros and cons.
Venture Capitalists (VCs)
Venture capitalists (VCs) and venture capital firms exchange capital for an equity stake in a product and/or company. They provide funds to startups, early-stage, and emerging companies that can demonstrate high growth potential.
One of the great benefits of getting funding from a VC is that they tend to invest large sums. Investments over ~$10 million are common. The downside is that these large investments aren’t available to just anyone. It’s hard to find a venture capitalist who is willing to invest without seeing that a product or business is capable of generating significant revenue.
A good situation to approach a VC is when you have a product that is generating strong revenue, with high growth potential, and you need capital to expand to larger markets.
Angel investors provide capital for startups in exchange for equity or debt. Compared to VCs, angel investors are more willing to take risks, therefore investing earlier in the start-up stage. Entrepreneurs in the seed and post-seed stages often seek out angel investors before they have hit a point where they can approach venture capitalists.
A pro for getting funding from angel investors is that you do not need to show as much history of revenue generation and growth, since they jump in at earlier stages of investment. Because of this, they often look more at your team, the product, market, and potential.
The downside of finding an angel investor for your product is that they do not have access to as much funding as VCs. Although they take on riskier (earlier-stage) ventures, they provide less capital.
Social circle investors usually include the founders, friends, and family. At the beginning of a business or product, this is where the initial funding often comes from.
Funds that you put up yourself have the clear benefit of not having to give up equity, which is especially helpful early on. As well, friends and family may not be as demanding on their return as private investors. Also, this is a good chance to practice your pitch in a more friendly and welcoming environment.
There are, however, some risks and limitations on relying too heavily on your social circle for investment capital. Putting up your own money, for instance, puts you at risk. You don’t have anything to fall back on if you put too much in. People often take out mortgages on homes, putting themselves in a position where their business needs to succeed or they risk financial ruin. This leads to poor decision making and significant stress.
As well, there is a limit to the number of personal investors you can have. This can be an issue, especially since personal investors often cannot provide as much funding as private investors.
Private Equity Investors & Investment Groups
Private equity (PE) is an alternative investment funding option for businesses not listed on the public exchange. Private equity investors and funds invest directly into a business, or buy them out and restructure them.
For companies in the early stages of development, PE funding may not be available. Typically, PE funds get involved at later stages than angel investors and venture capitalists, however, they often provide much more capital.
Crowdfunding has become a popular approach since the advent of sites like Kickstarter and GoFundMe. This approach uses crowdsources capital, using smaller contributions from lots of believers to fund a product. Instead of making an investment, funders get perks or products in return for providing funds. As such, you don’t have to give up any equity.
Still, crowdfunding isn’t for everyone. Getting significant funds is difficult, so it is more appropriate for businesses or products that need less funding at this stage. Most companies that pursue crowdfunding have been unable to, or are not yet ready to, get funding from VCs, PEs, and angel investors. Often it’s used by pre-seed companies attempting to raise enough capital to get products developed.
Understanding Funding Rounds
Pre-seed funding rounds are for startups who are early in their product development stage. A common goal for pre-seed startups is to raise enough capital to fund the first version of their product, or their minimum viable product (MVP). Once the first product is released, companies will move on to attempting to raise seed money.
Pre-seed companies will likely aim to pitch to personal investors, angel investors, and/or crowdsourcing.
Seed funding rounds are where startups seek to enter the equity funding stage. Seed startups have a product that they are looking to improve, scale, and expand. To do so, they require capital, as well as technical and/or professional support.
At this stage, companies can leverage the success of the first version of their product to prove the viability of their product and its growth potential. Now that they have real-world results, rather than relying on promises and potential, they can open up to larger investors. For seed funding rounds, companies often pitch to angel investors and venture capitalists.
Series A, B, C+
Once a business has been seeded, startups can enter Series A funding rounds. At this stage, investors are willing to invest significantly more into a product or business, but they expect a lot more. At this stage, they want to see traction in KPIs, users, and/or revenue, with a clear plan for developing the business model. As well, businesses are expected to be using this money to increase revenue.
Series B, C, and beyond rounds are intended to continue expanding products and raising revenue. Each new round of funding has more potential for larger investments, but require significant capacity and ability to scale and grow.
Partnerships for Raising Capital & Growing Startups
Torinit is a strategic technology partner that is dedicated to helping you grow. We provide startups and SMEs with the development, technology, and professional tools they need to grow. As well, we have access to the private equity and venture capitalists you need to take your product from pre-seed to Series A, B, C, and beyond.