If deciding to start a business of your own if the biggest financial decision you'll make, how you finance your endeavor is your second biggest decision. The type of funding you choose (or don’t choose) will fundamentally impact the trajectory of your business and, ultimately, the value you extract from it.
Whichever way you go, the process of raising capital will be full of ups and downs. It will most likely take way more energy, time and resources than you anticipated. With that in mind, here are a few pointers to help you mentally prepare for the fundraising journey that lies ahead.
Know Your Funding Options
Venture capital, angels, super angels, angel networks, crowdfunding, corporate venture, revenue-based financing, tech banks, peer-to-peer lending. There are more sources of capital and funding options available to tech entrepreneurs than ever before. That's great news, but it can make fundraising overwhelming — every source has its own complexities and suitability to different situations and revenue growth stages.
Sometimes entrepreneurs become fixated on raising a particular type of capital, because it is readily available, what they know, or seen as a golden stamp of approval or success. However, serious entrepreneurs know that raising capital is not the end of anything — it’s the beginning of the real work to grow their business.
It pays to do your research and make sure you are fully aware of the pros, cons, and consequences of heading down a particular funding path. So, before you go asking for capital, make sure you do your homework.
Things to keep in mind:
Talk to as many of the different sources of capital as you can. Position these conversations as opportunities to learn. Don’t start pitching before you’re ready.
Seek out entrepreneurs that have used a funding option. Try and learn from them the good, the bad and the ugly. Many investors will list their portfolio companies on their websites — try reaching out to one or two of them or search your network for someone to introduce you.
Bring someone into the process who knows you, your business and raising capital. Someone whom you trust to give you the brutal truth. Lean on your business lawyer or a professional CFO, or scour your network for those with the right background if you don’t have professional funding advice to rely on.
Follow investment industry experts and news. Keep abreast of the investing cycle and what’s hot and what’s not. Just make sure not to get caught up in the hype.
As you start to dive into your financials, metrics, business plan and projections, it will become more apparent how much capital you need, and which sources of capital are suitable for your business.
To help you get started, the table below highlights the three different funding paths most startups take.
Raising Capital for Tech Startups:
How to Get the Funding that Maximizes Your Value
Prepare for the Time It Will Take to Raise Funds
A key element of a fundraising plan is a realistic timeline. Many entrepreneurs underestimate the amount of preparation, time, and resources that go into the process. Doing your research, creating solid financial projections, organizing your financial data and metrics, making connections, moving through the approval process and finalizing agreements is all guaranteed to take more time — and more of you — than you anticipate.
At Lighter Capital we have seen companies go through literally hundreds of equity and bank financings; no one is ever surprised at how fast an equity round comes together, or how quickly a bank funds a loan. It always takes longer, often months longer, than entrepreneurs expect. If you think you’re different, think again — it will take a long time.
If you don’t factor this time into your fundraising strategy, and you don’t have a plan for how the business will progress while you’re focused on fundraising, you risk letting your company languish while you're focused on securing funding.
Mentally Prepare the Team
Whether you are raising equity or debt, the fact is you will be distracted and you need to prepare your core team to handle duties in your “absence.” The time to address this is before you begin fundraising. No matter how much you try to stay involved in your company’s day-to-day management during your fundraising efforts, it would be foolhardy to rely solely on your personal leadership to keep sales figures up and your product development on time.
Ideally you can hire or train someone on your management team to take over some major responsibilities. However, this is frequently impossible when you also need to raise cash to hire those very people.
So, what can you do?
Make sure your key people know when you’ll be distracted by fundraising.
Create plans they can focus on without your help.
Make sure they are prepared to step up and fill the gap.
Identify duties you can easily delegate.
Hire someone with skills in a specific area, such as sales, bookkeeping or product planning.
As soon as you close your financing, you will want to hit your projections and build a good relationship with your new investors. You don’t want your company to languish and need lots of attention to get back to where it was before you hit the fundraising trail!
Ensure Funding Is a Cultural Fit
We can’t stress enough how important it is to choose your source of financing wisely. Your choice will fundamentally impact the trajectory of your business and the ultimate value you extract from it. So, as you think about what capital sources make sense for you, don’t underestimate the importance of finding an investor you can actually work — and live — with.
This is less important if you choose debt financing, because, generally speaking, lenders are not trying to influence or exercise control over your day-to-day operations and decision-making. But it is still important to make sure they are the kind of operator you want to do business with and that they treat their customers fairly.
At Lighter Capital, we go much further than traditional banks. We like to build solid relationships with our entrepreneurs and understand deeply how their business works. This is natural, since the performance of the company directly determines our investment return, much like equity. Of course, we are also interested in the company’s metrics, financials, and potential. We are happy to help where we can and will often work with our portfolio companies on their funding or business strategy — but only as much or as little as they request.
If you secure an equity investment, you will work very closely with your investors for a very long time, since they are a partner in the business. You need to have strong relationships and clear communication with your investors. So, if you are offered an investment on great terms, but you don’t have a strong personal relationship with the investor, you should think twice about accepting the investment.
Many businesses fail to meet their potential, and many entrepreneurs end up realizing no value from their startup when the relationship between investors and entrepreneurs breaks down. If you’re constantly clashing over the direction of the company, how to do reporting, or what the role of the Board of Investors should be, you’ll be expending energy that could be used more effectively to run and grow your company.
Before you commit to a deal, make sure you know what it will be like to work with the investors. Talk to other entrepreneurs who’ve worked with them and find out what it’s like to partner with them — in good times and bad.
Do the Legwork to Build a Network
When raising capital, it helps to have a strong network. Being an active participant in your local or industry community is a great way to build your credibility and profile. Investors will be more excited to work with someone who is highly regarded and passionate enough about what they do to be engaged and contributing to their communities. It’s never too early to start building networks where you live and in your industry.
Networking tips for entrepreneurs
LinkedIn is your friend. Do an inventory of everyone you know and add them to your social networks. Then browse the lists of people you may know to see who else you can add and make a list of 2nd degree connections you may want to connect with.
Plug into your local community. Make time to get out and make face-to-face contacts. Attend local meetups to connect with other entrepreneurs and industry insiders.
Help people in your network whenever you can. Offer to be a mentor or volunteer at a local university. Teach workshops and seminars in your community related to your area of expertise.
Leverage social media. Establish a strong social media presence. Create professional profiles that accurately portray you and your company. Push out valuable content that people want to share and participate in relevant conversations.
Get to know your local bankers. A bank loan is likely to be the cheapest form of capital you can get. While banks are more likely to invest in non-tech firms than in tech firms, you have a shot at getting a small amount of working capital. So start establishing a relationship with your local bankers, open an account and invite them for a cup of coffee to initiate the relationship. They are more likely to invest in an account holder who they know as a member of their community.
The value of a strong network cannot be underestimated. Having an army of influential and well-connected people at your back when you start your fundraising journey will exponentially improve your chance of success.
Learn more from the experiences of founders like you
Tune in to new episodes of our podcast, Bootstrapped: The Lighter Side. It's a great way to find inspiration from other early-stage tech founders, VCs, industry analysts and more.