Common funding stages

I put this chart together for some UpStart clients who don’t have experience raising capital, and thought it might be helpful as a post. Of course, there are many ways to fund a startup. Some never need outside capital. Some only need one round. But for companies that need to raise significant capital, rounds tend to look like this:

In praise of the one-pager

Your one page teaser can be one of the most powerful tools in your fundraising aresenal. It’s your ticket to getting in front of potential investors and advisors. Here are a few tips on how to make the most of it:

-Write it after you you’ve developed your pitch deck, so you’ve already got a tight logic flow, and strong supporting arguments.

-Keep it brief. Limit it to one page, with no exceptions. It’s a teaser, so don’t try to cram in everything. Just enough to land the meeting and no more.

–Use headers. That makes it easier to read quickly.

-Send it as a PDF, so everyone can open it, and see it the way you designed it.

-Use short sentences. They are easier to read.

-Don’t share anything you don’t want forwarded. You will email this one pager, which makes it easy for recipients to pass along, and you won’t be asking for an NDA, so if you’ve got any secret sauce, save it for your meeting.

-The contents can vary, but I often include the following sections: “My team has the chops to execute”, “The opportunity is attractive”, “Customers are not getting what they need today”, “Our reason for being is Y”, “We have a realistic business model”, “We’ve accomplished 123 so far”, and finally, “We’re raising $X which will let us hit ABC milestones”. 

-Make it persuasive. This is effectively sales collateral.

Startup funding 201

Before approaching any angel, angel group or venture capital firm, do your homework. Know what they’ve invested in previously, and how those investments have performed. Know what types of investments they like to make now, which could be different from just a few months earlier. Know the backgrounds of the key players. And be sure you meet their investment criteria before you waste your time and theirs.

One tactic I’ve found particularly successful is to start by finding a lead angel – someone with expertise and credibility in your startup’s industry. Get that lead to commit before approaching other angels. If they are advisory board worthy, get them involved there too, and they’ll have even more upside to their involvement. You can even make their investment contingent upon your ability to raise some minimal amount from others, so they won’t be the only money in. Having a lead will give other angels more confidence in your opportunity and will also help settle questions about valuation.

In general, always seek out “smart money” investors – people with expertise, experience and skills and the willingness to use them to help grow your business. These investors can provide far more than just a check. They can help with strategy, provide business development leads, help you find and screen employees, drum up customers, suppliers, and more. Investors who have been successful entrepreneurs themselves are particularly beneficial. They know what it takes to start a new business, and will be both helpful and understanding.

Startup funding 101

If you plan to raise capital, there are some basics you should know. First, there’s a fairly standard set of stages startups and investors follow.

Startup round.

Most entrepreneurs begin with money of their own, and money from friends and family. At this stage, people tend to invest because they know / trust / love you, so they are not going to be as tough on your business plan as others. They will also be “patient capital” – they’ll be happy to make a profit on their investment, but they probably won’t be too upset if it takes longer than you expect. These rounds are typically less than $100,000 in total. Be sure not to take money from anyone who can’t afford to lose what they put in, and always make it clear that many things can go wrong, and that they could lose their money. This startup capital is typically used to the company prepared to launch its business by designing a product, creating samples or prototypes, and/or conducting market research. Some companies can get all the way to profitability using startup capital. Others must move on to the next stage.

Seed round.

Many companies seek outside capital in order to build a sustainable business. This stage is typically called a “seed stage”, and most entrepreneurs get seed stage capital from angel investors. An angel investor is an individual who invests their own money on an amateur basis – as opposed to a venture capital firm that invests the money in a fund, on a professional basis. Each year, angels invest about $26 Billion in more 57,000 companies – over 10x more companies than venture capital firms back each year. Some angels invest alone, and others invest through groups. Their levels of sophistication can vary widely; those in groups tend to be the most savvy, which makes them tougher to persuade, but also more valuable. Most angel rounds are below $1MM. The proceeds from these investments can be used for many different purposes. In many cases, angel rounds are designed to get a company to the point where it has a product or service up and running, and enough paying customers to prove that their concept works (aka “proof of concept”).

Series A round.

Companies that need significant amounts of capital often seek funding from Venture Capital firms. VC’s are tough nuts for the average entrepreneur to crack.  First, you’ve got to have the right background. Yes, VC’s sometimes invest in unknown, first time entrepreneurs, but there’s usually a back-story. More often, they invest in teams led by seasoned entrepreneurs with track records of success. Next, you’ve got to have the right idea. VC’s take a portfolio approach to investing. Let’s say a VC invests in 10 startups. Most of them will fail, or experience mediocre performance, in which case they’ll get merged or shut down. Maybe 1 in 10 of the companies will really succeed. For that reason, each of the 10 companies must have the potential to be a home run – to sell at a $100MM valuation or more, or make the equivalent from an IPO (remember those?). Oh, and it’s got to happen in 3 to 5 years. If your team or your idea doesn’t fit the bill, raising VC money will be painful or impossible.

Also, each venture capital firm has a specific focus. They invest in companies in specific industries and locations, and focus on certain stages of development – usually post-revenue. Plus, VCs tend to make larger investments than angels – typically more than $2MM, though there are some exceptions.

Bass ackward

In the late 1990s, when I launched my first venture, the first thing you did as an entrepreneur was to raise capital. You didn’t build a product, prove customers would buy it, prove you could make money selling it, and then raise money for expansion. You raised millions from investors, and then figured out the rest. It was ass-backward. And for most of us, it’s ancient history. Venture capital firms will continue to invest millions in teams with great track records, launching ventures that have potential to be worth $100MM in 3 years, but that doesn’t describe what most entrepreneurs really do today.