Fundraising 3.0 - How to get started?
Where to find the right investor? When your pitch deck is on point, and the design reflects your brand, goals, and characteristics of your business, and your storyline is clear and backed with data, it's time to dive into the many investment options.
The world of investors can be complex.
There are three basic types of investor funding: equity, loans and convertible debt, and grants. Each method has its advantages and disadvantages, and each is a better fit for some situations than others.
When talking about "equity funding", the first official investment round often consists of an angel, pre-seed, or seed round. These refer to a series of investments; for example, 15 or fewer investors "seed" a starting company with a capital between EUR 50.000 to EUR 2.000.000.
This budget is typically used to support the initial market and competition research before product development and get a startup from the ground. It has a steady base before developing an application. However, early-stage or seed-stage investments can be used for prototyping and creating an MVP.
So what types of investors rounds and financing are there? We gathered some of the most typical ones here, to explain them simply. While external funding is not the only option for startups to raise funds, we cover other ways, too: bootstrapping, loans, and grants. Let's go!
Bootstrapping: Building a business primarily with cash flow is called bootstrapping. In this scenario, a startup sells a product or service with minimal capital, their operating revenues.
An early-stage company is bootstrapping when they have founded and built a company from personal finances and only grows the business with the income they receive from selling their service or product.
Angel Round: An angel round is a smaller round designed to get a new company off the ground. Investors in an angel round usually include individual angel investors, family, and friends.
An angel investor is typically a high net-worth individual who provides capital for startups or early-stage businesses (usually coming from their pocket), usually in exchange for convertible debt or ownership equity. Angel investors usually fund startups initially, when most investors are not prepared to back them just yet.
Pre-Seed Round: A Pre-Seed round is a seed round with no institutional investors (such as a hedge fund or VC) or a slighter amount of often below EUR 150K.
Seed Round: Seed Round: The seed rounds usually occur while the company is still young and working to gain traction.
This funding round typically comes after an angel round and before a Series A round. There is a trend to bootstrap as long as possible (especially in tech). This means waiting as long as possible to begin fundraising and maximize valuation. These round sizes range up to EUR 2 million, though larger seed rounds have become more common recently.
Venture-Series: This funding type refers to an investment from a venture capital firm (however, where the series is not being specified). The Venture Series can be Series A, B, and later rounds. You can read Series A, B, and C definitions below.
Series A and Series B rounds are funding rounds for earlier stage companies, ranging on average between EUR 1M–EUR 30M.
Series C rounds (and all rounds coming after that) are for more established companies, on a later stage and. These rounds are usually above EUR 10M and usually often much more extensive.
Private Equity (PE): A private equity round is a late-stage funding round led by a private equity firm or a hedge fund. The funding rounds are composed of institutional and retail investors that invest in private companies.
The rounds are typically more than EUR 50M. But, as with all other types of funding, the rules are not set in stone. It is a less risky investment because the company looking for funding is more firmly established at this stage. PE investors can also be investing at an earlier stage.
Secondary Market: A secondary market transaction is a fundraising event in which one investor purchases shares of stock in a company from other existing shareholders rather than from the company directly. These transactions often occur when a private company becomes valuable, and early-stage investors (often co-founders and such) or employees (with equity) want to profit from their investment.
Lastly, Corporate Round: A corporate round occurs when a company invests in another company rather than a venture capital firm. These are often, though not necessarily, done to form a strategic partnership.
Crowdfunding
There is always an option to go for crowdfunding. Crowdfunding refers to the idea of raising funds from a large number of people for a project, cause - or in this case a company - through an online platform. It can also be a way of cultivating a community around a company, where businesses can take advantage of it to get early-stage support for their ideas.
Loans and convertible debt
Debt Financing: To be clear, with debt financing we are referring to business loans. This loan can be from family or friends, an investor, or a bank. In a debt round, an investor lends money to a company, which in return promises to repay the debt with added interest.
A bank loan usually requires some form of security or collateral. You should be extremely careful before securing a loan for your business from a friend or putting up your home as collateral; these decisions can cause a lot of grief if the company eventually fails.
Convertible Note: A convertible note (also known as "convertible loan) can be an "in-between" round of funding that helps companies hold over until they are ready for valuation, and thus the next round of funding. You will typically see convertible notes after a company has raised a Series A round but is not yet ready to raise a Series B round.
A convertible note is a way for seed investors to invest in a startup that is yet not ready for valuation. When the company is ready to raise the next round, this note will "convert" with a discount at the new round price.
Grants
Startup grants do not belong to the same category as funding rounds, but they are as important and can be key in a companies growth story.
Startups still exploring their concept and validating their business idea can often be applied for grants. A grant is when a company, investor, or government agency provides capital to a company without taking an equity stake; a grant is funding that does not require the transfer of shares. And that is precisely the reason why startups should always apply for all the grants they can!
There are a few different grants to help startups in the early days. Typically, grants are awarded for a specific part of a project, and the company must already have raised some capital.
For example, your project might be building a prototype. Let's say that will cost €100,000. 70% of the subsidy might come from a grant, and €30,000 must come from the company.
Last thoughts
When you are looking for financing for an early-stage startup, you will usually want investors that might want to be involved in this stage of your business. These investors might often consist of family or friends and individual angel investors to accelerators or early-stage VC funds.
Various funding ways have pros and cons, and angel investing will work better for others and equity-based funding for others. Some will "cost" your company equity, some will cost money.
We will most definitely come back with more blog posts, more details, and more personal experiences!
Need help?
Want to learn more about your investment options? Contact us, and let's meet up to discuss the possibilities of a fruitful partnership!
Did you know? We have a service called CheckMyDeckâ„¢, designed to support you in creating a business case or investor pitch deck that will open doors for you.
A solid business foundation is also the baseline for raising funds, applying for a grant. To reach your next milestone, nailing your pitch will help you.
Flourish on your feedback
Chances are you won't find your investors after your first try, and you'll likely hear a hundred "no's" before you get a "yes." With every "no" you receive, you need to precisely understand the received feedback. If you remembered to ask for feedback, that is.
And if you didn't, you better start asking for it. This way, you can continuously improve your pitch to the point of perfection. See failure as an opportunity to learn and grow.
Practicing your pitch repeatedly to know your material inside-out can get you very far. As part of CheckMyDeckâ„¢, our pitch deck feedback & training platform, we offer performance training to top-tune your performance skills and stand out in front of your Board, customers, or investors.
You can check it out on our website. www.kavanders.com/checkmydeck. We would love to walk the talk with you as these fantastic entrepreneurs have.
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