Raising Money for your Startup
There are many different sources of startup funding, including but not limited to bootstrapping from founder investments and customer revenues, friends and family, grants, individual angel investors (and groups of them) and Venture Capitalists. A startup should be building and maintaining relationships with potential sources of finance as a part of its business operations, not as an intermittent activity when it looks like the funding runway is about to expire or some other adverse situation arises.
Identify what you seek from potential investors
It is important that there is alignment between the vision and values of the startup and those who invest in it. Founders should establish early on what it is they seek from potential investors which may be more than just money. They could enhance the startup by bringing with them specialist technical, managerial or market sector experience or a network of potential customers or contacts that 'open doors' for them. If part of the funding deal is that an investor is granted a seat on the board then it is important to understand how they add value to the governance of the startup. Founders will need support as they grow their businesses and the worst situation is to have a passive investor on the board.
Raising capital is not a one off
Ideally you should seek investors who will be with you for the long term. Some early investors may not have the capital reserves to participate in subsequent funding rounds but others, especially Venture Capitalists, should be able to. However, in times of economic downturns (dot com busts) it is important to hold discussions with potential investors to understand how stable and how liquid their funds are. Venture Capitalists raise money from others (Limited Partners), consolidate their investments into one or more funds and then invest to generate returns. Some funds may be fully paid up but others may be calling on the Limited Partners a number of times during the lifetime of the fund. It is important that you understand how stable the VC's funds are so that you do not find at a later stage they are unable to invest because of the liquidity constraints of their Limited Partners.
Founders should undertake due diligence on all potential investors irrespective of their size. This should include financial and portfolio due diligence.
Hold your ground
An investor will want to get the best deal they can as will a founder. Therefore compromise will probably be needed during fundraising rounds. A founder's view of a pre-money valuation is likely to be much higher than that of an investor. It is important that founders know the true value of their startup and that they can articulate it clearly. Be prepared to demonstrate the assumptions that underly the valuation you have arrived at, rather than pick a number out of thin air and then struggle to justify it. If a founder can do this then they should hold their ground when it comes to negotiating an investment. Potential investors will not look upon you badly if you can demonstrate the thinking behind your valuations and it gives both parties the opportunity to challenge and discuss the current and potential worth of the startup.
Exit strategy
At some future date many investors (especially a Venture capitalist) will seek to generate returns on their investment by selling out (through probably an IPO) or an acquisition by another, larger company. Founders and early staff members who were granted "founder share options" may also want to see a return on their risk. This event could happen maybe 8 - 10 years after an initial investment is made, so it is important to understand the exit strategy of the founders and also that of the investors to ensure they remain aligned over time. Some investors will probably have a series of funds that are structured for different types of investment, including early stage and growth, so it is important o discuss them early on and periodically thereafter.
There are many different sources of startup funding, including but not limited to bootstrapping from founder investments and customer revenues, friends and family, grants, individual angel investors (and groups of them) and Venture Capitalists. A startup should be building and maintaining relationships with potential sources of finance as a part of its business operations, not as an intermittent activity when it looks like the funding runway is about to expire or some other adverse situation arises.
Identify what you seek from potential investors
It is important that there is alignment between the vision and values of the startup and those who invest in it. Founders should establish early on what it is they seek from potential investors which may be more than just money. They could enhance the startup by bringing with them specialist technical, managerial or market sector experience or a network of potential customers or contacts that 'open doors' for them. If part of the funding deal is that an investor is granted a seat on the board then it is important to understand how they add value to the governance of the startup. Founders will need support as they grow their businesses and the worst situation is to have a passive investor on the board.
Raising capital is not a one off
Ideally you should seek investors who will be with you for the long term. Some early investors may not have the capital reserves to participate in subsequent funding rounds but others, especially Venture Capitalists, should be able to. However, in times of economic downturns (dot com busts) it is important to hold discussions with potential investors to understand how stable and how liquid their funds are. Venture Capitalists raise money from others (Limited Partners), consolidate their investments into one or more funds and then invest to generate returns. Some funds may be fully paid up but others may be calling on the Limited Partners a number of times during the lifetime of the fund. It is important that you understand how stable the VC's funds are so that you do not find at a later stage they are unable to invest because of the liquidity constraints of their Limited Partners.
Founders should undertake due diligence on all potential investors irrespective of their size. This should include financial and portfolio due diligence.
Hold your ground
An investor will want to get the best deal they can as will a founder. Therefore compromise will probably be needed during fundraising rounds. A founder's view of a pre-money valuation is likely to be much higher than that of an investor. It is important that founders know the true value of their startup and that they can articulate it clearly. Be prepared to demonstrate the assumptions that underly the valuation you have arrived at, rather than pick a number out of thin air and then struggle to justify it. If a founder can do this then they should hold their ground when it comes to negotiating an investment. Potential investors will not look upon you badly if you can demonstrate the thinking behind your valuations and it gives both parties the opportunity to challenge and discuss the current and potential worth of the startup.
Exit strategy
At some future date many investors (especially a Venture capitalist) will seek to generate returns on their investment by selling out (through probably an IPO) or an acquisition by another, larger company. Founders and early staff members who were granted "founder share options" may also want to see a return on their risk. This event could happen maybe 8 - 10 years after an initial investment is made, so it is important to understand the exit strategy of the founders and also that of the investors to ensure they remain aligned over time. Some investors will probably have a series of funds that are structured for different types of investment, including early stage and growth, so it is important o discuss them early on and periodically thereafter.