What is fundraising for startups?

Tl;dr: This is a very simple introduction to fundraising for those that know absolutely nothing about what fundraising is!

You’re the founder of a startup. You don’t have the money to fund the growth you want to achieve. You aren’t profitable so you can’t use your cash flow to fund your growth. Or, you stone broke and need “Daddy” to get you started (Yes, Daddy can be an investor).

When you need money to run your company you “fundraise”. You reach out to people called “investors”. There are two main categories of investors:

• Private investors: These can be known as “angel investors”, they’re termed as HNWI (High Net Worth Individuals) and under US law need to be “Accredited” (Which means they have a lot of money).
• Funds: These are companies whose job is to invest other people’s money and they are paid to do so. Yes, the people that run the funds have their own money tied up, but normally they are given money from pension funds and the like.

This is highly simplified, but you can learn the details over time in my other blogs.

Why fundraise?

To state the obvious, your ambitions don’t match your bank account.

Startups are expensive and you will be shocked how quickly you can literally light a match to millions of dollars.

If you want to set up a little consulting company, all you need to get started are some business cards, a phone and maybe a website. Call that $50.

A consulting company is not a startup. Startups are companies designed to grow fast and scale up. The faster you grow, the more money you blow.

Why do investors invest in startups?

You want money. Money always comes with strings attached.

Investors are going to take a share of your company in exchange for that money. That’s typically 10-40% (best case and worst case), with the average more between 17-22%.

When investors take a cut of your company that process is called “Dilution”. This is because you add more shares when you issue them to investors, so like buying a coke and adding water to the drink, it gets “diluted” (so you lose the flavor?).

It is the hope of investors that in 7 years time your company will be worth a lot and their 20% will be worth at least 3x what they gave you. Realistically they want 10x or more, because most of their investments will fail.

Fundraising is a process

Fundraising is the process you go through to get money from investors.

There is a step by step process to raise.

1. You do preparation
2. You find investors
3. You get a meeting
4. You get more meetings and answer questions
5. You do legal stuff
6. You give up equity in exchange for cash (and maybe 6 months of your youth whilst you do it…)

All of those steps involve a lot of work and a heck of a lot of stuff to learn. But don’t worry, you can do it and you only need to know more as your company gets larger (as you raise larger amounts).

When you close a round of funding, you are “funded”

Fundraising is the process, right? Well at the end you get to tell everyone you “are funded” and “just closed your round”.

Why is it called a round? Well, you’re likely going to keep fundraising every 12 months or so, so you will go through many rounds of funding. Each round you hope to triple your valuation and triple the amount you are raising (or more). When your valuation doesn’t go up between rounds that is called a “down round” (It is really bad!).

The goal fundraising is to get you to a next round of funding

The truth is that once you raise money from investors you are basically a crack addict and you need your next hit of capital every year. “I’m jonesing” for that capital.

Startups that keep growing rarely reach profitability and so rely on other people’s money. Don’t believe me? Look at the annual reports of companies that just did an IPO.

When thinking about raising money, the best thing to do is to think about rounds of capital. You are raising to reach a new set of milestones with more traction so you can raise more cash at better valuations.

Fundraising is a means to an end

Some people enjoy fundraising. These can be people with a big ego who love the spotlight. They raise a lot of money and not they’re “cool” so TechCrunch writes about you and you get invited to talk at events.

The best founders put their head down and focus on growing the company (getting traction). Once the money has gone you need to show what you have done with it. If you get a lot of bang for your buck you are called “capital efficient”.

If you are a capital-efficient “operator” and deliver amazing results every year, fundraising becomes really simple as investors are suddenly throwing themselves at you.

Fundraising is something you learn how to do

I don’t care who you are. No one knows everything about fundraising. And frankly, you shouldn’t! You should be world-class at growing your company!

Yes, being incredible at fundraising is a competitive advantage as you can raise more than your competitors, but it does come at a cost of commitment to learning something pretty esoteric if I am honest.

If you’re stressing the f out that you don’t know how to raise, chillax. It’s not easy, but you can learn. I’m going to help you learn what you need to know, but you’re realistically going to learn on the job.

My advice is if you are raising a convertible note then learn about them. Don’t learn about priced rounds yet. Learn what you need for the stage you are at.