HOW DO YOU RAISE CAPITAL FOR A STARTUP?
Money is the first concern, every startup needs money to grow, that’s for sure. In the early stages of a startup, one of the safest ways to raise money is to raise capital from venture capitalists. But do you know, When do you start to raise capital? How can you raise capital? The following are some of the most basic concepts when raising funding for a new startup.
What funding rounds do startups usually go through?
In the process of looking for investment sources for the project, startups often go through fundraising rounds such as seeds, series A, B, C… The gap between funding rounds is 6-12 months. The round-up of fundraising typically involves the steps of collecting company data, researching investors, preparing and practicing for presentations, meeting investors, and raising funds. Next is building the relationship, submitting proposals and specific plans, passing the appraisal round, ending the fundraising round with the transfer and paperwork. The startup will go through the following fundraising rounds:
- Round Serie A
- Serie B
- Serie C
Only Raise Capital when you genuinely need more money
The more money you raise from investors, the more you give up control. When still self-funding and developing, don’t focus on raising capital. The process of raising capital will require a lot of time, energy, and concentration. You may find yourself distracted and confused. Instead, a focus on product development is advisable.
Understand that raising capital is just the starting line, it’s not the destination. You’ll recognize when your startup really needs more money. Do not sell false promises to investors. Don’t plan and promote this idea with the goal of making money from investors. Be realistic, specific, and create the necessary growth momentum before actually raising for capital.
Just raise the necessary amount of money
Million dollar figures sound interesting. You may start thinking, “What would I do if I had 1 million dollars? What if an investor offered 10 million dollars, what would be the plan to use this money? ” This is not a good way to think, and somewhat elusive. Instead, as your startup grows to the next level, consider how much money you need to achieve your goals. For example, suppose you propose an amount of 1X in exchange for a 20% stake. However, the investors see the potential in your startup and propose 3X or even 5X in exchange for a 51% stake. If you decline this proposal, they won’t invest. When investors really see potential in a startup, they often want to control. Do you waver?
The more money raised, the more control your investors are going to want to have. Beyond percentages this means terms and conditions which add more protections for their money and more limitations on what you can do on your own.
In earlier stages you may crave and price flexibility and the ability to make all your own decisions far more than money. So, find a happy balance.
There are well known dangers of having too much money. It can lead to overspending, spending on the wrong things, slacking off, lack of creativity or focus on a more profitable model, more distractions and friction between the founders. Don’t come up short, but be alert to these risks.
Choosing an investor, choose carefully
The right investors can add value to your startup, far beyond the capital they bring to your business. You need to be careful in selecting the investors because seed investing is an early-stage investment requiring particular skills and experience.
When selecting an investor, consider the person, not the number. Select someone who can guide you through difficulties, who will be willing to mentor you and help you become a better founder. You also want someone who can help your startup identify and improve its shortcomings and develop its potential. Before deciding on an investor, make sure that they will stick with you during the remainder of the startup life.
Be careful of legal issues and types of paper documents
You may have heard a lot of shortcuts in founding a startup because many founders lack experience with contracting. There are many obscure phrases that you may think you understand but actually don’t. The problem is that startups often must operate in a very economical manner. Some founders are unwilling to pay for quality legal services in drawing up capital contracts. Paying for good quality legal expertise is an extremely wise decision. If investors discourage you from using money for this, they may not be professional and may be unreliable. In this case, you should choose other investors. Failure to do so may cause you to lose your enthusiasm and assets simply because you saved money on a few unqualified attorneys at the beginning. There are numerous forms of funding, many terms, an abundance of agreements, and multiple ways in which investments can be diluted.
Deals are structured many different ways. The legal documentation spells out the terms, covenants, conditions, responsibilities, and rights of the parties in the transaction. The money sources make deals every day, so naturally they are more comfortable with the process than the entrepreneur who is going through it for the first or second time. Covenants can deprive a company of the flexibility it needs to respond to unexpected situations, and lawyers, however competent and conscientious, cannot know for sure what conditions and terms the business is unable to withstand.