How do I do a Primary Raise for my Start Up?
Unless you’re a gifted sales salesperson, pitching for funds feels unnatural. But it’s all part of the job description for most founders.
A funding round can take up to 12 months to complete. To get you started on your journey, we're going to summarize the basic knowledge you’ll need for your first round of fundraising, which is often called the seed round.
How to prepare for your first round
Startup capital is the money needed to finance a new business.
A startup may need to raise funds numerous times through different “rounds”.
Depending on what stage the startup is at, the funds raised in each round might be used for different purposes.
Money raised at the seed stage can be called startup capital, seed money, seed capital, or working capital. It pays for market research, product development, rent and supplies, new equipment and staff hires.
An early stage startup has proven its idea works and is looking for expansion capital, often called Series A and Series B funding, to scale the business.
At the late stage, the successful startup needs fresh funding to move into new markets either through new products, geographical expansion, or even acquisition.
Determine how much you want/need to raise
The first step you’ll need to take is to set a funding target.
The gold standard is to raise enough money to get you to profitability, but in reality, founders tend to raise just enough to get to the next milestone.
The amount you raise requires balancing three things:
How much ownership and control you’re willing to give away — modeling from your cap table is useful here.
How far you’re trying to go with the new funding.
Your perceived reputation and credibility, based on past progress and future plans.
Some founders find it useful to base their target on the number of months of operation they’re looking to finance.
Define the right financing tool(s) for your business
Convertible notes, simple agreements for future equity (SAFEs), convertible preferred stock, and common stock are all widely used seed financing tools.
Picking the right one(s) for your business requires that you evaluate how well the characteristics of each instrument align with your preferences.
Convertible notes are loans that could be converted into equity. They’re simpler and less costly to issue than convertible preferred stock. However, some founders are put off by the uncertainty around their ownership percentage on note conversion.
SAFEs are basically convertible notes without the interest rate, maturity and repayment requirements. They’re less familiar — and therefore less popular — with investors.
Convertible preferred stock gives holders the option to convert their preferred shares into a predetermined number of common shares after a prescribed date. Certainty is a big advantage but they’re also more complex and costly to issue.
Common stock is the simplest seed instrument because there are no special rights, preferences or privileges to negotiate. However, they lower the fair market value of the company's common stock, and that adversely impacts the company's equity incentives for employees.
Decide who you should be raising with and when
For the best chance of success, start fundraising when you’re ready.
You’re ready when you can demonstrate your product or idea fills a gap in a growing market. This requires knowledge about your customers and the market, and a firm belief that your product meets their needs.
You’re unlikely to win over investors without a compelling product and some level of customer adoption.
But you should start building your network as soon as possible. The more contacts you have from startup communities and networking events, the more people you can reach out to when you’re ready to pitch.
Remember, a warm introduction from a contact in your network is an ideal way to meet investors. Failing this, the next best thing is to participate in a demo day.
Develop your pitch
A good place to get started is to learn about your audience so you can create a pitch that connects with them.
A pitch built around a story is more likely to resonate, so figure out how you can turn facts, figures, and events into a compelling narrative.
Below are some ideas of what to include:
About you. Investors are investing in you as much as they’re investing in your idea or product. So impress them with your industry and entrepreneurial experience.
Your product. Investors will want to know why your product or idea is so great and if there’s demand for it.
Customers. Articulate who your customers are and why they’ll buy from you rather than someone else.
The competition. Identifying what you’re doing well in and how you can improve demonstrates you know how you compare against competitors.
Future plans. Investors are investing in your future, so you should be transparent about your plans and how funds raised will be spent. Itemize costs and provide revenue forecasts so investors can see where your business is heading.
Remember, even if you deliver a perfect pitch it’s highly unlikely that an investor will say yes immediately.
Another tip is to bring financial documents as evidence to support any business claims you make.
While it’s important to be confident, you’re less likely to connect with your audience if you come across as being arrogant.
Finally, how you deliver your pitch is crucial. Figure out a presentation style that suits you, then practice!
How to find the right investors
To find the right investors, you’ll need to consider the size of investments or returns they’re looking for, how “hands on” they’ll be and whether they’ll invest in seed or early stage businesses.
Venture capitalists have deep pockets, but they’re investing other people’s money, so they take longer to make investment decisions. Moreover, they tend to prefer startups with proven revenue models or at least a sizable customer base.
Angel investors are willing to be part of pre-revenue businesses but they’re investing their own money — which means they often want to be involved in company decisions. They may not be a match for founders looking for “hands-off” investors.
Private equity firms prefer mid to later-stage businesses that are already successful with stable profits and cash flows.
Crowdfunding sites can be great for streamlining fundraising process — simply post your pitch online and let interested investors come to you. Although funding doesn’t have to be equity based, there are caps to how much you can borrow.
SBA Microloans provide up to $50,000 to startups and small businesses, repayable over a maximum of six years. You’ll have to meet a strict eligibility criteria to qualify for the loan.
The deal isn’t complete until binding agreements are signed and money is in the bank.
Any investor doubts should be addressed quickly and timelines to finalizing arrangements should be clearly defined.
Founders must provide due diligence materials when requested. Documents like financial accounts and your cap table should be accurate and up-to-date.
A disorganized cap table could make it difficult for investors to evaluate their investment and raise a serious red flag.
Using a specially designed cap management tool such as Adnales will give you an advantage when fundraising. With Adnales, your cap table is always valid, so you can minimize effort in reconciliations and revisions. You can reliably and easily model out the impact of the proposed funding round.
To prepare for a primary raise, start defining what you’re looking for. Who is your ideal investor? How much would you like to raise? What amount of equity are you prepared to give away?
Grow your network even before you're ready to pitch. Keep accurate financial accounts and stay organized with your cap table.
To find out how Adnales can improve you cap table management and fast track your fundraising, request a demo today!