As an early-stage startup, raising capital is probably on your radar. Additional capital can help turbocharge your progress as a company. You can hire the people you need, buy necessary equipment, and invest in marketing that spreads the word more rapidly to your prospective customers. Without enough cash to fund the essentials, your startup won’t last very long.
You have a few options for fundraising as an early-stage startup. You can ask friends and family, set up a crowdfunding campaign, look for grants, and pitch angel investors. Each method has its own pros and cons, and it can be difficult to know which option is right for you.
In this post, we’re sharing insights from a conversation we had with Matt Dunbar, Co-Founder and Managing Director of VentureSouth, an early-stage investment firm in Upstate SC. Dunbar has been in the capital provider space for 12 years, and was an engineer and management consultant prior to that, giving him a wide range of experience.
Consider If You Should Do Outside Fundraising at All
First, you should know that fundraising isn’t the only right path for every startup. In fact, Dunbar says, “The best source of capital is revenue. If you can bootstrap via your own resources and money you make from customers, you’ll give yourself more flexibility.” To do this, Dunbar offers a reminder that bartering with vendors and negotiating for extended payment terms can be a great way to help manage cash flow.
What Kind of Business Do You Have?
If you do need to raise outside capital, the best way to determine what type of funding you should raise is to evaluate the kind of business you have. What amount of capital do you need in order to get to the point where you can start generating revenue? The answer to that question will help you to know which type of fundraising to pursue since the amount of funding each capital provider offers is one of the key differentiators between them.
What to Consider with Each Source of Funding
Dunbar offers a few additional pointers related to each type of funding:
Friends and Family
“Friends and family are a great place to start because they believe in you,” Dunbar says. “However, you need to be careful in how you structure the arrangement because you want to be sure you don’t make it problematic for later-stage capital providers to invest (in other words, don’t overprice the friends and family round).” Additionally, be aware that the relationship may change or impact your startup in ways you didn’t anticipate.
Grant programs are widely available for science-heavy startups. If you’re in the life sciences field, for example, opportunities abound, from federal SBIR/STTR programs, to corporate R&D to venture philanthropy.
Dunbar says that crowdfunding can be a good option for early-stage startups, particularly for consumer products that can be “pre-sold” through sites like Kickstarter and Indiegogo, but he recommends caution when it comes to equity crowdfunding. You’ll run into legal requirements that can become complicated.
With angel funding, you’re typically selling ownership in your business. You need to know what comes along with that, and every angel investment firm is different. There are several advantages of angel funding, making it particularly attractive to some startups. These advantages include the guidance and mentorship that most angels provide. Startups with an experienced angel investor on board can gain a significant edge over the competition.
Dunbar shares that angel investors are looking for specific things in a startup:
- A defensible competitive advantage — High-growth startups typically have a competitive advantage that isn’t easily replicated. For this reason, angel investors focus on this characteristic.
- The ability to generate significant growth in a short time period — Angels are looking to make a 50% rate of return, so they need to bet on companies that can grow very rapidly. Unlike some institutional investors that might be comfortable with longer return horizons, individual angels typically target achieving liquidity on their investments in 3-5 years.
- A strong team — Anyone can come up with a good idea. But a team that’s trustworthy and can execute the idea effectively is rare. Specifically, Dunbar shares that his company looks for resiliency and resourcefulness, relevant experience, knowledge of the industry, a deep understanding of the pain points prospective customers are experiencing, and an understanding of the economics of the business (how the business is going to make money). Beyond this, angel investors are looking for a willingness to take input and consider it in their decision-making. Angels want to do more than simply infuse a company with cash. They bring their experience and expertise to the table, giving the company a greater chance of success.
Advice from an Angel: Map Your Needs to Your Options
Dunbar shares a simple formula for early-stage startups wondering what type of fundraising they should do. He says, “Do your homework to make sure you understand exactly what you need when it comes to capital — and how various capital options might work in your business. Once you know what you need, you can map those needs against the right types of capital providers that are out there.”
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