How to Fundraise: All You Need to Know to Kickstart Your Startup
Angel Funding —8 min read
Whether you’re a first-time business owner or a seasoned entrepreneur, funding for your startup will need to come from somewhere. That’s where the startup fundraising process comes into play.
Fundraising is an exciting step in the startup formation journey, but it’s also filled with potential hurdles. If the prospect of thinking of fundraising ideas and negotiating with investors makes you nervous, don’t fret — in this article, we’re going to take you through the ins and outs of how to fundraise for your startup.
Put simply, startup fundraising is the process of raising capital from external sources with which to launch a new venture like a small business or startup. Founders use startup funding to pay for the many expenses of establishing and growing a business, including market research, product development, branding, hiring, and much more. Without capital, no startup can survive for very long.
Startup funding can come from many different sources:
- Angel investors are wealthy individuals who invest their money into attractive business ideas. They can be a fantastic source of capital for young startups, but keep in mind that they will typically want equity (a share of ownership in your company) in return for their investment.
- Venture capitalists invest substantial amounts of capital into promising startups in exchange for equity — just like angel investors. The main difference is that while angel investors invest their own money, venture capitalists manage venture funds consisting of money contributed by various individuals and institutions.
- Grants are sums of money given to a venture by a charitable entity like a nonprofit organization or a family foundation. Applying for grants can be a very quick process or a very time consuming one, depending on the type of grant you’re applying for.
- Startup accelerators like Y Combinator often fund promising startups. One advantage of applying to a startup accelerator is that you get far more than just money — you also get access to invaluable resources like office space, mentorship, and exposure to investors.
- Crowdfunding platforms like Fundly or GoFundMe allow founders to raise money in small increments from individual supporters. This style of digital peer-to-peer fundraising has gained considerable popularity in recent years. There are even crowdfunding platforms like Qgiv that are geared specifically toward raising funds for charity and nonprofit organizations.
- Bootstrapping is another word for self-funding your startup. It’s pretty rare for a startup to be 100% funded with the founder’s own money, but many startups bootstrap at first just to get off the ground.
To understand which type of funding source you might need deep dive to the 6 Different Types of Startup Investors.
Preparing for Success
Before you approach potential investors, there are a few steps you can take to maximize your odds of success. First of all, as you’re learning how to fundraise, never forget that your ultimate goal is to sell your idea to investors. You need to adopt a sales mindset and instill confidence in your buyer.
Here are a few surefire ways to get investors feeling confident in your pitch:
1. Clearly define your project.
Hardly anything will kill an investor’s interest in your business faster than not being able to figure out what it is. Within the first sentence or two of your pitch, the investor should be able to fully grasp why your product or service exists and what it does.
2. Conduct thorough market research.
Investors (especially venture capitalists) are in the investment game to make returns. Their ultimate goal is to find the business ideas that are most likely to provide them with exponential profits. Clearly defining your idea will get them listening, but to hook them, you’ll need to back up your idea with some research.
Most importantly, show investors that you’ve found a significant market segment (group of customers) who are interested in what you’re selling. Even better, show them that you’ve done the math to prove the long-term profitability of your business model.
3. Know how much money you need.
You should know how much money you plan to ask for and what you plan to spend it on before you start the process of courting investors. Not only will your preparedness bolster investors’ confidence in you, but it will also ensure your business doesn’t over or under-fundraise. Accept too little funding and your startup may run out of money, but accept too much and you risk diluting your share of ownership in the company.
Crafting Your Fundraising Strategy
So how do you craft a fundraising strategy for a business that actually gets the results you’re looking for? The first step is to choose the fight funding source. Like many aspects of launching a startup, funding the appropriate funding avenue begins with research. Start with your existing network. Put yourself and your company on angel investors’ radar by reaching out to any potential investors you know or anyone who might know a potential investor. Find out if there are any government grants currently available for businesses like yours that you could apply for.
Most importantly, consider the nature of your venture and ask yourself what kind of funding makes sense for your unique circumstances and goals. For example, are you willing to give up a share of equity in exchange for a large investment from a venture capital firm? Sometime s, this is the best way to inject a great idea with the momentum it needs to succeed. Or, if you already have a loyal group of early adopters and a product that can be funded incrementally, it may make better sense to entirely crowdfund your business.
Building a Pitch Deck
Once you know who you’re going to ask for the funds, the next step is to create a pitch deck. Whether you plan to approach an angel investor or a venture firm, start a crowdfunding campaign, or apply for a grant or accelerator program, you will need a compelling pitch that explains why your startup is worth investing in.
We can boil an effective startup pitch deck down to a few essential ingredients:
- Problem - what problem does your product or service solve?
- Target market - who experiences the problem on a regular basis?
- Solution - how does your product or service solve the problem?
- Traction - what evidence of success do you have so far?
- Team - who is behind your product or service and what do they each bring to the table?
- Competition - what other solutions like yours exist and how will you beat them?
- Projections - how will your business model make a profit long-term?
While most investors will be interested in all of these elements, you should structure your pitch deck according to your startup’s specific strengths and weaknesses. For example, if you don’t have strong evidence of traction yet, make up for it by emphasizing your dream team and your impeccable market research.
Above all, remember that brevity is king. Investors don’t want to hear a long, polished speech about your business. They want to hear the “nuts and bolts” elevator pitch that communicates as efficiently as possible why your idea is worth their time and money.
Executing the Fundraising Campaign
By now, you’ve prepared as well as you can and it’s time to execute on your fundraising strategy.
First and foremost, get into a realistic mindset about your fundraising timeline. Startup funding typically progresses in rounds, beginning with a seed (or even pre-seed) round and moving on to series A, B, C, and beyond. The timing of each round depends heavily on the industry you’re in and the types of investors you’re working with. In general, you can expect each round of funding to take at least three months to complete, but plan for the possibility of a year or longer. Likewise, the length of time between funding rounds usually varies from about six months to a year.
This is a great time to contact anyone in your personal or professional network who may be able to help you speed up the fundraising process. Many professional investors are much more receptive to founders who come recommended by a fellow investor or another founder in whom they have previously invested. If you’re raising money from supporters via a crowdfunding platform, make sure you create attractive incentives like limited edition merch, early access to new features, or custom thank-you packages to encourage investments.
Overcoming the Challenges of Fundraising
Fundraising is not easy. According to data from Failory, 16% of failed startups meet their fate at the hands of financial problems. So how do you make sure your business doesn't get added to this statistic?
Our first piece of advice is one that no one likes to hear: embrace rejection. Investors say no to a lot of startups — far more than they say yes to. It’s their job to be brutally discerning. Each time you’re turned down, use the feedback as a stepping stone to improve your chances with the next investor. As they say, don’t get bitter; get better.
One of the best ways to get better is with the help of a mentor. By leaning on the guidance of a founder or investor with years of real experience, you could reduce your learning curve considerably. A mentor can share fundraising tips to help you avoid common mistakes and shortcuts to help you reach your funding goals faster.
Fulfillment and Trust
The fundraising process doesn’t end after you’re done raising the money you need. After you've secured the capital, it’s essential to follow through on your end of the bargain by delivering on commitments to investors or backers. It’s also crucial to maintain transparency by providing regular updates on your business’s progress. If things aren’t going according to plan, it’s far better to be upfront with your investors rather than blindside them when they think everything is going smoothly.
It’s common for founders to struggle with fundraising — either because the process intimidates them or because they have poor understanding of what it entails. But raising capital doesn’t have to be a headache. If you apply the strategies and tips we’ve outlined in this guide, you’ll be well on your way to a successful fundraising round. If you’re finding it difficult to learn how to fundraise by yourself, enlisting the help of a fundraising mentor is a great way to get personalized, one-on-one guidance. To learn more about fundraising be sure to check out the 13 Smart Methods To Raise Money For a Startup.