What Is Startup Fundraising?

Startup fundraising is the process of raising money to finance a new business venture. At its core, the fundraising process involves identifying potential sources of funding, developing a pitch, and presenting to investors. Founders can turn to a variety of sources to raise capital for startups, including:

Friends and family
Angel investors
Venture capital firms
Startup accelerators
Crowdfunding campaigns

The right time to begin raising funds for your startup is when you have a clear idea of your business model, market opportunity, and revenue plan — in other words, don’t raise capital before you know what you’re going to do with it! The perfect timing for fundraising depends somewhat on your particular industry, but in general, the best time to approach investors is when you start to see demand for your product start to pick up. The amount of demand you need varies, but most investors will want to see user or revenue growth of at least 20% month over month.

Let’s explore how startups get funding in more detail. We’ll go over different potential sources of funding, discuss the value of fundraising mentors for startup founders, and explain some of the most important concepts you need to understand to successfully raise capital for your startup.

What Are the Different Types of Funding Options Available to Me?

First, let's look at a few of the different types of investors:

Friends and Family

Founders often rely on donations or loans from friends and family during the earliest startup fundraising stages. This is not a formal type of funding, but rather based on personal relationships. It’s important to invest in your startup’s reputation by being transparent and honest about how you use funds from friends and family. Friends and family will often invest using a SAFE (Simple Agreement for Future Equity), which allows them to convert the money they’ve invested into equity at the time of the startup’s next funding round.

Angel Investors

Angel investors are typically high net-worth individuals who use some of their wealth to invest in young companies they personally believe in. Angel investors normally ask for equity in exchange for their funding. Some (but not all) angel investors also provide the founders in whom they invest with valuable advice and guidance as their startups grow. Angels will typically invest between $25k and $100k, but the exact amount you can expect to raise depends on your startup and the investors you choose to approach.

Venture Capital (VC) Firms

Venture capital firms are organized groups of investors who pool their money to back fast-growing startups with potential for high returns. VCs are able to provide some of the largest financial investments out of all the different funding sources. However, they typically take substantial equity stakes, and may expect some degree of involvement in business strategy decisions to protect their returns. For example, VC funds generally require the startup to first secure a lead investor before other venture capitalists in the firm will invest, and this lead investor will usually seek a board seat with the startup.

Startup Accelerators

Accelerator programs like Y Combinator, 500 startups, Founders Fund, Techstars, and many others offer a wide range of benefits for startups, including (but not limited to) funding. In addition to capital investments, startup accelerators provide the startups they accept into their programs with resources like mentorship, access to industry connections, and conveniently-located office space.

Crowdfunding Campaigns

Crowdfunding is a form of fundraising for startups that has taken off recently due to the ease with which social media allows founders to spread the word about their projects. A typical crowdfunding campaign hosted on a site like Kickstarter or GoFundMe accepts many small investments from backers — most of whom are not professional investors or high net-worth individuals — in exchange for whatever kinds of incentives the founders choose to offer, such as early access to the product. Founders can also try equity crowdfunding using a platform like StartEngine. Equity crowdfunding is very similar to regular crowdfunding, except founders offer equity stakes in exchange for investments.

What Can a Startup Fundraising Mentor Do for You?

A startup fundraising mentor is an experienced entrepreneur or investor who provides guidance, advice, and support to startup founders attempting to raise capital with which to build their companies. A fundraising mentor can help you develop your fundraising strategy, create a compelling pitch, identify potential investors, learn to negotiate term sheets, and more. They can also provide expert feedback on your financial projections and growth potential.

The most valuable asset a fundraising mentor has to offer you is their experience. A mentor can help you avoid common fundraising mistakes — as well as not-so-common mistakes you may not have otherwise anticipated. Mentors can provide firsthand insight into the fundraising experience, making it easier for novice and experienced founders alike to navigate the sometimes enigmatic process of courting investors.

A fundraising mentor provided through MentorCam can also provide a fresh, knowledgeable perspective on your startup’s growth strategy. This type of guidance is essential for aligning your fundraising efforts with future growth opportunities and plans for scaling your business.

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