At Peak Asset Management, we help startups navigate through the murky and confusing waters of raising investor capital. This is where Peak’s community of passionate investors come in. We don’t just look to raise money for anybody and try and collect a fee. We only show our community deals that we would invest in ourselves.
There is no doubt that the game has changed with respect to raising money for your startup.
Investor capital is now more abundant than any time in history and valuations are at an all time high. Plus, entrepreneurs now have access to some brilliant platforms that were not available a few years ago.
Source: The Verge
Does this make funding your startup an easy task? Certainly not!
This is a guide to some of the sources of raising the capital needed to fund your next stage of growth.
Friends and Family
· Raising size: $1+
· Business stage: Seed – some traction but funding is typically used to prove product-market-fit
· Where to find them: Your phone book
There is no shame in using your close contacts to get your business of the ground with a little funding. When raising money from friends and family, ensure that they are well and truly aware of the risks of investing in your business.
The reality is that most businesses fail, so to avoid any bad blood – make sure the amount requested doesn’t have a meaningful impact on their overall finances if it goes belly up. Despite the seemingly casual nature of the transaction, agreements should be drawn up that clearly set out what each party stands to gain and lose.
These types of investors are easier to approach and faster to raise money from. However, raising money from friends or family carries very little credence in the eyes of future investors. Provided you make traction and find product-market fit, build a large following of dedicated users or even achieve cash flow break even, then any lack of social proof from previous investors will become irrelevant.
Make sure that you treat this class of investors as you would a more formal investor. It will give you good practice in honing your pitch, give you an appreciation of any questions that you may not have thought of and understand what isn’t clear about your offering. Plus, this ensures that your backers have been grounded in what the transaction really entails.
Entrepreneurs that choose this path could bootstrap their business for longer, allowing you time to prototype and gain traction. It will be significant to prove that there is a market for what you are building and that you’re the one who is best poised to deliver it. This will enable you to sell equity at a higher valuation when it is time to scale your offering.
· Raising size: $50k to $1m
· Business stage: Seed – some traction but funding is typically used to prove product-market-fit
· Where to find them: Leverage your network – warm introductions are most effective. For cold introductions, use AngelList
We have intentionally separated Angel Investors from friends and family, mainly because the emotional component is removed.
Angels come in all shapes and sizes. They are wealthy individuals that invest their own money in startups. Angels generally don’t sit on your board and depending on the Angel, the mentorship and guidance is not as rigorous as a VC fund. Angel funding can be a great way to get early capital for your startup.
Most Angel investors have been successful entrepreneurs in their own right. So, securing an Angel investor can help with more than just the capital. They can provided guidance, prevent mistakes and open the right doors for you by leveraging their connections.
If they don’t understand your business vertical when pitching, make sure that you simplify what the problem is that you are solving and how you are going to solve it. Hint: metaphors are a great way to break-down these barriers.
Individual Angels will typically invest $25 – $100k individually. So, if you’re looking to raise $500k seed money from Angel Investors, this round will consist of multiple Angel’s investing. Despite the quicker decision process than VCs, reaching out to various Angel Investors and therefore having multiple meetings can be exhausting and an inefficient use of time.
Angel Groups or Super Angels are a great way to raise larger amounts of capital over a shorter time horizon.
Angel Groups are groups of accredited investors that invest in a syndicate by pooling Angel funds to make larger investments. Angel Groups share deal flow, due diligence work and may invest around $750k in one transaction.
Super Angels are individual investors that invest on behalf of other investors. This variety of investor might kick in $600k in one go. These investors differ from VCs with the added bonus of not relinquishing as much control or equity in your business.
Startups that raise an Angel round will typically be at the seed stage, meaning revenues are unlikely but you might have a concept, a team or an early prototype. Assembling a great team and preparing a great pitch are vital for securing your first Angels.
Building a prototype is cheap these days and most Angels will expect to see one. The more you can demonstrate your vision via a prototype, the greater chance you will have of communicating your vision and securing investment.
Getting investors early will make raising further money easier – this is why you should pick the lowest hanging fruit first. Then you can secure investors that will add value
Finding your friendly neighbourhood lawyer would be a good idea. Term sheets and related costs can be quite cumbersome for a startup at this stage. There are some law firms catered specifically towards entrepreneurs but it will still cost more than a few thousand bucks, so make sure you raise enough to make it worthwhile.
Accelerators and Incubators
· Raising size: $10 – 50k with potential for large investment after
· Business stage: Seed
· Where to find them: Apply. Here is a list for Australia
Accelerators take a small amount of equity in return for mentorship and small amounts of capital. Accelerators are akin to a boot camp for startups that last for 3 – 4 months. Accelerators provide valuable connections to investors and potential business partnerships and upon ‘graduating’, startups will pitch investors.
World famous accelerators include Y Combinator and TechStars where the competitiveness to secure a position is insane. If you have somehow missed these awesome lectures from Y Combinator – you must check them out. Speakers include Peter Thiel, Paul Graham, Marc Andreessen, Ried Hoffman, Ben Horowitz and more. And if you don’t know who these people are, you have been living under a rock!
The numbers will tell you that it’s unlikely that your startup will be a roaring success right out of the blocks. Being part of an accelerator will help you avoid some crucial mistakes and enable your business to pivot when required. Moreover, this is a breeding ground for potential future business partners, mentors and investors.
Under the incubator model, the startup will relocate to the incubator and work alongside other startups which are funded by the same group of investors. Instead of being confined to a few months, startups will stay in the co-working space as long as needed. The co-working space helps enables you to bounce off like-minded entrepreneurs on a daily basis who are all trying to build something exciting and get their business of the ground.
Both accelerators and incubators are excellent for first time founders that are looking to fast track the learning curve of starting a business and make valuable connections.
Source: The Startup Guide
· Raising size: $3k – $3m+
· Business stage: Seed
· Where to find them: Google. The question becomes which platform is right for your business vertical and more importantly where do you find your backers
There are 5 crowdfunding models that have risen to prominence in the past 5 years: rewards, equity, debt-based, donation and royalty crowdfunding. Innovative platforms such as Kickstarter, wefunder and OurCrowd have fuelled this growth in addition to the increasing number of startups.
Rewards crowdfunding is when entrepreneurs appeal to the public for money in exchange for rewards e.g. pre-sold products or services, a thank you letter, promotional gear or even naming rights to a baby goat.
Rewards crowdfunding is an avenue to obtain seed money without giving away equity or incurring debt.
Here is a great guide to raising money on Kickstarter.
Equity crowdfunding enables entrepreneurs to raise capital in exchange for equity in their business. Platforms such as VentureCrowd allow lots of investors to invest smaller amounts in exchange for small parts of the business.
The SEC in the U.S. has recently ruled that non-accredited investors can invest in private businesses, including equity crowdfunded projects. However, equity crowdfunding is not available in Australia… yet. Changes to The Corporations Act 2001 have been proposed which relate to the increasing the maximum number of investors in a proprietary limited company (currently 50). Startups such as Equitise have their finger on the pulse for these laws to change.
The downside to starting a crowdfunding campaign is that you let competitors (potential or existing) know about your awesome idea and can give rise to copy-cats. Nonetheless, any business that isn’t defensible or doesn’t have IP protected is going to run into this problem eventually.
Running a successful crowdfunding campaign is not as simple as taking a video on your iPhone and uploading it to your platform of choice. The campaign need to be strategic, tactful and requires some marketing prowess. Double Fine were able to leverage their existing community of gamers in addition to a well marketed campaign to raise $3.3m.
· How much are you looking to raise: $2 – 15m+ average but up to over $100m
· Business stage: Typically product-market fit and beyond
· Where to find them: Warm introductions are always best with many of the top VCs only looking at deals via referrals. Research the VC before approaching them cold.
Venture capitalists manage a fund by investing large sums of money on behalf of other investors and take a fee. VCs tend to take longer to reach an investment decision than Angels, you will generally give up more equity and the VC will usually require that one partner take a seat on the board. In return, startups are able to raise more money and also have more resources available to them.
Some VCs are beginning to invest at the seed stage, which sees them compete against their Angel counterparts. This enables VCs to position themselves close to startups so they can make some early bets on the best future deal flow for Series A.
At Series A, the startup is at the stage where it has found a solution to a problem that needs to be solved. The company has some revenues to show that there is demand for the product or service and requires capital to scale the business further. At this stage the business may be producing revenue but it’s unlikely to have reached cash flow break-even.
Companies at Series B are generally profitable and funding is typically used to fuel growth – namely your user base and expansion of the team.
At Series C and beyond businesses are looking to accelerate growth further and expand into new markets and product categories. Companies that are competing in a rapidly growing space may clamber over each other and purchase users at a loss in an effort to capture market share.
It is important that the VCs you approach does invest in the same space that you operate in – this way you are not wasting your time or theirs. To avoid all the time and effort that goes into this, Peak has partnered up with Match Capital. We profile your business and let the clever algorithm figure out the best VC for you.
You need to be cognisant of the role each investor is there to play .Some investors are purely there as a source of capital, some are there to give you advice while some are there for their rock star status which can open important doors for you.
Some of the best advice is to be in fundraising mode or not. When you are in fundraising mode, get it done as quickly as possible so you can get back to doing what you’re meant to be doing… running and growing your business.
You don’t start a business to raise money, you start a business to serve customers and provide value to them.
If you would like to speak with someone at Peak about raising money for you startup, feel free to get in touch.