As you already know, due to the downturn in the financial markets, venture capitalists have slowed down investments towards the end of 2022. While they have plenty of “dry powder,” fundraising could get harder, even in the early stages, as they become pickier.
It should be stated that the days of cheap, accessible money are gone. But the venture capital industry is unlikely to see a year of doom and gloom. According to Finextra, 54% of investors plan to be mostly early-stage in 2023. At the same time, 56% of investors intend to increase their venture investments, and 20% are inclined to increase significantly.
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Contact usSo what do we see? The startup world is a rollercoaster of ups and downs, and VCs obviously want to buy at prices reflecting the public market shakeout. They plan to invest in the best – success is guaranteed only for the top 10-20% of early-stage startups in their portfolio.
We understand the importance of securing funding for your business. That’s why we’ve put together this comprehensive guide to help you raise money for your startup. From understanding your financial needs to building a winning pitch, we’ll show you how to make your startup irresistible to investors.
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With the current economic climate, securing funding for your business can feel like an uphill battle. But don’t let the challenges discourage you. With the right strategy and approach, you can receive the funding you need to take your startup to new heights. Here are some options to get funding for your startup:
Starting a business from scratch without or with little outside funding and using personal or family funds are the easiest way to raise capital for a startup, which is why 10% of business founders do just that. Of course, such financing for a business comes with some risk. While borrowing money from family or friends may have little (or no) interest attached, it can still be expensive if it harms your relationships.
How to find: Friends and family funds are all legitimate sources when your startup begins. Therefore, even for them, you must specify the repayment terms in the contract, including partial ownership, interest rates, or other conditions when raising capital.
That is another proven way of financing startups that do not have any of the resources to implement their ideas. Crowdfunding is a method of raising funds for a project, business idea, or cause by soliciting small contributions from a large number of people, typically via the internet.
While hundreds of app and startup ideas go unnoticed and unfunded on crowdfunding sites, pitching them right can be a lucky shot for your app. You get enough funds to make your dream come true in exchange for a service fee from the crowdfunding platform and a transaction fee from the payment processor.
How to find: Crowdfunding is usually performed online via sites like Kickstarter, GoFundMe, and Indiegogo, making it easier to put your product in front of a wide audience.
Partnering with a larger company or joining an incubator can be a good way for startups to gain access to new markets, consumers, and resources. Such partnerships and incubations often involve stock exchanges or other forms of financial compensation.
Incubators provide resources such as mentorship, office space, networking opportunities, and access to funding to help companies overcome the challenges they face in the early stages of growth.
Most well-known academic institutions have initiated incubation programs to develop entrepreneurship among their students/graduates and regions. They can be an excellent source of low-cost funding for very early-stage companies, many of which are not even ready for angel funding.
How to find: Many incubators are available online – one of the most popular options is YCombinator. Inquire locally to see if there are any incubation programs available. If you can’t find local alternatives, focus on online platforms and check if your business fits their criteria.
Accelerator programs are equivalent to incubators because they provide a wide range of resources. Unlike incubators, accelerators focus on existing companies, not those with an idea. Such programs can be private, funded by investment firms, or even owned by companies or colleges. Along with financial support, these programs provide access to experts, training, and additional resources to help startup owners move toward success.
How to find: Accelerators are available locally and online on platforms like Gust . We recommend you find a local group first. They may be less competitive and benefit from a more personalized approach.
Venture capitalists are firms or groups of investors funding a startup in the early stages in exchange for company ownership. That can be a good option for mature startups with a clear growth trajectory that need more resources or credit to secure traditional forms of funding.
VCs also provide mentoring, add value to startups by connecting them with the right people, and assist in startup team building by helping hire key employees. In recent years, many traditional venture capital funds have also introduced micro-venture capital accelerator programs to identify high-potential startups early on in their journey.
How to find: You can see venture capital firms and individuals online. Websites like AngelList and Gust provide a database of VC firms and individual investors and allow startups to search for and connect with potential investors. From there, investors can contact you, giving you a chance to reply if interested. You can also find the best investors by doing some research and requesting suggestions on LinkedIn.
Angel investors are typically successful entrepreneurs who invest their own money in startups that they suppose to have the potential to become promising in the future. In addition to granting the capital needed to grow a business, angel investors share their business experience, valuable mentoring, and industry connections to help startups thrive. The angel investment market size is currently $29.1 billion a year.
How to find: Like venture capitalists, angel investors are associated with different platforms. For instance, the Angel Capital Association is an investment network of business angels made up of accredited investors who fund promising ventures. Additionally, you can find individual investors or groups of investors using resources like Angellist.
Entering an app competition can be a great way for your startup to get where it needs to be. Many competitions are sponsored by universities, tech companies, business angel networks, and other organizations that offer new entrepreneurs the resources to pursue their business ideas.
How to find: Browse the Internet to choose from hundreds of contests worldwide. Websites like Challenge.gov, Gust, and Kickstarter provide listings of app funding contests and opportunities for startups to find and apply for funding.
Debt capital is usually one of the main sources of financing for traditional enterprises with stable cash flows, which can provide collateral to lending institutions. It is not a practical way for many startups to raise money, though, as most do not get significant revenue in the first few years.
However, at a later stage, some categories of startups may use it to raise funds rather than venture capital money instead of shares. Many traditional banks have now established finance departments that offer startup lending options.
How to find: Bank loans are available from any financial institution, local, national, or online. Finding suitable loans through affiliated financial institutions is made easier with the support of the Small Business Administration (SBA).
Each of these investment alternatives has advantages, so it’s crucial for businesses to carefully weigh their options before deciding on the best course of action. But remember that some investors, like accelerators and incubators, only work with businesses in the early stages. If you want to control your business fully, consider an angel investor and avoid VCs looking for partial ownership.
Companies seeking external funding usually start with a pre-seed round. Some will then move on to Series A, B, and C rounds. But before any round begins, the company must be evaluated. This can affect investor interest in the company and how much new capital a startup can raise.
A valuation examines:
After the valuation is completed, startups can open a funding round. The timeline and process vary by company. Some founders look for investors for months, others close the round in a few weeks.
And while some startups are slow to move through each funding round, others are accumulating capital at a much faster rate. It is not uncommon for an innovative startup to raise several million dollars in one or two rounds while another company raises $25 million in the same number of rounds.
The investment process is divided into funding rounds. Let’s examine each step of the process and what it means for startups and investors.
A pre-funding round aims to kick-start a startup idea from the ground up — let it participate in the project full-time, hire key team members, and build a proof-of-concept (POC), prototype, or viable product (MVP), prepare a go-to-market strategy and get some initial traction needed to attract the (next) seed round of investment.
Note: The pre-seed funding stage is generally not included in official funding rounds.
A seed round occurs when a startup has created: a proof of concept, go-to-market strategy, demo/MVP, and/or seed traction. Seed investments are typically used to develop other products and teams, formally go to market, acquire customers, and test product-market fit and business model (revenue generation). Angel investors and early venture capital funds usually lead the seed round.
Post-seed / pre-series A / early A takes place when a startup already has a product-market fit and generates revenue. But it needs additional money for marketing & sales and an effective customer acquisition strategy that will deliver solid metrics to land series A investment. A startup needs $1M in annual recurring revenue to hit a round.
A Series A funding round (also known as a Series A funding or Series A investment) is the next round of fundraising after the seed investment. That is the case when a company has: established product-to-market fit, robust unit economics, and an operational and adaptable business model that can scale quickly. In addition, it must generate revenue (preferably 1 million dollars annually) and be able to stimulate market growth through additional funding. Typically, Round A is led by venture capital funds.
Series B is a funding round at a stage where the company has already built a significant user base and introduced a proven business model. Round B aims to build on existing success and scale rapidly. The capital raised is typically used for team growth, marketing, and geographic expansion. Large VCs run B rounds, typically starting at $5 million and can go up to $60 million.
Series C and beyond are funding rounds that support mature companies in further development and scaling. At this point, the company is most likely valued at over $100 million and can be on the fast track to an exit or at least significantly enlarging market share. The business is de-risked enough for financial institutions to involve in investment. Apart from large VC firms – series C is led by PE funds, banks, hedge funds, and corporates. One of the most probable outcomes from this stage is an IPO or acquisition by a bigger player.
An initial public offering (IPO), which marks the culmination of a startup’s lifecycle, allows the general public to purchase shares in a private company. This creates new opportunities for fundraising on the open market and raises the level of transparency. However, since you now have to deal with shareholders and investors, this also entails more complications. Maintaining these relationships will take a lot of work and be expensive.
Now that you are aware of each stage of the startup fundraising procedure, it is time to think about convincing investors to give you money.
Creating a successful pitch starts with validating a business idea. You need to describe everything that makes your business valuable carefully and why it is worth investing in.
Identify the target market for your product realistically by segmenting it into the TAM (Total Available Market), SAM (Serviceable Available Market), and SOM (Serviceable Obtainable Market). While the TAM evaluates the upside possibilities, the SOM and SAM assist in de-risking the venture. Plus, it will enable you to develop a more conscious rollout strategy.
If you can, try to create an image of the user or your ideal customer by talking about your target market. This might aid in visualizing the possible clientele and demonstrate that you have given serious consideration to the target market for your startup.
The name “elevator pitch” grows from the idea of grabbing attention in a very short time (typically 30-60 seconds). Keep in mind that the elevator pitch objective is to arouse interest, not close a deal. It is aimed at intriguing your potential investors so they can want to get to know you better. Also, you usually don’t use other materials, such as slides, during this speech.
You can use some presentation materials to highlight your speech during a common pitch, which is longer than the elevator pitch. Although you have more time, keeping your presentation concise and brief is vital because audience attention spans are typically only about 15 minutes. The slides that comprise your presentation have been named a pitch or startup deck.
For it, you should prepare meaningful illustrations instead of long texts. The text, in turn, should be spoken freely and included not in slides but in presentation notes. So you can easily send your presentation as a PDF.
Presenting an MVP with minimal features will help investors test and use your product in real time. Investors who see you are serious about your product are more willing to invest in it.
Let’s take as an example our case when we developed an MVP for the Fisk startup. Now the company can analyze customers’ needs and offer a more efficient service while attracting investors for the project’s further development. So, if you want to interest investors with a high-quality MVP, let our dedicated team take care of it!
The current funding problem, like most things, is also an opportunity to foster a new entrepreneurial mindset. The recession will limit the generation of free-spending startups and create new kinds of companies focused on performance and market fit, not lightning-fast scaling or the promise of changing the world.
If you are a startup that needs support in climbing to the top of the world, Relevant is here. We are a global IT outsourcing company whose key purpose is to provide exceptional and supremacy software solutions. Interested in how we can lead you to success? Contact us as soon as possible.
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