Next to deciding to start a business of your own, how you will fund its growth might be the biggest financial decision you will make. The type of funding you choose (or don’t choose) will fundamentally impact the trajectory of your business and, ultimately, the value you extract from it.
Whichever way you go, the process of raising capital will be full of ups and downs. It will most likely take way more energy, time and resources than you anticipated. With that in mind, here are a few pointers to help you mentally prepare for the fundraising journey that lies ahead.
Know Your Funding Options
Venture capital, angels, super angels, angel networks, crowdfunding, corporate venture, revenue-based financing, tech banks, peer-to-peer lending. There are more sources of capital and funding options available to tech entrepreneurs than ever before. (How great is that?!) Every source has its own complexities and suitability to different funding purposes, company types and revenue growth stages.
Sometimes entrepreneurs become fixated on raising a particular type of capital, because it is readily available, what they know, or seen as a golden stamp of approval or success. However, serious entrepreneurs know that raising capital is not the end of anything – it’s the beginning of the real work to grow their business.
It pays to do your research and make sure you are fully aware of the pros, cons, and consequences of heading down a particular path. So before you go asking for capital, make sure you do your homework.
Things to Keep in Mind
Talk to as many of the different sources of capital as you can. Position these conversations as opportunities to learn. Don’t start pitching before you’re ready.
Seek out entrepreneurs that have used a funding option. Try and learn from them the good, the bad and the ugly. Many investors will list their portfolio companies on their websites — try reaching out to one or two of them or search your network for someone to introduce you.
Bring someone into the process who knows you, your business and raising capital. Someone whom you trust to give you the brutal truth. Lean on your business lawyer or a professional CFO, or scour your network for those with the right background if you don’t have professional funding advice to rely on.
Follow investment industry experts and news. Keep abreast of the investing cycle and what’s hot and what’s not. Just make sure not to get caught up in the hype.
As you start to dive into your financials, metrics, business plan and projections, it will become more apparent how much capital you need and which sources of capital are suitable for your business.
To help you get started, the table below highlights the three different funding paths most startups take.
How to Choose the Best Funding Path for Your Startup
Prepare for the Time It Will Take to Raise Funds
A key element of a fundraising plan is a realistic timeline. Many entrepreneurs underestimate the amount of preparation, time, and resources that go into the process. Doing your research, creating solid financial projections, organizing your financial data and metrics, making connections, moving through the approval process and finalizing agreements is all guaranteed to take more time – and more of you – than you anticipate.
At Lighter Capital we have seen companies go through literally hundreds of equity and bank financings; no one is ever surprised at how fast an equity round comes together, or how quickly a bank funds a loan. It always takes longer, often months longer, than entrepreneurs expect. If you think you’re different, think again – it will take a long time.
If you don’t factor this time into your planning, and you don’t have a plan for how the company will progress while you’re focused on fundraising, you risk letting your business languish while you shift your focus to securing funding.