Fundraising for your tech startups can be unpredictable and confusing. There are many funding options available, and you want to make the right choice. Should you choose a VC-backed path or one in which you avoid venture capital? Or is a blended path best?
To help make sense of your options, Lighter Capital Director Branden Harper hosted a webinar last Thursday to discuss key considerations for creating a funding strategy for your tech startup. Here are the seven most important takeaways.
Takeaway #1: More competition, higher demands
The cost of innovation has dramatically lowered over the past decade. What does this mean for the entrepreneur? More competition for funds and higher expectations from investors. Today’s investors can pick and choose from a staggering number of startups, so they can be more demanding when it comes to the functionality of a minimum viable product, prototype, early consumer adoption, and even initial revenues.
Takeaway #2: Macro trends in the VC industry
Rise of small funds (micro VCs, super angels, etc.)
Increasing number of alternative sources of capital, including crowdfunding, revenue-based financing, AngelList, and peer-to-peer lending
Traditional VC funds are getting bigger (now you see billion-dollar funds) with fewer total players
Takeaway #3: Big market is a requirement for VC investors, but not for others
Even though the structure of the VC industry is changing, one thing that does not change is the kind of returns VCs demand. Typically, VCs want to see a 10x return of their investment in 5–7 years. Most entrepreneurs are not going after the right market that will be able to achieve this.
At Lighter Capital, we don’t care so much about your market size. We believe great entrepreneurs can gain good traction in any market, and we will consider you for funding if you have $15K monthly revenue for 6 months.
Some of our clients get a second look from VCs after using our funding to grow and increase their valuation. Full Circle CRM is a good example—they just secured Series A last November.
Takeaway #4: Revenue-based financing is more flexible than traditional bank loans
Unlike VCs, banks care more about loss prevention than explosive growth. When things don’t go well, banks want to make sure they can get their money back. That’s why borrowing from a traditional bank can be tricky for software companies.
Furthermore, a traditional bank often requires many debt covenants and personal guarantees on a loan. At Lighter Capital, we believe there’s a more entrepreneur-friendly way, which is why we don’t impose any of these restrictions on the entrepreneurs.
Takeaway #5: Consider your fundraising profile and goals
There are many factors that determine how attractive your startup is to investors. What stage are you in? What’s your potential market? How strong is your product-market fit? How much money will you need to scale and how fast can you get there?
The answers to such questions will help you determine which funding options are best for your company in the short- and long-term.
Takeaway #6: Be prepared
Raising funds can be a slog, but if you’re ready for it, the process will go smoother. This is true no matter which funding option you choose. You must have historical data and financial projections that are based on reasonable growth assumptions. It’s also good to continually finesse your messages and presentation decks. Make sure you have all your legal and accounting ducks in a row. Finally, ask clients and customers now if they are willing to be a reference so they won’t be surprised when an investor calls as part of the due diligence process.
Takeaway #7: Keep your momentum and meet your deadlines
After you talk to an investor, it’s expected that you will follow up, so don’t be shy about making that extra touch. With every communication, though, try to move the decision closer to a definite answer. Even if you know the answer will be no, follow up so you can delete the dead end from your list of prospects. Plus, understanding their objections gives you a chance to think through if you need to make any changes to your pitch.
Finally, a great way to speed up the process is to set a target date for a final decision. This creates a sense of urgency and lets the investor know it’s not an open-ended process.