Every year, over 305 million businesses are founded worldwide, and the vast majority fail. According to Startup Genome, 9 out of 10 startups fail at initial stages. There are numerous reasons why startups fail, including the difficulty of young companies in finding a market niche, competing with established competitors, and making a profit—let alone just breaking even.
Raising capital for your startup is a highly challenging process. It involves a lot of hard work and perseverance, but it can also be very rewarding. You may sometimes feel overwhelmed, and the road ahead can seem uncertain at best. However, if you’re prepared to take action and remain steadfast in your pursuit of funding, then there’s no reason why you won’t succeed! In this guide, we’ll explain the basics of raising capital for your startup, including everything from when to raise capital to finding potential investors in local communities.
By following our tips and strategies below, we believe you’ll find raising money more effortless than ever before.
Why Do You Need to Raise Capital for Your Startup
There are many reasons why you should raise capital for your startup, and the most important reason is that you need money to grow your business.
Another good reason for raising capital is that it gives you a sense of security and stability, especially when you have no other source of income coming in. This can be helpful if things get rough at one point or another while running your own company—you won’t have any worries about whether or not there will be enough money on hand to keep things running until everything starts going well again!
If we’re talking about raising capital from investors (which we will), then there are plenty more reasons why doing so could benefit both parties.
When Should You Raise Capital for Your Startup
Not every startup needs to raise funding. Many successful startups will bootstrap themselves to create growth with little or no external capital (particularly for those lucky few who are cash flow positive from day one), finding ways to ‘hack’ their way to the top over time.
However, most high-growth firms require funding to get started by capitalizing on their idea (a seed round) or to swiftly grow into an established company (a growth round). With investment, high-growth firms would succeed because they will require too much capital to keep up with the market and their competitors.
The first seed capital is the trickiest. It is the first money you’ll get into your business beyond your own (or your friends and family) and is, therefore, the first time you have to convince someone else, who most likely doesn’t know you yet, that your company is worth investing their money in. Seed capital is typically used to build your idea and validate its potential in the market. It’s what takes you from MVP to product-market fit (where your product solves a particular problem for a defined group of people, representing a transparent market for your product).
- There are many opinions on this question. Typically, the right time to consider raising seed investment is once the following three conditions are met:
- There is a minimum viable product (MVP). Importantly, this can be something other than a working prototype, but it must demonstrate that you have refined your idea and show how it solves problems for other people.
- A level of customer traction is proven – you have a verifiable and repeatable formula for obtaining paying customers.
- There is a robust business model and plan. This doesn’t have to be a short novel in length. Still, it must describe in some detail how you plan to expand, the metrics you’ve currently achieved, any competitors in the space, and the overarching milestones you are looking to accomplish with the injection of seed capital.
Series A/B Capital
Growth capital (Series A/B) is when you have reached product-market fit (there are varying levels and opinions on when this is) and have built out your acquisition channels. While there is no one-size-fits-all answer to what makes a startup qualified for Series A/B capital, there are some general criteria that investors look for:
- Strong traction and market validation: To qualify for Series A/B funding, startups should have a clear and compelling value proposition that solves a real problem in the market. The company should have already achieved some level of traction, such as significant user growth, revenue, or partnerships, that demonstrates the market validation of their product or service.
- Scalability: Series A/B investors typically look for startups that have the potential to scale quickly and sustainably. This means that the company’s product or service should have a large addressable market and the ability to expand beyond its initial customer base.
- Strong team: Investors want to see a talented and experienced team that has the skills and expertise to execute on the company’s vision and navigate the challenges of growth. A strong team includes not just technical talent, but also business and marketing expertise.
- Sound financials: Startups should have a clear understanding of their financials and a path to profitability. Investors want to see that the company has a solid financial plan, a clear understanding of their unit economics, and a sustainable business model that can generate long-term returns.There is no specific revenue threshold that qualifies a startup for Series A/B capital. Revenue requirements for Series A/B funding can vary depending on the industry, market, and the startup’s growth stage. Instead, investors typically evaluate a startup’s potential for revenue growth, profitability, and long-term sustainability. For example, a software startup with a subscription-based business model may be considered for Series A/B funding even if their revenue is relatively low, as long as they can demonstrate strong user growth, low customer acquisition costs, and high retention rates. On the other hand, a hardware startup may require more significant revenue to qualify for Series A/B funding, given the higher upfront costs and longer development timelines associated with hardware products.
At this stage, there is an apparent demand for the solution your startup provides, and you will likely need more employees to help your small team grow and maintain your customer base.
Series C/D Capital
Subsequent rounds (series C/D onwards) occur once your business has exceptional traction. They are often firms who have established the company in the space, and are looking either to expand into a new market (international regions/product space are common reasons) or to fight off competitors that are catching up. For instance, Series C/D raises have certain revenue requirements which vary widely depending on the industry, market, and the startup’s growth stage. For example some industries, such as software and technology, companies may be considered for Series C and D funding with annual revenue of $50 million or more. However, in other industries, such as healthcare or biotech, companies may require significantly higher revenues due to the high costs of research and development, regulatory hurdles, and longer commercialization timelines.
In addition to revenue, investors may also consider other factors, such as the company’s customer acquisition costs, profit margins, market size, competitive landscape, and growth potential. It’s worth noting that revenue is just one of many factors that investors consider when evaluating a company’s suitability for Series C and D funding. While high revenue growth is often a strong indicator of a company’s success, it’s not the only metric that investors use to make investment decisions. Sometimes investors are looking for companies with strong leadership, a clear vision for growth, and a competitive advantage in their respective markets.
How to Raise Money for Your Startup
Raising capital is a complex process, but following these steps ensures that your startup is well-prepared for any situation.
- Determine your startup’s worth
- Find potential investors
- Build a strong team of advisers and mentors
Determine your startup’s worth
As a startup founder, you must wear many hats and juggle many responsibilities. One of the most important is raising capital to fund your business. But how much funds should you raise?
It’s a common question with no easy answer. The amount of capital you’ll need to raise depends on several factors, including the stage of your business, your industry, your business model, and your growth plans.
You’ll want to raise capital to get your business off the ground and support its early growth. That means having enough money to cover your startup costs, including your team’s salaries, rent, and other operating expenses.
Finding Potential Investors
Finding potential investors is a crucial step in the fundraising process. It’s important to find investors who are a good fit for your startup, but it can take time to know where to start. Many types of investors have different strengths and weaknesses; it’s up to you as a founder to determine which ones might be most beneficial for your company.
- Angels – Angels invest their own money into startups, usually at an early stage (before VCs). They tend not to have professional experience in venture capital or investing but instead use their knowledge and expertise when deciding whether or not an idea has potential.
- Venture Capitalists (VCs) – VCs provide capital through funds raised from limited partners such as pension funds, universities, insurance companies, etc., to generate returns through exits via acquisition by another company or merger/acquisition with another firm within five years from initial investment date.
Building a Strong Team of Advisers
Building a strong team is one of the most important aspects of your startup. You need people who believe in your vision and can help move it forward, so it’s worth spending time finding the right advisers for your company.
Here are some tips for recruiting advisers:
- Look for people with experience in areas where you need help. For example, if you’re starting a tech company but need to gain technical knowledge, look for someone with technical skills (and who likes working with startups).
- Be sure that any potential adviser has time to commit to helping out – don’t waste their time or yours by asking them to do something they don’t have time for! If an adviser isn’t willing or able to give advice regularly while still having other responsibilities (like running their own business), then they aren’t right for this role after all.
Raising capital is exceptionally challenging but also very rewarding.
The rewards of raising capital can be enormous: the ability to grow your company and hire new employees, expand into new markets or open more locations worldwide. If you’re an entrepreneur with a great idea and a strong team behind it, raising capital shouldn’t be too difficult.
However, if you have yet to gain experience or connections in this field (or even if you do), things might not go as smoothly as they could have been otherwise.
The most important thing when trying to raise money from investors is having a good pitch deck ready with all the relevant information about your business model and strategy for growth; this will help convince potential investors that investing in your company will lead them toward success down the line.
We hope this guide has helped you understand the process of raising capital for your startup. In addition to having a great product and a compelling story, finding the right investors to fund your startup can be a time-consuming and challenging task.
This is where Cyndx Raiser, an investor identification tool, can help expedite the process. Our platform uses artificial intelligence and machine learning algorithms to match your startup with potential investors who have a history of investing in companies like yours.
With Cyndx Raiser, you can easily access a curated list of investors who are most likely to be interested in your business, saving you time and effort in the fundraising process. Say goodbye to the hassle of manually researching and reaching out to potential investors and hello to a smarter, more efficient way of raising capital for your startup.