Preface: Capital attraction formula for start-up (5 strategies)
This article is based on training for the fundraising strategy that is provided to startups during the growth and acceleration stages. Let’s say you have an idea, you’re at a point where you create value for the customer and make a profit yourself, you may even have an employee, a sponsor, or a product to sell. But if you really want the startup to fly, you need to “attract capital”. Oh, what a scary word. Attracting investors is not easy, you have to be thick-skinned and prepare yourself to hear a lot of “no”; Time passes slowly and every phrase “I’ll call you later” hits you like a sledgehammer. Attracting investors can be a stressful and discouraging process. But a light shines in the depths of darkness; To move towards the light, we teach you fundraising strategies.
A good capital raising strategy has convincing answers to at least the following five questions:
- Why – Why seek to attract capital?
- Who – from whom do you provide the required capital?
- How much – how much capital do you want? (now and in the future)
- When – when will the capital reach you? (now and in the future)
- How do you go about attracting capital? (process)
Fundraising for startups
According to Startup.com’s definition, startup funding or startup capital is the capital needed to start a startup business.
The Hubspot website also says in its definition of startup fundraising that “startup financing means raising capital to support a business.”
This capital can be obtained from various sources to help start-ups turn from an initial idea into a real business.
But in general, companies and startups get capital in different ways. The type of funding you hear most about in the news about startup funding involves raising capital through outside investment, known as funding rounds. In these cases, investors exchange their capital for shares or partial ownership of the company.
Startups with high capacity usually succeed in attracting the most investors. But it should not be forgotten that attracting capital for startups always comes with a warning; Because investors often take partial ownership of businesses and have an active role in the decision-making process of companies.
Of course, if the founders do not want to participate with investors, they can attract capital through loans. Loans allow founders to retain full ownership of their business, but must also begin repaying them immediately. Therefore, getting a loan may not be the best option for startups that do not have cash flow.
At the same time, if a business is making money, it can seek loans through traditional financial institutions or even online lending companies.
‘As a CEO, you should ALWAYS be fundraising’ – recommends Joe Bond, Principal at PROfounders Capital. According to Joe, ‘it’s crucial to start talking to investors early and continue the conversation even then you don’t need funds, as your approach to the conversation is very different when you’re desperate to land investment versus when you want to build a solid business relationship. Start speaking to investors early, and continue an informal conversation even when you don’t need money (which is actually the best time to build up interest!). The best entrepreneurs are able to do this without it being a huge distraction’ – adds Joe.
Also, founders who are not looking to attract investors for their startups can use bootstrap financing or self-financing. For this purpose, they usually use personal savings or capital from family and friends to launch their startup.
Although bootstrapping is a highly controversial topic, it helps founders take control of their business instead of giving away equity to investors or having to pay interest on loans. Of course, the negative point here is that if the startup fails, the founder loses his savings or his family and friends.
Finally, every founder should know which type of funding is suitable for his startup. To know this, we will go through the common process of attracting funds.
How startup financing works
Now that we somewhat understand the basics of startup fundraising, we’ll explore how the startup financing process typically works for founders, investors, and the company.
Suppose you are the founder of a startup. Your business is growing and now you’re looking to hire more employees to turn your product prototype into a real product, but you need to raise funding to make it happen. For this, you need to attract investors to your startup; So you try to identify interested investors.
On the other hand, investors want to support startups they believe in and trust, and at the same time, investment returns are important to them. That’s why almost all start-up fundraising deals are done with angel investors, venture capitalists, or private equity firms. When the company starts to make a profit, the investors get a portion of the company’s stock in addition to their initial funding.
Founders who seek to finance their startup through investors usually start their investment with an initial investment round or seed investment. But before starting any round of investment, an assessment must be done on the company. This assessment takes into account the startup’s maturity, management, market size, history, profitability, and risk, and can influence the type of investors interested in the company and the amount of new capital it can bring in.
After completing the evaluation, startups can start an investment round. The timeline and startup investment process are different depending on the type of business; Some founders spend months looking for investors, while others close their first investment round in a matter of weeks.
Also, while some startups move slowly through each investment round, others raise funds much faster. Of course, this is not unusual at all; For example, it is possible that an innovation startup collects several million dollars in one to two rounds of investment, while another company attracts $25 million in two rounds of investment.
But what is the meaning of each round of investment in a startup? What steps are there to attract start-up capital?
Startup investment stages
Searching for new capital and what steps each startup should go through can be confusing for founders. To understand this, it is better to familiarize yourself with each investment round:
1. Pre-seed investment
Pre-Seed Funding is the first stage of startup fundraising where a startup collects capital to verify its hypotheses and proposals. The pre-seed stage usually involves an investment from the founders’ personal savings, family, friends, supporters, or network of other founders. This round can last for years as the startup is launching, or it can happen quickly if a company can prove itself well.
2. Seed investment
Seed funding is the first official investment of startups and is often related to startup stocks. This capital helps the startup to attract capital for its first steps such as conducting product research, launching the product, marketing to the target audience, and creating an audience. Consider this stage, as the name suggests, as the seed from which the rest of the company will be able to grow and flourish. Without seed investment, a founder cannot hire a team or test their idea in the market.
Seed investment can come from family, friends, angel investors, incubators, or private equity firms. But its amount is very different; At this stage, some companies collect $10,000 and others $2 million. On average, companies raising a seed round are worth between $3 million and $6 million.
3. Investment round A
When a business uses its seed investment to develop a product and build a customer base, we can say it’s time for an A-round investment. This capital is often used to expand a company’s products, attract more customers, and develop a long-term plan for the startup’s growth and development.
That is why startups that go through this investment round can attract investors from traditional private equity firms.
Capital raised in Series A rounds can range from $2 million to $15 million.
4. Investment round B
B-round investment is usually done for business development and how to achieve the next stages of startup growth. Capital raised in this round will go towards supporting an established customer base by hiring new talent and enhancing sales, marketing, technology development, and customer support.
Companies that go through Series B rounds are valued between $30 and $60 million and earn an average of $33 million in revenue.
5. Investment round C
Series C funding is for successful startups that need additional funding to create new products, acquire other companies, expand into new markets, or hire an exceptional leadership team. This capital is intended to help increase the company’s activities so that it can grow as quickly as possible. Since investing in this round is less risky, new investors also enter the game.
C round investment can include private equity companies, hedge funds, secondary markets,s or investment banks that want to establish their position in the successful investment world. This stage is usually done before an initial public offering (IPO), and companies that enter the Series C stage are usually valued at $118 million or more.
6. D-round investment and beyond
It’s rare for startups to get beyond a C-round investment, a D- or E-round. Those companies at this stage are often looking to raise final capital before an IPO or need additional funding to meet the goals they set in the C round. At this stage of fundraising, startups must have a stable customer base, revenue streams, a history of growth, and a solid plan for how to use the new capital.
Methods of attracting investors for startups
While we often hear about startup capital attraction from venture capital, we should know that this type of investment is only one of the 6 main sources of capital attraction for startups. Statistics from the Startup.com website show that of the $531 billion in startup capital raised each year, $185.5 billion comes from founders’ personal savings, $60 billion from friends and family, $22 billion from venture capital, and $20 billion from venture capitalists. Fereshte is $14 billion from banks and $5.1 billion from crowdfunding.
Therefore, there are many options for attracting new startup capital. But how can startups find the best funding option for themselves? In the following, we will mention the common types of fundraising for startups; Certainly, knowing the types of fundraising methods helps companies to find the best option in line with their business goals.
1. Personal savings, friends, and family
A personal savings account usually constitutes the largest part of the startup’s initial capital. With this method, founders do not need to convince anyone to invest in their company. This method is the most accessible form of financing because you don’t need to rely on anyone but yourself to use it.
Many founders turn to friends and family to help fund their startups. These people also believe in what you are doing and you don’t have to convince them like a venture capitalist, angel investor or bank.
Friends and family can be good sources to start with, but you must remember to clearly separate the business part of your relationship from the personal part. Get legal documents for all the steps and explain to your relatives that they may not get any return on their investment. Of course, some entrepreneurs avoid attracting this type of capital due to personal problems.
2. Venture capital
Venture capital is a type of fundraising that is done in start-ups and small businesses that usually have high risk, but also have a lot of potential for growth. In fact, if the startup fails, the investors will not see a return on their investment, but if the startup succeeds, it can achieve significant profitability. For this reason, the goal of venture capital is to get a very high return for the venture capital company.
High-growth companies and venture capitalists often work well together. Venture capital is a suitable option for startups that are looking for large and fast funding. Considering that these types of investments are relatively large, startups must be ready to grow quickly after receiving funding.
3. Angel investors
Angel investors are usually people who have a lot of wealth and invest relatively little in startups. This investment usually ranges from a few thousand dollars to a million dollars.
Angel investors are often considered one of the most accessible types of seed funding for entrepreneurs and are therefore an important part of the fundraising ecosystem. The biggest advantage of working with an angel investor is that they can usually make investment decisions personally; They don’t need to manage a company or follow corporate hierarchies, which allows them to make personal decisions based on their own feelings. This is often what an entrepreneur needs at the beginning of his startup development.
Getting a loan is a traditional way to attract startup capital. For some startups, getting a loan is easier than venture capital. A loan is a suitable option for startups that have some income; This is because while venture capitalists take big risks to invest in order to achieve higher profitability, traditional banking institutions are careful about their capital. Also, unlike angel investment, getting a loan for small businesses means maintaining full ownership of startups.
Crowdfunding is a method of raising capital through the collective efforts of friends, family, customers, and individual investors. This approach involves the collective efforts of a large group of people, mostly through online methods such as social networks and crowdfunding platforms.
In traditional startup fundraising, entrepreneurs spend months searching their personal networks and checking potential investors, but crowdfunding is much easier for entrepreneurs; They can get more opportunities in front of people interested in investing and benefit from more ways to grow their business.
6. Incubators and accelerators
Incubators and accelerators are programs that provide start-up companies with capital, guidance, and networking. There is a slight difference between the two that you should know if you are considering this type of investment for your startup.
Incubators help entrepreneurs to build their businesses; So they focus on developing a business plan, name, website, and minimum viable product (MVP). But startup accelerators not only provide startup capital but also support startups that are thriving. For example, if a company already has an MVP, an accelerator will accelerate its growth. Each accelerator works differently, but most startups get mentorship, funding, and networking from them.
Grants are capital given to a business by the government, company or non-profit organization. These grants are usually mission-oriented; That is, the goals or values of your business must be in harmony with the organization so that you can apply for funding. Since these grants are considered gifts, they do not need to be repaid.
5 fundraising tips for startups
Fundraising for a startup depends to a large extent on the business idea, history, and access to financial resources of the founders. Considering the various factors that can affect the financing of startups, below we will mention 6 important ways to attract capital, paying attention to them can increase your chances of attracting funds.
1. Calculate your financial needs
Before you approach investors or apply for a loan, you need to know how much money you need to achieve your business goals. Are you looking for a small amount? A business loan or grant may be right for you. Do you want more shares? An angel investor might make more sense. Generally understanding financial needs allows you to have the best approach.
2. Create a business plan
Investors, lenders, and even family members want to see a business plan before handing over funding. The plan should outline the opportunity, team, target market, industry, execution, marketing plan, financial summary, and budget required.
3. Assess your financial health
If you don’t know where you stand today, you can’t know what kind of funding you’ll need. Gather your business and personal tax returns, bank statements, income statements and income projections to help you (and investors) understand how much capital you have and how much you need.
4. Explore fundraising options
This article may have opened your eyes to the types of fundraising available. Before you choose a particular type of fundraising, do extensive research to see if it’s right for your business. Remember that there are hundreds of online resources on how to approach investors, apply for business financing, or distribute equity.
5. Set up a repayment schedule
Although most founders only need a few thousand dollars or a few million Rials to start, as a founder it is better to create a plan to repay the money you have borrowed. To do this, you can estimate your repayments and work them into your budget.
Fundraising for tourism startups
According to the PhocusWire website, a reliable source of travel and tourism industry news and research, travel startups that operate in sectors such as tours and activities, hotel technology and ground transportation, etc., attracted a lot of capital in the years before the Corona epidemic; But one crisis was enough to end the good times of tourism startups.
According to statistics from Crunchbase, a business information platform about private and public companies, tourism and travel startup investment in 2020 reached its lowest level in the last 5 years; The year was defined by the Corona epidemic and the suspension of many tourism sectors.
Crunchbase data shows that investment in the travel and tourism sector in 2020 was about $4.8 billion in the form of 629 deals. While in 2019, investment in tourism startups hit a record and reached 10.8 billion dollars; These numbers show that in 2020, both the amount of capital and the number of transactions reached their lowest levels in the last 5 years.
Despite all this and according to the same data, the investment and enthusiasm of investors to finance tourism start-ups show that it gradually changed this trend.
Tourism businesses that have survived the pandemic have learned how to remain resilient and have used the crisis to build their value proposition, according to Christy Choi, an investor at Plug and Play Ventures.
In fact, research shows that even though travel and tourism were one of the industries that suffered a lot during the pandemic, the travel companies that survived have emerged stronger. A seasoned investor himself, Choi believes that when a crisis hits an industry, it can be invested in.
In the tourism industry, alternative accommodations such as short-term rentals and technologies that can make alternative accommodations a more attractive option are among the things Choi mentioned. Another popular option for investors in the tourism sector is fintech technology in tourism companies and startups; One of the options of fintech technology is the “buy now, pay later” option, which became especially popular during the Corona era.
In general, from mid-2021, tourism companies and start-ups have seen signs of investor interest. By mid-2021, travel and tourism companies have attracted $3.4 billion. Among the notable transactions of these start-ups, we can mention the attraction of 170 million dollars of Hopper start-up funding and the attraction of 160 million dollars of TravelPerk capital. Finally, it is expected that more investors will invest in start-up companies in this industry at the same time as the footprint of Corona on the tourism industry fades.
The art of fundraising for startups
Undoubtedly, attracting capital for startups is one of the most important concerns of founders, but we must know that part of attracting startup capital is art, and part of it is science. The thing that founders should pay attention to is which type of fundraising is suitable for them. Some businesses need huge capital from foreign investors to develop their idea, and some with a small loan can move towards higher income and financial freedom.
As mentioned in this article, there are many potential sources of startup capital and funding on the table. But as a startup founder, you need to determine which type is best for your goals.
Don’t put all eggs into one basket. ‘Make sure you speak to a lot of funds as you will always get some NOs! TOP TIP – if you feel you need to hone your pitch, then maybe you could actually start with a few of the funds lower down your list so that the pitch is perfect when you approach your favorite fund!’ – highlights Joe Bond. The investor will be your partner in business for the next few years, so you have to make sure that it’s a good match as well. ‘Don’t just rely on the quality of the portfolio and recognition of the brand when picking your VC. Getting the perfect match is all about the people and the relationships you build. Make the effort to speak to some of the VC’s (ideally exited) portfolio CEOs (pick some failures as well as successes!) to get some real opinions on what they are like to work with.’ adds the Principal of PROfounder Capital.
Professor Siavosh Kaviani was born in 1961 in Tehran. He had a professorship. He holds a Ph.D. in Software Engineering from the QL University of Software Development Methodology and an honorary Ph.D. from the University of Chelsea.
Maryam Momeni was born in 1970 in Tehran. She holds a degree in Literature - German language from the Melli University of Tehran.
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