They say money can’t buy you happiness. But it’s pretty crucial when launching a successful startup.
If you’re confused about how to fundraise for your new venture, you’re certainly not alone. Between seed rounds, VCs, angels, and crowdfunding (say what?!), the whole thing can be pretty overwhelming.
However, don’t lose heart just yet. Here’s a handy guide to the startup fundraising options out there and when you can use them:
Seed funding is the initial capital that grows your idea shrub into a thriving startup tree.
But if you’re thinking of seed funding as a huge chunk of cash that catapults your venture to Apple stardom, think again. These days, startups need to take an “always on” approach to their fundraising.
Seed “rounds”, as they are commonly known today, are very much an ongoing process. We can break them down into three phases: pre-seed, seed and post-seed rounds.
Pre-seed rounds (capital up to around $500,000) is usually raised directly from family and friends, crowdfunding sources and the founders themselves.
The seed phase (the next $1–2 million) tends to come from an institutional investor (think First Round Capital, Floodgate or True Ventures).
You’ll then likely need a post-seed round (an additional $3-4 million) to raise a Series A, your company’s first significant round of venture capital financing. Look to angel investors and early-stage VCs for this final phase.
The name says it all. Angel investors are individuals that provide seed funds for your startup in exchange for an equity stake in your company. (Pretty angelic, right?)
If you’re looking for an angel, look for reputable companies such as Investible. Founded by serial entrepreneurs Creel Price and Trevor Folsom, Investible is essentially a “startup generator that pairs entrepreneurial education with high-quality investment capital”.
Folsom says he wants to “improve the quality of the entire startup ecosystem” through Investible’s network of entrepreneurs, angel investors and business leaders.
VC or venture capitalist investment usually comes later in the game, when your startup is ready to become a fully-fledged business. Some venture capitalists invest during the seed phase, but not always. And not often.
Thing is, VCs will usually only invest in a business if there’s a reasonable chance they’ll see a high return. And with almost 97% of new ventures exiting or failing to grow within the first three years of launch, the odds aren’t great in the startup world.
This means VCs tend to invest in startups that have the potential for big returns, fast. Think business models that can massively scale and hold a commanding stake in their market very quickly.
Crowdfunding is one of the emerging channels seen as a viable alternative for startups who might not qualify for traditional forms of investment.
You can promote your concept on a crowdfunding platform, where regular folk who like the sound of it can provide funding to help you realize your project.
This is a great option for entrepreneurs looking to retain ownership of their company. The downside? Crowdfunding platforms can be expensive. Kickstarter and Indiegogo, for example, can take up 13 percent of the total funds raised in commissions and processing fees.
Venture debt and collateral free loans
Venture debt or collateral-free loans might be available to startups in their early stages, that don’t yet have significant assets to use as collateral.
Venture debt providers combine their loans with warrants, or rights to purchase equity in the company later down the track. This compensates for the higher than normal default risk.
These kinds of funds are by no means easy to get, but they could be an option for smaller startups that don’t qualify for VC investment.
Some new ventures might be able to attract investment from larger companies that stand to benefit from what the venture actually does.
Think about who might have an interest in seeing your project succeed and wow them with an impressive pitch!
The takeaway? Your startup should pretty much always be fundraising. Look at as many options as you can; the when is far less important than the how.