In part 1 of this article I asked the question, “What should come first for a startup, people or money?” I answered, ‘people’. This is true, but it is also false. Without funding, a startup is just a hobby.

Strategies for Successful Fundraising

The Opportunity

They will always value it more than their investors, causing their startup to fail. Your acceptance to dilution is crucial in the funding of your startup and its future success.

Ask yourself: Do you want to own a pond, or share an ocean?

Valuation

According to Robert Koturbash, the managing director of the new Toronto-based Maple Leaf Angels, the biggest mistake that entrepreneurs make is on valuation. Rob says, “Don’t hold off for the highest valuation. You will waste valuable time getting to market and will often take money from the wrong types of investors.”

The average angel deal has a pre-money valuation of just over $2 million, according to the Angel Capital Association. Insisting on a higher valuation will simply cause capital to flow to other startups, leaving you with few options for raising money.

Frugality

Be frugal. Period. There isn’t a single phase where you shouldn’t be frugal. When you are starting out and looking for funding, frugality will make or break your success. Don’t hire too quickly and don’t spend excessively.

Rent, contract and lease wherever and whenever you can.

You will need to stretch the funds that you have longer than you are expecting – it’s just a fact of life. Raising capital always takes longer than anticipated. Have a realistic view of how long your cash will last and then add a buffer.

Always be Funded

As the CEO of your new venture, your number one priority is to make sure you never run out of cash – ever. Therefore, you should devote a large portion of your time to bringing money into the company. Whether incoming cash is through revenue on sales (highly unlikely in a startup), or through investment (your greatest chance of success), cash always needs to be coming in.

There is a saying in the sales world that says you need to ‘Always Be Closing’ (the sales deal), but a CEO needs to ‘Always Be Funding.’

How will your Investors Make Money?

No one (except for your mother) is going to give you money just because they want to see you succeed. Investors need to understand how they will make money off of their investment. Prove to them how your exit strategy will bring a sizeable return on their investment. This will demonstrate that your goals are aligned. You will not get rich off your salary – you could potentially become very wealthy off of your exit, though.

Too many entrepreneurs forget to think about how their investors will make a profit. Don’t be surprised if there are specific exit conditions written into the shareholders’ agreement by outside investors. It is that important to them.

Ask for Help

Make sure to consult knowledgeable people in your community who have gone through fund raising before. Also, you can use Venture Catalysts to help you ‘find’ funding. They will either take some equity or cost you some cash, but their contacts and experience will prove invaluable.

Phases of Funding a Company

Before you go out and start raising investment, you need to know how most startups are funded.

First, you bootstrap the startup with funding from yourself. Then, go out to your friends and family. This allows you to do market research and refine the solution that you want to bring to the market.You will be expected to develop at least a proof of concept to demonstrate to outside investors that your solution is feasible.

The Seed round is typically raised through Angel investors and high-net-worth friends and family. This infusion of capital often occurs when the product is in Beta, you have a few pilot projects, and are looking to begin your sales and marketing drive in earnest.

The next major fundraising event is the Series A round, which will be your first MAJOR fund raising campaign. This is typically handled by VCs only and the proceeds should be used to aggressively ramp your sales and marketing and start generating significant (>$1m per annum) revenue.

If you run out of your seed money before completing your Series A (which isn’t uncommon),you will need to get a bridge round of financing from your Seed round investors. Be sure to start the bridge process well before you are out of funds, as it is a difficult task to raise two separate rounds of financing at once.

There are always multiple rounds of financings, so your A round will lead to a B round, which will lead to a C round. Each time you go back for more investment, you will typically lose more control. Also, each time typically brings in more investors (i.e. VCs) and “too many cooks in the kitchen sometimes spoil the broth…”

The last phase of a startup is the exit strategy—how your investors get their money and their profits out. This will either be an M&A activity (mergers & acquisitions), or turning to the public markets, which will provide for liquidity in their investments.

Part III of Roy’s series “Where to Get Funding” is coming soon.
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