Startup fundraising is tough in any economic environment. Nonetheless, business funding is the lifeline of building a startup and enduring, profitable company. I love what one of my favorite colleagues at Founder Institute says at just about every session she mentors – “Building a startup is hard. It’s really, really hard.” While passion and performance are important, a startup has to have sufficient financial resources to launch, scale and keep the lights on as it grows.
Let’s take a look a few of the more popular ways to secure startup fundraising:
If you want something done well, the conventional wisdom is to do it yourself. This is the premise behind the strategy of bootstrapping. This is an approach where a business is built on a powerful idea and innovation without support from any investors, other than one’s own savings. If there is any way for you to build your startup without having to give up equity, then do it.
Sam Walton of Walmart and Steve Jobs of the tech behemoth Apple are two of the most prominent success stories of bootstrapping.
This startup funding strategy can most definitely be a tough path, but it can be well worth it.. When done with passion, focus, dedication and impeccable ethics, bootstrapping can help grow you launch and scale your startup without having to give up equity or control.
The term originated in the early 1800s in the United States to refer to an action that is almost impossible to do — because you’re on your own without any outside assistance. The strength of this strategy is that it focuses on maximizing resources and self-sustainability. Even with limited funding, a startup can launch and grow with effective hands-on management.
The bootstrapping startup fundraising approach focuses on minimizing external debt and equity financing from banks or outside investors. The strategy requires dedication, commitment, innovation and a really strong ability to quickly innovate. Nonetheless, a full 77% of startups launched in the United States each year are funded through bootstrapping.
There are three funding stages in companies that employ bootstrapping. The Beginning stage is the first part of the startup funding raising plan and it generally depends on personal savings or in some cases credit cards, home equity loans and similar. In some cases, there is also a way of funding your startup with your customer’s money. This can be the second stage of bootstrapping. Here you go out to target customers and convince them to sign contracts for your goods or services, essentially giving your startup the funding it needs to grow and scale. You have to be very careful here. If you aren’t able to deliver on your promises, you can find yourself in a world of trouble. Once you reach the third stage of bootstrapping, you will generally find that a lot more options are open to you.
The startup fundraising goals of bootstrapping companies focus on proving that they can efficiently raise profits by managing its operation very well. When this has been accomplished, it is now easier to attract investors. Examples of these are Jon Oringer’s ShutterStock. He started with his personal photo library that grew into a photo service worth $2 billion. SimpliSafe has the same success story as a self-started security business from the savings of founder Chad Laurans.
Angel Investors and Venture Capital
Even though just a small percentage of startups are funded through angel investors or venture capital firms, seeking outside investors as a means of securing startup capital is the dream of many founders. Angel investors and venture capital firms (VCs) are people that startup capital during the infancy of a startup in exchange for equity ownership interest.
Success stories that follow this formula include tech titans such as Uber. Look at the fundraising timeline of this popular cab service app. They raised $1.5 billion in venture capital and have since secured equity investments from firms such as Wellington Management, BlackRock Inc. and Fidelity Investments, among others. Some other startups that were able to secure equity investments from venture capitalists include Facebook and WhatsApp, among many more.
Venture capital firms and angel investors want equity in the startup in exchange for their investment and generally expect a minimum of 10x return on investment (ROI). And since many of their startup investments are going fail, there is a consensus that many VCs or angel investors hope to replenish the size of their entire fund through a single investment. While this doesn’t often happen–it is indeed a lofty goal. There are risks for angel and vic investors; but if you make it clear that you are driven, passionate, committed and goal-oriented, you can inspire them that they are making the right investment and partnership in your startup.
Some of the popular angel investment groups include the Common Angels in Massachusetts and the Tech Coast Angels in Southern California, and the Keiretsu Forum, among many others. Platforms such as FundersClub and AngelList have made it possible for angel investors to commit as well to individual startup fundraising campaigns.
If you are looking for venture capitalists and venture capital firms, Crunchbase is one of my favorite to-to resources. They offer a range of great search functions and provide relevant data to help you make sure you are approaching the best venture capital firm for your startup fundraising needs.
Business Grants and other Non-Dilutive Funding
Just about every founder I have encountered would love to secure business grants, government grants or other sources of government-backed non-dilutive funding. The great thing about government grants, business grants, cooperative agreements and other sources of government-backed non-dilutive funding is two-fold:
1) as long as you follow the rules and do what you said you are going to do, you don’t have to pay back business grants; and
2) you don’t have to give up any equity in your startup.
For certain types of startups, you can secure government partnerships or government contracts and leverage these into startup capital.
While there are lots of pros to business grants, government grants, government partnerships, government contracts or other types of government-backed non-dilutive funding, there are a lot of drawbacks as well.
- Alignment to the funder’s priorities has to be perfect. There are only certain types of startups that governments will fund, and in nearly every case, the startups product, technology or service has to be directly to strategic national priorities and the funding agency priorities for that particular competition.
- It’s a lot of work – developing a winning funding proposal to win business grants or other types of government funding is a lot of work. The questions you must answer are often ambiguous and difficult to understand.
- Short timelines – in general, a business grant opportunity is announced then closed within a six-week window. This does not give you a lot of time to develop a comprehensive, compelling proposal.
- Competition is tough – as a former reviewer and review team leader, I estimate that overall, only about 3% to 8% of all business grant proposals (or other government-backed non-dilutive funding opportunities) submitted, actually get funded. Some programs have better odds, but I’m talking in general.
Suggestion – if you are really serious about securing non-dilutive startup funding, your best bet is to hire a professional. Over the years, I have secured wll over $400 million for my clients so I know the ins and outs of the selection process better than most.
Choosing the Best Startup Fundraising Strategy
The choice between self-reliance via bootstrapping or seeking outside funding (and giving up equity) for your startup early on via angel investors or venture capital is case specific. Only you are in position to understand what is best for your company. If you can stand on your own feet or if you can achieve more by securing outside investors. Just remember that outside investors such as angel investors and venture capital firms are going to expect a significant portion of equity and very large return on investment.
Here are a few questions to ask before making a decision:
- Are you hoping to build a lifestyle business or a billion-dollar company? Nowadays, a lifestyle business can mean sales of $100 or more. Most venture capital firms in particular, are looking to invest in startups with tremendous growth potential, not lifestyle businesses.
- Are you willing to give up equity in exchange for an investment?
- Are you willing to give up (at least a portion of) control of your startup
- Can you handle the stress of working with or answer to an outside investor? I remember depositing an investor check at my bank one day. The banker said, “Gosh, that’s a lot of money.” I said, “Yeah, I have a sinking feeling that I’m selling my soul by depositing this check.” Turns out, I was right. The investor was a micromanaging control freak who made my life hell.
- Do you have the financial resources to bootstrap your startup?
So there you have some strategies for startup fundraising.
Want to learn more? Contact me today and let’s talk!