Let’s suppose, you have a promising idea, but there’s not enough money to start your business. Does it sound eerily familiar? Hopefully, this challenge is not that big as it may seem at first glance: everything is possible with the right attitude and dedication. In fact, there are several sources to find investments for early-stage startups. So without further ado, grab a coffee and discover how entrepreneurs can organize the whole process and find funds in 2022.
The search begins with self-identification, so to speak. First, you have to understand what stage your startup is currently at. When you’re going to contact potential investors, this realization will help you define the steps you need to take. As mentioned in the title, we’re going to cover early-stage startups. So how do you find funding for your business? Let’s get into the weeds!
Pre-Seed Funding Stage
Ah, the dawn of your company. At the pre-seed funding stage, startup founders realize their project’s potential and why the idea can be economically feasible. They also understand what problems their product helps to solve and who their potential customers are. They usually have a prototype (or a mockup) and even sort of a small team of enthusiasts (although it’s a bit rare). However, the product itself is still in its infancy.
So, what do you need money for? And how much? At the pre-seed funding stage, it’s vital to attract funds to develop a prototype (if you don’t have one) to test hypotheses on product potential in the market and identify the product’s key functions.
This process of putting ideas into practice is called product-market fit (PMF). The term was introduced in 2007 by investor and entrepreneur Marc Andreessen, co-founder of a venture capital fund at IT Andreessen Horowitz. In his opinion, the product-market fit determines the viability of a startup. Sean Ellis, the marketer who coined the term “growth hacking”, considers product-market fit to be a key step in building a highly profitable company. PMF helps to find the dominant value aspects and functions of the product through market research.
As for the amount, the numbers may vary. According to a report from DocSend, the average amount raised in the U.S. during a pre-seed round hovers above $500.000, while the worldwide average amount sits above $415.000.
So you’re at the early stage, congrats! In this case, your main funding sources are crowdfunding (such as AngelList, Kickstarter, and Wefunder), business angels, and VC funds (sometimes labeled “super-angels” or “micro-VC’s”). Now you need to know what fundamental factors are vital for an effective pre-seed fundraising campaign.
1. Be specific and confident
There's this recurring problem in the startup community: founders need funds but cannot say exactly how much investment they need and how specifically they will use this money.
Do your homework and present a detailed plan. An estimate, a financial forecast, you call it. You need to demonstrate the potential of your business. In particular, that it is easily scalable: that the income per user is many times greater than the cost of attracting it. You need to analyze the situation on the market and wisely approach investments. In other words, you have to be a leader with versatile business skills. Otherwise, it won’t simply work.
2. Be sympathetic
Investors won’t deal with founders who aren’t good listeners. Can you take advice? Although it’s good to show your leadership qualities once in a while, don’t mix up confidence with arrogance.
3. Provide the idea’s visual representation
People can talk your ear off about their ideas but do not find the time to implement them. That’s a bummer: investors don't believe in idea generators. Therefore, when meeting them, you need to present at least some developments made with your own resources, meaning your time, energy, and money. Sure enough, there are exceptions. For instance, investors put their trust in Reface at the stage when the startup did not yet have a product. But there was a strong team behind it, another important factor we’ll talk about later.
4. Come up with fair conditions for both parties (revised by lawyers)
Professional relations with investors (even family members or friends) show a serious attitude, professionalism, and respect. Pay attention to the ownership structure of the project and thoroughly discuss the rights and obligations of the parties that are fair from the point of view of business ethics.
Seed Funding Stage
Seed funding is the first official equity funding stage. The startup does have a team and a prototype with a critical product function to start expanding. The team has also tested hypotheses on the market and gathered user feedback.
At the seed stage, funding is needed to support current progress. For instance, startup founders use fundraising to diversify existing sales channels. Use funds to look for new sales channels or non-standard ways to reach a potential client and test conversions in each new channel empirically.
The logic is relatively simple: the more transactions from different types of clients you get, the greater is the volume of feedback (and the fewer risks for the future investor). This model is the basis for improving the prototype, increasing or changing its functions, and sometimes for a complete change of course with a significant adjustment to the "vision of the future", the so-called pivot.
Let's observe two groups of investors: business angels or private venture investors who already have significant experience, capital, and competencies. The second option is seed funds (check out the overview), both as part of larger organizational structures of venture capital and separate mono-structures that control a single specialized fund.
So what does it take to get funds at this stage? Let’s find out.
1. The right team
Investors pay special attention to the people working at a seed funding stage startup. It’s fair to say that the team is the key factor when they make up their mind. The reason is simple: even a good idea with a mediocre team will be doomed.
Every role plays its part, from the management team to the technical staff. So it makes sense to carefully check what skills and achievements the team members have and how potential investors will perceive them.
2. Prototype evolution to MVP
The Seed stage offers broad opportunities for your idea’s commercialization. At the same time, it’s mandatory to confirm its viability in the market. Therefore, the product should solve several problems, not just a single one.
3. Legal protection
Hey, your competitors don’t sleep! What if the stea…okay, what if they get inspired by your idea? If they manage to enter the market with their products, they pose a serious threat to the financial well-being of a startup and, consequently, the well-being of investors.
The registration of technological solutions (patenting) is one of the most effective barriers to keeping competitors at bay. Therefore, make sure you have legal protection for any technology or product you develop.
4. Can you provide a decent exit strategy for investors?
This factor is really critical when making a deal. You must have a clear understanding of each scenario at all stages of product development, whether it be a new round of investments, a takeover by a corporation, or even a public offering of shares (IPO). Investors want to be sure that you are a person who knows his business and understands the rules of the game.
However, you have to confirm your forecasts with specific facts, research results, and industry trends. After all, we live in a world where charts are much more powerful than words. If you do your homework, then the exit strategy will look more realistic for potential investors.
Funding is a complicated process, yet many people did it before you. Are you looking for more advice? Here’s the list of useful resources compiled by YCombinator for your consideration.
- A Fundraising Survival Guide by Paul Graham
Techniques for surviving and succeeding at fundraising
- How To Raise Money, Paul Graham
Detailed thoughts on fundraising. A must read.
- The Equity Equation, Paul Graham
How to decide if you should accept an offer from an investor
- The Future of Startup Funding, Paul Graham
How startup funding is evolving
- How to Convince Investors, Paul Graham
How to convince investors to invest in you
- Investor Herd Dynamics, Paul Graham
How investors think about investing in early-stage companies
- “Venture Deals”, Feld and Mendelson
Essential elements of a venture deal (book)
- Raising Money for a Startup, Sal Khan
Startup Fundraising from Sal Khan
- Venture Hacks: Debt or Equity, Babak Nivi
Discussion on debt vs. equity
To Sum Up
In a nutshell, fundraising methods directly depend on the startup's stage. Any investor loves specifics. The more accurate the calculations and forecasts are, the more chances to obtain the funding you have. In addition to numbers, a founder's attitude plays a vital role in the whole process.
Hey! Do you have a startup idea? If you do, you might have wondered what first steps you should take to move forward. Here at Akveo, being a former startup ourselves, we know this feeling. It would be awesome if the process were unchallenging, but it’s not. I want to make it a bit easier. Here’s the collection of insights to help early-stage companies have a quick start and grow. This startup guide is for entrepreneurs looking to start a company and those in the process of building one.
So without further ado, download the interactive startup pack with advice from founders, downloadable tools, tips, templates, and helpful media resources. The guide answers the following questions:
- How can I accelerate my growth?
- What tools can help me reach my goals?
- What are the current startup trends?
- Do I need a co-founder?
- What mistakes should I avoid?
- What media should I follow?
And one more thing. Don’t go crazy if investors aren’t interested in funding your startup. Be patient and persistent. It definitely won’t hurt to reintroduce yourself after a while. Talk about your current progress, new metrics, and clients. This attitude makes you a professional. If your project grows to a certain level, investors will most likely reconsider their decision.
P.S. Startups have a special place in our hearts. Let's write your success story together! Our team has the right skill set to help you launch your product faster. Follow us on social media! We publish a lot of helpful content for both startups and big companies from various industries.
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