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When should I raise money for my startup



When should I raise money for my startup

Starting a business requires more than just a great idea; it demands execution, a lunatic leader (guilty) and financial resources to turn that idea into reality. Something that cripples a lot of startups is determining the right time to raise money for the business and getting that money before you run out of runway. The murky underbelly of raising capital is full of friends of friends, rich parents and luck. But if you’re going to play the game you should know the basic rules at least. Let’s have a look at in’s and out’s of startup funding and when it’s the opportune moment to seek your tooth fairy for financial backing.

1. Seed Stage

At the inception of your startup, you’re in the seed stage (look, we know, pre-seed is a thing too, but you generally don’t have a whisper of a product then and a lot of pre-seed companies that raise do so because they’ve had an exit before, so we’re skipping it). This is where you develop your concept, conduct market research, and build a minimum viable product (MVP). Seed funding typically comes from friends, family, or angel investors or it you had one of those helping you at pre-seed, maybe a seed friendly fund.

There were times that seed was very small funding rounds, these days they are growing. A large seed in 2024-25 could easily look like a very small Series A from a few years ago.

2. Series A

In the Series A stage, your business begins to gain traction. You’ve validated your product or service, and there’s evidence of market demand. Series A funding is often provided by venture capitalists (VCs) in exchange for equity. You might be raising $1-10M (averages will vary massively depending on where you’re raising – the US tends to be much higher).

3. Series B and Beyond

As your startup matures, you may seek additional rounds of funding in Series B, C, and so forth. These rounds are aimed at scaling your business operations, de-risking things, expanding your team, and penetrating new markets.

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1. Product Validation

When your MVP has gotten some positive feedback from early adopters (hopefully not just your mother or partner) and you’ve validated the product-market fit, it may be time to raise funds to accelerate growth.

2. Market Traction

If your startup is gaining momentum in the market, with increasing user adoption, revenue growth, or strategic partnerships, investors are more likely to take notice and invest.

3. Scalability

Investors are interested in startups with scalable business models that have the potential for rapid growth. If your business model demonstrates scalability, it’s a green light for fundraising.

1. Building a Solid Business Plan

A lot of people discount this and only have a pitch deck. But a comprehensive business plan that outlines your market opportunity, competitive landscape, revenue model, and growth strategy. A well-defined plan will give confidence to potential investors that you actually know how to build a business (this is not just building a product). Being ready for funding due diligence is a full time job in and of itself.

2. Assembling a Strong Team

Investors invest in people as much as they do in ideas. Surround yourself with a talented and dedicated team that complements your skills and shares your vision. Look for building out a co-founder relationship – investors look at solo founders sometimes with a little bit of hesitancy. Think about have a strong startup lawyer on your side too.

3. Developing Relationships with Investors

Networking with potential investors early on can pave the way for successful fundraising in the future. Attend startup events, pitch competitions, and leverage your existing network to make valuable connections.

1. Angel Investors

Angel investors are affluent individuals who provide capital in exchange for equity. They often offer mentorship and industry connections in addition to funding. Look for founders that have exited, high net worth individuals and the like.

2. Venture Capitalists

Venture capitalists are institutional investors who manage funds dedicated to investing in high-growth startups. They typically invest larger sums of money in exchange for equity and expect a significant return on investment.

3. Crowdfunding

Crowdfunding platforms allow startups to raise capital from a large number of individuals, often in exchange for rewards or equity. It’s a viable option for early-stage startups looking to validate their concept and engage with their target audience.

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1. Dilution of Ownership

By accepting outside investment, you dilute your ownership stake in the company. It’s essential to weigh the benefits of funding against the potential loss of control. Understand that whatever you do early in the business in terms of fund raising will either haunt you or set you up for success in the future.

2. Pressure to Perform

Investors expect a return on their investment, which can create pressure to achieve aggressive growth targets. Be prepared to navigate the expectations and demands of your investors. A lot of people are put off by this and there is a rise in the number of people looking to build business without investor money.

3. Loss of Control

Taking on investors means sharing decision-making authority and potentially relinquishing control over certain aspects of your business. Ensure alignment with your investors’ vision and goals to mitigate conflicts. Make sure you also know the dynamics of your business and how control works.

1. Bootstrapping

Bootstrapping involves funding your startup with personal savings or revenue generated from early sales. While it offers independence and control, it may limit your growth potential. A lot of people look to bootstrap and it’s becoming a more legitimate way to become a startup founder.

2. Revenue-based Financing

Revenue-based financing allows startups to raise capital based on their existing revenue streams. It offers flexibility and aligns the interests of investors with the company’s performance.

3. Strategic Partnerships

Forming strategic partnerships with other companies can provide access to resources, expertise, and distribution channels without diluting ownership or taking on debt.

So, What’s Right For Me?

Deciding when to raise money for your startup, “When should I raise money for my startup,” is a strategic decision that requires careful consideration of various factors. By understanding the startup funding lifecycle, recognizing key milestones, and assessing the risks and alternatives, you can make informed decisions that propel your startup towards success.

We suggest spending a lot of time understanding what the implications of each choice is. Funding can ultimately be one of the biggest causes of a good exit or a bad exit for a founder. Do your homework and make sure you talk to other people who have been in these positions before.

1. How much equity should I give up when raising funds?

The amount of equity you give up depends on the valuation of your startup and the amount of capital you’re raising. It’s essential to strike a balance between raising sufficient funds and retaining enough ownership to maintain control over your business.

2. What documents do I need to prepare for fundraising?

Typically, investors will request a pitch deck, financial projections, a business plan, and any legal documents related to your company’s structure and intellectual property.

3. What are the advantages of bootstrapping?

Bootstrapping allows you to retain full control over your business, avoid debt and investor pressure, and focus on profitability from day one.

4. How can I attract investors to my startup?

To attract investors, focus on building a compelling value proposition, demonstrating traction and scalability, and articulating a clear path to profitability.

5. What should I do if I get rejected by investors?

Rejection is part of the fundraising process. Take feedback constructively, iterate on your pitch, and continue networking to find investors who align with your vision and goals.

Contract Sent is not a law firm, this post and subsequent pages on this website do not constitute or contain legal advice. To understand whether or not the ideas and guidance on the Contract Sent website is applicable to your business, you should consult with a licensed attorney. The use and accessing of any resources contained within the Contract Sent site do not create an attorney-client relationship between the user and Contract Sent.

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