Updated Feb 10, 2024
When is the best time to start raising capital for startups? Sooner than you think. Wait too long on that working prototype before you set up a capital stream, and you might just find yourself with a sign over the lobby, a great proof-of-concept, and a total lack of the funds you need to reach customers, let alone expand production. Abraham Lincoln recognized the value of a solid plan when he said, “Give me six hours to chop down a tree and I will spend the first four sharpening the ax.”
As a small business owner today, let that old adage serve as a reminder that it’s never too early to start mapping your path to capital. Plus, today’s market is turbulent and causes added stressors and time to secure funding. Here’s how to start the process.
How Much Does It Cost to Start a Business?
Before you dive into any sort of startup fundraising, you need a target that includes startup funding and first-year costs.
While some microbusinesses, like ecommerce or work-from-home outfits, can get off the ground with a few hundred or few thousand dollars, Small Business Trends estimates that the average startup and first-year costs for a small business fall between $30,000 and $40,000 in 2022. That number can, of course, reach up into the millions depending on scale — the U.S. Chamber of Commerce considers startup funding of up to about $15 million or more typical for startups raising venture capital. Incorporation, online and physical marketing, inventory, business insurance, software and supplies, licensing, space, staffing and taxes are all essential parts of that startup budget.
How To Get Funding for a Startup
One of the most challenging parts of startup fundraising is that it doesn’t happen all at once. Whether you’re working with venture capitalists (VCs), other types of investors (more on that in a bit) or a combination of funders, raising capital happens in a series of rounds, each one a stepping stone to the next milestone. Typically, startup funding rounds draw from a variety of sources that include the following:
- Pre-seed funding usually comes from personal sources like savings, crowdfunding and borrowing from banks or family, rather than from funds obtained from outside investors.
- During the seed round, the business owner gathers the capital needed to get things off the ground, covering necessities like research and development.
- Series A funding is where outside investors really start to become a major part of the picture — this phase is about turning an idea into a business.
- Series B then grows that business in order to meet increased demand or new R&D costs.
- Series C fundraising and beyond focuses on scaling your business, expanding its vision and branching out into new territories.
Startup Fundraising Options
So now that you have an idea of the fundraising flow, it’s natural to ask how to get funding for a startup in the first place. The good news is, you’ve got plenty of options to explore, spanning the spectrum of scale, business needs and accessibility. The following are some options to explore:
Bootstrapping, or Self-funding
Bootstrapping, or self-funding options is often the first step in financing your business dreams. Likewise, investors in your circle of family or friends can offer financial support here. Wondering how to start raising capital for startups? The answer might be close to home. After tapping into personal savings and securing funds from those within your close network, the next step is often to look for external funding sources. This can take several forms discussed below.
Crowdfunding
On the next level, crowdfunding — including platforms like Kickstarter, GoFundMe and SeedInvest — empowers online communities to offer capital, often in exchange for early or discounted product access or other small rewards.
Loan and Credit Options
Small businesses can also turn to loan and credit options like small business loans from banks or the federal Small Business Association, credit cards, credit lines, traditional loans or microloans, just to name a few.
Incubators or Accelerators
Incubators, also known as accelerators, provide startups with workspaces, mentorship, training and, sometimes, funding (in exchange for equity stakes) to help get businesses off the ground.
Grants
Small business grants offer an alternative to borrowing as funds that don’t have to be paid back. These usually come from government sources, though some may be private, and typically cater to projects geared toward societal good or beneficial research in sectors like medicine, education or energy.
Angel Investors
Angel investors often enter the picture before venture capitalists, offering substantial personal funds (and often mentorship) early on in exchange for perks like convertible venture debt or ownership equity.
Research Investors Interested in Your Sector
Are you introducing new software or information technology? It’s here that venture capital often enters the picture. A venture capitalist is essentially a professional investor or firm that specializes in investing in startups and growing companies. Usually, venture capital investments start at $1 million or more, in exchange for substantial control of the company.
A venture capital firm may be a reasonable choice for a relatively fast development process. And you can take comfort in the fact that venture capital firms often follow strict investment guidelines per industry, business stage, investment size and even geographic area.
Is your offering a physical product requiring material sourcing and testing? If so, then investigate incubators, angel investors or equity crowdfunding sources. Like venture capital organizations, some angel investors must adhere to mandated guidelines.
Conversely, if you’re in the bootstrapping days of your startup…
Friends and Family Can Be a Source of Capital During the Seed Stage
Resources like startups.com, Angel Investment Network and the International Business Innovation Association can help you find potential investors, too. Likewise, professional associations like Startup Nation, CoFounders Lab and eFactor can help connect you with investors, as well as the mentors you’ll need for support and counsel.
Keep Track of Your Interactions
Throughout the startup fundraising process, your to-do list is likely to go way outside the bounds of your whiteboard. Add your research about raising capital, and you’re going to need a bigger wall. To head off those potential headaches, consider a document management system or better yet, a virtual data room (VDR), to streamline this process. Using a data room for investors you can securely store your contacts and organize your files, ensuring efficient communication with potential investors.
At CapLinked, we offer a system that securely stores your contacts in a single location and organizes your files. And when you’re ready to reach out, CapLinked can help you notify prospective investors.
One key interaction you’ll need to track is the ever-important interview process. Use these nine questions as a springboard before you secure investments and let CapLinked handle all the document hosting, permissions and access privileges you’ll need to dive into when it comes time for due diligence.
Prepare Your “Elevator” Pitch
Just like in moviemaking, the “elevator pitch” is a short, to-the-point, sometimes casual presentation that aims to persuade and get folks on board with your business — crafting that pitch is an essential part of your toolbox during the startup fundraising journey.
Ultimately, the pitch aims to outline your company’s reason for being with just enough detail to pique your audience’s curiosity; by the end of the pitch, you want your audience asking questions.
Present your value proposition succinctly and powerfully, and you’re more likely to get the in-depth meeting you need to talk about raising capital. And a word of advice — when talking with prospective investors, don’t say you’re fundraising unless you’ve already secured a lead investor.
Each pitch deck (your presentation’s visual and data aid) should be a unique reflection of the opportunity for investors. For a successful M&A pitch deck example — think Facebook, Buzzfeed or Tesla — can be viewed right here if you need a little inspiration. Just a quick look and you’ll notice that the most effective pitch decks share some common elements: They present a problem, they offer a solution with tangible and emotional benefits, they identify the target audience,and finally, they present an “ask” to investors. Info like market and trend analysis, roadmaps and future strategies (including financials) and team credentials often round out the basics.
When pitching, keep your messaging straightforward (avoid too much business jargon, which can be exclusionary), passionate, data-driven and focused to capture the nods, smiles and — most importantly — attention of a potential investor.
Know the Rules for Raising Startup Capital
Realistically, raising capital for your startup will take time. You’ll want to get it right, so remember Warren Buffett’s advice: “Risk comes from not knowing what you are doing.” The startup fundraising process is a highly regulated one, so it’s of utmost importance that you understand the rules before you begin to seek equity financing.
Two regulations that are important to consider are the following:
- Private companies raise funds under Regulation D for its relatively low cost and easygoing process. Regulation D is open to both private (506(b)) and public (506(c)) entities, but they must have earned at least $200,000 over the past two years or have a net worth of at least $1 million (excluding their primary home).
- Under Regulation A, entrepreneurs can raise up to $50 million from any investor, with two qualifying tiers. Tier 1 allows up to $20 million in funds, with state and SEC review. Tier 2 hits a $50 million limit but requires semi-annual reporting and SEC review. Although more streamlined and accessible to a broader group of investors, the qualifying process takes 3 to 4 months.
CapLinked EZ Insights for Raising Capital
You’ve probably noticed that when it comes to startup fundraising, some insights are harder earned than others. Good thing you can leverage CapLinked EZ Workspace Insights, specifically geared for raising capital.
But what makes them so easy? CapLinked’s EZ Workspace Insights offers an analytics dashboard that takes the pain out of document review and workflow by letting your admin staff quickly and securely access shared data, including — and this is key to startup fundraising — due diligence docs as well as private equity and venture capital transactions. Even better, you can track changes made to shared documents. This file data provides valuable insights into how your company is interacting with and leveraging data, based on automatically collected stats like workspace visits and file views.
Closing Thoughts
With a plan in hand, a VDR from CapLinked and a clear understanding of the mechanics of raising capital, you’re ready to start your fundraising journey. Be patient, be persistent and remember the words of one last pro from a whole other highly competitive sector — just like Babe Ruth said, “It’s hard to beat a person who never gives up.” Sign up today for a free trial!
Dan is a small business owner and freelance writer based in Dallas, TX. In over a decade of experience, he’s been fortunate to write and collaborate with business-facing brands including The Motley Fool, Chron, Office Depot, Fortune and more.
