When is the best time to start raising capital for your startup? Sooner than you think.
It’s a common misperception that you need to have your business established or a working prototype in the market before you think about setting up a capital stream. You may end up with a sign over the lobby and a great proof-of-concept but lack the funds to reach customers or expand production.
The ‘early bird gets the worm’ proverb does apply here, but we don’t want to consider investors as the ‘early worm’. Instead, let’s stick with ‘it’s never too early to start mapping your path to capital.’
Raising Capital Starts with a Plan
Abraham Lincoln recognized the value of a good plan when he said, “Give me six hours to chop down a tree and I will spend the first four sharpening the ax.”
While you’re developing products and setting up your business structure, take time to plan how you’ll approach the financing community:
1. Research the types of investors interested in your sector.
Are you introducing new software or information technology?
Venture capital may be a reasonable choice since you’ll have a relatively fast development process. And venture capital firms often follow strict investment guidelines about the industry, business stage, size of investment and even geographic area.
Is your offering a physical product requiring material sourcing and testing?
Then investigate incubators, angel investors or crowd-funding sources. Like venture capital organizations, some angel investors must adhere to mandated guidelines. Are you in the early, bootstrapping days of your startup?
Friends and family can be a source of capital during the seed stage.
Resources like startups.co, Angel Investment Network, and the International Business Innovation Association can help you find potential investors. Professional associations like Startup Nation, CoFounders Lab, and eFactor can also connect you with investors and provide you with mentors for support and counsel.
Keep track of your interactions.
Your to-do list of activities for your startup likely exceeds the size of a traditional whiteboard. Add your research about capital, and you’re going to need a bigger wall. Instead, consider a document management system or better yet, a virtual data room (VDR). We have a system that securely stores your contacts in a single location, organizes your files and when you’re ready to reach out, can help you notify prospective investors.
Prepare your ‘elevator’ pitch.
If you haven’t heard about this idea, read more here. The intent of this activity is to outline your company’s reason-for-being with just enough detail to persuade your audience to ask for more. Present your value proposition succinctly and powerfully, and you’re more likely to get the longer meeting you need to talk about capital. And a word of advice – when talking with prospective investors, don’t say you’re fundraising unless you have a lead investor.
Each pitch deck will be (and should be) a unique reflection of the opportunity for investors. Decks for successful pitches — think Facebook, Buzzfeed, or Tesla — can be viewed here. Ultimately, effective ‘pitch decks’ share common elements: They present a problem, the solution (and benefits both tangible and emotional), the target audience, and the ‘ask’ of investors. A market and trend analysis, roadmap/strategy for the future (including financials) and team credentials round out the basics. Keep your messaging straightforward (no jargon) and clear and you’ll get nods, smiles, and investors.
Know the Rules for Raising Startup Capital
Securing an infusion of cash 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 process for raising startup capital is highly regulated, so make sure you understand the rules before you begin asking for financing.
Two regulations to that are important to consider are:
- Regulation D. Private companies raise funds under Regulation D for its relatively low cost and easy process. Investors can be private (506(b)) or public (506(c)), 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).
- Regulation A. Under this rule, 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 the higher $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.
The New Kids on the Startup Capital Block(chain): ICOs and STOs
Initial Coin Offerings (ICOs), which sell cryptocurrencies like Bitcoin, raised more than $6 billion in 2017. There are several ways to structure your token offering – from investments (equity tokens are like shares of stock) to utilitarian (like membership or preorder tokens). While many ICOs are well-managed, some were discovered to be unethical and the SEC is pursuing several causes of fraudulent ICOs raising money for non-existent businesses.
Enter Security Token Offerings (STOs), which are modeled after ICOs and issue tokens to raise funds, but are tied to tangibles like assets, revenue and profit. Having more precise ties to an ownership stake in the startup companies reassures investors and the SEC.
Keeping track of investors and reporting appropriately with these blockchain-based fundraising tools becomes more complex for the startup issuing the tokens. We recognize the need for robust security in this new financial landscape and developed TransitNet to help issuers manage STOs.
With a plan in hand, a VDR from CapLinked, and an understanding of the mechanics of getting capital, you’re ready to raise money for your startup. Be patient and persistent. As baseball legend Babe Ruth counseled, ‘It’s hard to beat a person who never gives up.’
Learn more about starting a free trial here.