If you need to raise capital for an early-stage startup, you probably already know it will be a complex and potentially overwhelming process. Unfortunately, it’s probably also going to take a long time. So, pack a lunch and buckle up! You’re likely going to be working on this for a while.
However, there’s no need to despair. We built this guide to help founders navigate the fundraising process by better understanding your options, the process you need to follow, and lots of other helpful and practical tips you can use to make this as painless as possible.
We will discuss different strategies, the tools you need to execute each, and some methods you can use to streamline the process.
If this is your first time out, review this entire guide. If you know what you’re doing but need a quick refresher, use the links below to jump to the appropriate section.
Table of contents
Exploring your funding options
Before you start raising capital, you should evaluate all of your options. This list isn’t exhaustive but provides a quick overview of the most common fundraising strategies.
Equity financing and convertible notes
Two of the most common options are equity financing and convertible notes. Both options have unique advantages and drawbacks, and you’ll have to decide whether or not either option aligns well with your needs and goals.
Equity financing
Equity financing is raising capital by selling shares to investors. Shares represent ownership in your company, so equity financing does cause dilution of your ownership and control.
Equity financing requires a pre-money and post-money valuation, due diligence, and work. If you’re going down this path, you’ll want an investor-grade financial model, and Forecastr can help.
Also, check out our resources section for helpful tools like our guide to fundraising benchmarks, an investor pipeline template, and the pitch deck Forecastr used to raise our seed round in 2021.
Convertible notes
Convertible notes are a type of debt that converts into equity at a later date - often at the time of the next financing round.
Convertible notes offer more flexibility compared to equity financing. In exchange, investors get a higher percentage of ownership.
SAFEs (Simple agreements for future equity)
SAFEs are an alternative to convertible notes. As with convertible notes, you receive capital upfront in exchange for future equity triggered by an upcoming event.
- Pros: SAFEs can be faster and easier than equity financing and convertible notes. They typically have lower legal and transactional costs. Founders retain their current level of control until the instrument converts.
- Cons: Investors have no guarantee that the investment will convert. While there’s no immediate dilution, it occurs whenever the triggering event happens.
Venture debt
Venture debt is a form of financing designed for venture-backed startups that may not have significant cash flow or assets to secure traditional loans. Here are some notes about venture debt:
- Startups issue equity warrants to account for the lender's risk.
- There’s typically no immediate equity dilution.
- Venture debt provides an alternative to equity financing for startups needing additional capital between rounds.
- There are many reputable venture debt lenders to partner with.
- You typically get a three-year term with the loan amount based on a percentage of the previous equity round.
- Expect interest payments and equity warrants for 5-20% of principal.
- Only available to businesses that have already received venture capital.
Extensions
If you’ve already received some funding, you need to extend your runway, but you’re not ready to raise a round; an extension might be a good fit for you. Extensions are also called “Seed Prime,” “Seed 2,” and “Seed to A” rounds.
- Pros: Extensions can buy time without completely changing the dynamics of your cap table. There are typically no fixed repayment requirements. There is the opportunity to get fresh and valuable insight and advice by bringing in new investors.
- Cons: Extensions require a new valuation, which can be problematic if you don’t have valuable assets or steady revenues. There is also additional dilution, which might mean less control going into your next round.
Equity crowdfunding
Equity crowdfunding is an alternative financing option that allows startups to raise capital from a broader range of investors, including non-accredited investors like loyal customers, social media followers, and other community members.
Select a reliable platform like Wefunder, StartEngine, or Republic. You set minimum and maximum funding goals before you launch. The service holds all payments in escrow. If you meet the minimum funding goal, you get the money. If not, investors get their money back.
Equity crowdfunding may be a good fit if:
- Your startup has a loyal customer base or social media following.
- Your company offers novel, unique, or exciting products that generate public interest.
- You are trying to limit dilution. No single investor gets a huge stake in your company. Instead of issuing a few large stakes, you issue many small stakes.
Equity crowdfunding may not be a good fit if:
- You are in a hurry. Equity crowdfunding is not a quick fix for immediate funding needs. It can take just as long as traditional funding rounds.
- You are not US-based. This option is only available to companies based in the United States.
- You need a very high minimum funding amount. Funding limits for non-accredited investors cannot exceed $5M over 12 months.
Revenue-based financing
Revenue-based financing can be a strong option for businesses with recurring invoice-based revenue - like startups and tech products. You get a percentage of your projected monthly revenue and pay it back over time with interest.
- Pros: You retain your equity and keep a clean cap table. Getting funding is relatively quick and easy.
- Cons: You must demonstrate stable recurring revenue - and the funding available depends on your MRR. If you take too long to repay, the financing gets less economical.
Grants
Grants can be a great funding source but are not easy to get. You can find grants through organizations like state and local governments, universities and labs, or nonprofits.
- Pros: There is no repayment or dilution.
- Cons: There is much competition, paperwork, and time spent.
Preparing for your pitch
There are several things you should put in place ahead of time before you start approaching investors.
Metrics matter
When you talk to investors, you need to be ready to speak their language - numbers. Investors compare competing opportunities every day, and metrics and benchmarks help them understand your performance and growth potential.
Your most important metrics depend on your business model and your industry. These are ten key metrics that every founder should understand:
- MRR (Monthly Recurring Revenue): The amount of recurring revenue your company receives monthly.
- ARR (Annual Recurring Revenue): The annualized version of MRR, typically calculated as MRR multiplied by 12 months.
- Gross margin: Indicates if sales will exceed business costs, calculated as (Revenue - Cost of goods sold) ÷ Revenue.
- ACV (Annual Contract Value): The average value of your contracts is particularly important for enterprise SaaS companies with custom contracts.
- LTV (Lifetime Value): The amount you expect to earn from an average customer lets you track retention and compare it against customer acquisition costs.
- Payback period: The breakeven point for each customer, or the average time it takes for your company to recover costs from each customer acquisition.
- CAC (Customer Acquisition Cost): The cost to acquire a customer, calculated by dividing marketing costs by the number of customers gained.
- Churn rate percentage: The percentage of customers or subscribers who cancel or do not renew their subscriptions during a period, calculated monthly or annually.
- MAU (Monthly Active Users): The number of active users every month, with active users being less likely to churn.
- Expansion MRR: The increase in monthly recurring revenue within your current users, typically consisting of users upgrading to higher-tier subscription plans.
If you need help understanding your metrics, get a financial model. Forecastr is an online financial modeling tool that lets you track and project your financial metrics. Because financial modeling can be time-consuming, we also provide seasoned financial analysts to help build and maintain your model. Click here to set up a demo: Get Forecastr.
How to find investors
One element of a successful fundraising campaign is a well-managed investor pipeline. Here is a simple process to build and optimize a pipeline that connects you with the right investors.
- Locate investors: Search for investors through personal networks, industry events, and online platforms like AngelList, Crunchbase, and Pitchbook. Focus on investors in your industry, your stage, and your deal size.
- Document your pipeline: Create a contact list, spreadsheet, or database as the foundation for your investor pipeline. Include details like fund name and size, location, ranking, ticket size, domain, contact info, type of interest, intro status, meetings scheduled, and additional notes. Rank investors based on how they match up with your deal in terms of industry sector, location, and deal size. Try to find 50-100 potential investors who match your profile.
- Put your pipeline to work: When you are ready to start raising capital, reach out to your highest-ranked investors and best relationships. After the first contact, maintain regular communication with every investor in your pipeline. Send monthly updates with accomplishments, milestones, KPIs, and financial insights. Focus on building rapport and instilling confidence in your abilities as a leader. Stay engaged to keep your opportunity relevant and keep investors interested.
The importance of your financial model
When raising capital, a financial model is an essential tool that helps you forecast your financial performance, future cash flow, revenue generation, and expenses.
A solid financial model makes a great impression on potential investors and lets you showcase your deep understanding of your operation and metrics.
Here are some of the key benefits of using a financial model in the capital-raising process:
- Determine capital requirements: Analyze factors like market opportunity, growth strategies, historical growth rates, and overall financial position to understand how much capital is needed to achieve your goals.
- Estimate company valuation: Although investors will determine the final valuation, a financial model allows you to enter valuation discussions with realistic expectations based on your performance.
- Support your pitch deck: While your pitch deck should be the focus of your pitch meeting, your financial model becomes crucial when investors ask detailed questions about your finances.
- Negotiate terms with investors: Use your financial model during follow-up meetings to justify valuation adjustments and negotiate equity stakes, ensuring you secure the best possible deal for your startup.
- Facilitate due diligence: Investors will perform due diligence before investing in your startup, and a solid financial model based on accurate historical data and defensible growth assumptions will be a critical component of their review.
With a strong financial model in your corner, you can start raising capital confidently, ready to effectively navigate each stage of the process, from planning and due diligence to executing your growth strategy after securing your funding.
Presenting your financials during the capital raising process
You should know some nuances when sharing and presenting your financial data while raising capital. Getting the timing right is crucial for building confidence with your investors. Follow these guidelines to provide the right level of information at the right time:
- Before the pitch: Never let your financial model stand on its own. The first time an investor sees your model, you should be present to defend and explain the data and assumptions within your model. Present it in person so you can control the narrative and guide the discussion, providing supporting information as needed.
- During the pitch: Familiarize yourself with the model to the extent that you can use it to answer questions confidently on the spot. But your pitch should not be about your model. Focus on your fundraising narrative and tease your financial model for review during a follow-up meeting. In your deck, include any key metrics or benchmarks that support your narrative, but limit yourself to high-level summaries.
- After the pitch: If you hook the investor on your narrative, they will have many questions about your operation and metrics. Now is when your financial model takes center stage. When you review your model with an investor, be open to feedback and willing to accept changes to your assumptions. Take advantage of the opportunity to get valuable feedback about your model and cultivate a collaborative discussion. If the investor requests specific changes to your model, make those changes and circulate the updated model for review.
Stick to this process to present yourself as a capable leader with a clear vision, increasing your chances of successfully raising the capital you need.
Leveraging your network and community
When raising capital for your startup, your network might be the best place for you to start. Even if you do not know many wealthy people, talking to those you know can open doors and expose the possibilities you are overlooking.
Directly asking for help is often the best way to open a networking conversation like this. Let your connections know you’re working on a startup project, and ask them if they would be willing to listen and give you their thoughts.
When you ask for advice, people will probably try to help. That can mean making phone calls and introductions that open doors for you. Or, worst case, it’s another set of eyes on your materials and another valuable opinion.
Let’s break it down a little:
- Treat your contacts as mentors, not piggy banks: Seek out people with experience in your industry, working with companies relevant to your business. Don’t treat everyone as a source of funds (although some might be); ask for their guidance and advice.
- Set up mentorship sessions: If someone has valuable advice and shows interest in your project, try to get another meeting. Show up with a list of questions and create an atmosphere of mentorship. The more invested you are, the more invested they will be.
- Stay grateful and connected: Show thanks to everyone who takes the time to listen. Reach out and let them know you appreciate their time. Start sending out a monthly email update to let everyone know how things are shaping up. Stay top-of-mind in case a new opportunity arises.
- Do not burn bridges: Be gracious if you ask someone for help and they decline. Try to maintain respect and trust throughout your network. People talk, and when a potential investor asks questions about you - you want the response to be positive.
It all comes down to being open, friendly, and respectful. Just let people know that you want their help. You might find some surprising opportunities.
Raising capital in different regions
It’s easier to find investors in some places than others. A Silicon Valley startup has some advantages over a startup trying to raise in Kentucky. But you can do it.
Here are some tips for raising capital in rural areas and other countries.
3 strategies for raising capital in small markets
Raising in a rural area requires dedication, with an emphasis on relationship-building and leveraging local resources.
- Build relationships with local angels: Networking is always a best practice, but it’s essential for success in smaller markets. Focus on cultivating relationships with local investors and business leaders. If anyone in your area can open doors, it’s them. Many smaller cities have close-knit startup communities that attract angel investors. Ask and find out what’s going on in your area.
- Leverage entrepreneurial support organizations: Engage with local organizations supporting startups. They can provide valuable contacts and press coverage opportunities. Local organizations sometimes have regional partnerships with larger organizations.
- Work with an accelerator: If there’s not an accelerator where you live, look for one in nearby cities and towns. Accelerators can give you market validation and put you in touch with angel investors. Some accelerators may provide some funding, but the most significant benefits are typically networking and mentorship opportunities.
Tips for raising in europe
Europe presents its own set of challenges. European investors expect founders to be well-prepared with strong documentation.
- Get investor ready: European investors typically look for strong financial performance, with B2B companies expected to reach revenue benchmarks of £1 million per year for Series A and £5 million for Series B. Be prepared to present comprehensive financial data, including a 5-year forecast, profit and loss statements, balance sheets, and growth projections.
- Aim to please the median investor: Maximize the number of meetings you book by catering to the median investor.
- Set yourself up for a great term sheet: Ensure you have a general fit with potential investors by filtering out irrelevant VCs looking for specific deals where you’re not a match. Look for VCs who have recently invested in similar companies - but still try to cast a wide net. Familiarize yourself with market-standard term sheet items like average valuation, liquidation preferences, vesting schedules, and exclusivity clauses.
- Negotiate terms with multiple investors: Instead of sharing the first term sheet you receive with other investors, send a message indicating that you’re considering an offer, share your desired valuation, and provide a timeline. Some other final offers may roll in before that date.
Follow these tips to raise successfully in any region. They’re also good general best practices if you are in Silicon Valley. Next up are things you should specifically not do while you’re fundraising.
How to avoid common fundraising mistakes
Fundraising is a big deal for any founder. It’s often the first time you step out and put your ideas in the open, where they will be scrutinized, nit-picked, and potentially shot down.
You always want to be sure you’re putting your best foot forward. If you screw up on something big - you’ll likely lose the confidence of the investor you’re talking to.
Here are three key mistakes you need to avoid on the fundraising trail:
- Overstate your revenue forecast: Most founders are optimistic, and that’s great! But when you’re forecasting your revenue it’s also important to be realistic. With outlandish numbers, you’ll lose the investor’s interest immediately. From their vantage point, if you don’t understand your revenue potential, you don’t understand much.
- Raising too little capital: Set your capital requirements strategically. Calculate how much cash you need to make it to your next round, and mitigate the risk of running out by including a buffer. You can always ask for an extension, but you might avoid that stress by adding a 20% buffer to account for unforeseen challenges and opportunities.
- Starting too late: This is the big one. If you have less than six months of runway, you should probably be raising already. Raising capital takes about 4-8 months or longer. To avoid a cash crunch, start the process at least eight months before you expect to run out of funds. You also lose leverage in the negotiation process if you’re in the middle of a cash emergency.
Be aware of these common mistakes and be proactive about side-stepping them. You’ll be better prepared and more likely to lock in your funding.
5 essential resources for fundraising founders
When you are fundraising, you have to let people help you. Whether it’s just listening to a mentor’s feedback or paying for professional guidance, the job probably exceeds your bandwidth. It is important to get the help you need.
If you’re not a pitch deck expert, get some opinions from investors, designers, and other founders. If you’ve never built a financial model, make sure someone with experience reviews your model before you share it.
You might need some help to build them, but these are five resources you should put in place before you hit the fundraising trail.
- Pitch deck: Obviously. A pitch deck is the one thing every founder knows they need. We’re including it in this list so that you can see why it’s not the only thing. Your pitch deck is your first impression, so it is critical. Make sure yours tells a compelling narrative, and make sure it hits.
- Financial model: Your pitch deck tells the story. Your financial model shows how you’ll make it a reality. Finance is the investor’s native language and your model gives them a numerical narrative. It’s a framework they understand which empowers them to make informed decisions.
- Data room: A centralized data room has two huge benefits. First, it establishes transparency, which is very important to investors. Second, it saves you time. Handle questions and requests efficiently and focus more time on strategy and execution. Every time you answer a question or concern, put that information and the supporting materials in your data room so investors can find answers without your help.
- Investor pipeline: You use a CRM to manage sales and marketing. You use accounting software to manage finances. Why wouldn’t you have a designated tool to manage investors while raising capital? Use an investor pipeline to organize investors' contact info, notes, and your next steps with each of them. Include metadata like their preferred check size and industry concentrations, and prioritize them by how closely they match your opportunity.
- Confidence: Is confidence a resource? Yes, it is. It is something you can influence that provides an advantage over your competition. The best way to show it is to deeply understand your financial metrics, industry landscape, and go-to-market plan. Whether you’re a charismatic visionary or an introspective code jockey - if you roll up your sleeves and work to develop those plans well, you will become confident talking about them to investors.
Use these resources to attract good investors and maximize every opportunity.
Go forth and raise capital
Raising capital for an early-stage startup is a challenge for anyone. It takes hard work and a lot of time. But with knowledge and the right tools and strategies, you can confidently tackle this task and turn your dreams into reality.
Watch out for the pitfalls mentioned above, and don’t be afraid to seek help when needed. If you don’t know where to start, your financial model is a good choice because it informs all the other resources you will need.
Reach out to Forecastr to start building an investor-ready financial model today. We have the best tools on the market, and every customer gets personal guidance from an experienced finance professional.