How to raise funding for startups

Jan 12, 2023 see all posts

My notes from a course I did on raising money for startups.

A stack of money

Funding Basics

There are a few types of funding. Amongst them, the most common one is Equity funding.

What is Equity Funding?

Your company gets money in return for the equity i.e. you sell a piece of your company to the investor.

Once you incorporate your company. You issue a net of 1,000,000 (1 Million) shares of the incorporated company.

Types of Equity funding:

Understanding major funding stages

Pre-Seed: When you have an Idea ready and a founding team ready to go.

Why do people fail to raise Pre-Seed?

Generally, when people have an idea, they also need the skills necessary to execute it, for example, you are a personal gym trainer and have an idea for a fitness app which can have some killer new revolutionary features, but have no technical skills to make this. In this case, you will be looking for a pre-seed round to Hire engineers to make you an MVP and the thing is these engineers are costly when they are working for a salary. So angel investors to steer clear of this. So what you can do to save yourself is to get engineers willing to work for Shares of your Company rather than a salary.

Investors play with probability and you have to prove yourself as a relatively less risky investment and the best way to portray that is to put your money where your mouth is.

Also when people leave their comforting jobs to live this life of struggle as an entrepreneur it shows their commitment to the idea.

Seed: This is money for you to experiment with. This is the round where you raise money to find Product Market Fit. In product market fit you try to answer a few questions. Who needs your product? How much will one pay to use your product? At what frequency will one need your product? What is the potential of your product? Once you answer all these questions you have what in the industry is known as a playbook. You use this model in your playbook to expand and grow your business.

Series A: A template is ready. Your product has market acceptance. Market clarity.

Why, When & How of Raising money

Should you raise? Are you a venture type of business?

VCs are typically looking for companies which have the potential, ability and market fit to grow and become a $100,000,000 market cap in 8-10 years. Something founders should keep in mind is that a valuation increase means profit for the VCs but that doesn’t necessarily translate to your profit or the company. Having huge valuations is meaningless if the underlying business is not strong.

Are you willing to partner?

As you raise funding, you lose control. It is how this works.

Do you want to chase a big vision?

You only get to raise a seed round once. Choose wisely.

When to raise?

How much to raise?

Art & Science of Valuation

Science:

Valuation of a B2B company dependent on total revenue eg. B2B SaaS companies, valuation = 5 - 15 times their revenue

For B2C companies, valuation depends upon revenue per user, market size, etc.

Reverse calculate the valuation i.e. Valuation = Money you want to raise/% of equity you want to give away.

Art:

https://www.researchgate.net/publication/349533034_WeWork_Case_Study

Dilution is not always BAD. But try to keep control till at least series B.

LabelPre MoneyPost Money
What you wantWhat they want
Funding Asked$1,000,000$1,000,000
Valuation$1,000,000$1,000,000
Investor Equity9.09%10.00%

Say an investor is ready to invest $1,000,000 and wants 10% of your company.

Pre-money means the company is valued at $10,000,000 before its money comes into the company.

Post money means the company is veiled at $10,000,000 after his money comes into the company.

How VC works

How does a VC work? [2]

Structure of a VC fund:

Life cycle of a VC fund:

Tips to interact with VC:

How VCs think

Probability & Pattern recognition:

They assume most will fail. Some will break even. And a handful will be the ones that give 10x returns.

They look for everything. The moment you enter their offices and till the moment you leave their office.

Understanding Pattern: Which is the right VC?

Some are sector agnostic. Even then all have a preference, find your niche.

Before Funding

Bootstrapping:

When a founder cannot or wouldn’t secure funding from a VC, he or she has to pay out of their pocket to sustain the business. Sustain on the bare minimum.

Accelerators and Incubators:

They provide:

Process of Raising

  1. Preparation
  2. Meetings
  3. Early Diligence
  4. Pitching
  5. Term Sheet
  6. Due Diligence
  7. Closing

Funding Process overview

Preparation and Pitch Deck

Prepare yourself:

Pitch deck:

Due diligence items

Pitch deck structure:

https://www.slideshare.net/kambosu/uber-pitch-deck

https://slidebean.com/

https://bestpitchdeck.com/

https://www.forbes.com/sites/alejandrocremades/2018/03/02/how-to-create-a-pitch-deck/

https://techcrunch.com/tag/pitch-deck/

Cover Slide:

Simple. Clean. Informative.

Problem Slide:

Solution Slide:

Product Demo:

Market Share slide:

Click me.

Business Model:

Competition Slide (Use grid format):

There is an industry-standard. Just follow it.

Competitive advantage:

Can be technical

Go to market slide:

Team slide:

Traction Slide:

Booking Meetings:

No Magic:

Booking in-person meetings (Decreasing order of effectiveness):

  1. Warm Intro: Get mutual connections to introduce you to them.
  2. Events: Demo days, pitching sessions.
  3. Cold emails, calls, Twitter, and LinkedIn.
    1. Add tracking tools to your emails.
    2. Share drive links for PPT don’t embed.
    3. Be as discreet as possible, small community.
    4. Send personalised mail, no CC/BCC.
    5. Can add an expiry feature if you have a term sheet with other VC ready.

Pitching:

Outcomes:

  1. You get destroyed.
  2. You are early.
  3. Positive.

Pitching guidelines:

Term sheet:

Key terminologies.

What is a term sheet?

[1] Bridge round: Say you have raised Series A and are on track to raise Series B in n months but in n-1 months it is seen that the company is very close to its next target but needs to raise some capital to get to the next step. This is where the bridge round comes in. Can be raised at any time. Generally, at the same valuation or in rare cases where the company is in distress the valuation can be lower

[2] A VC fund needs to deliver returns to LPs in 7-9 years time7

[3] Best not to raise money during this period, seeing as VC will rush you, as they need to give returns to their LPs

[4] I got this bruh.

[5] Refer to chapter How VCs thinks

[6] Good books:

  1. Venture deals by Brad Fels and Jason Mendelson
  2. Pitch Anything by Oren Klaff

~ Aryan Singh on