The title of founder is synonymous with fundraising. Most companies raise funds every 15–18 months, hoping to raise enough capital for 12–14 months. Before beginning an official raise, you’ll want to make sure that your business is ready to receive investments. But it’s really never too early to get a good sense of the opportunities out there and which might be right for your company.
Your funding options will vary depending on which stage your company is in. Stages have chronological names: “pre-seed” comes before “seed,” which comes before “Series A,” which is followed by B, and then down the alphabet. But they also functionally describe how mature the company is—thinking about stages that way will give you a sense of who might want to invest in your company, and how much financial risk they’d be taking.
Below, we go through your main options in every stage from pre-seed through Series A.
The pre-seed round
If you’ve identified a market opportunity, just gotten started building a minimum viable product (MVP), or have a prototype of your product to show, then your company will likely be considered at the pre-seed stage.
Pre-seed funding is often used to develop your good idea; investors are often making a bet on the founder and the market before any “product-market fit” (or even a true product) has been established. That means that the very early investors in your company are taking on a lot of risk. Typical funding amounts for this round are lower—both because of the risk and because you’re just getting off the ground.
Friends and family
Sometimes known as an FFF round––that’s the tongue-in-cheek “friends, family, and fools”––this type of initial funding will depend on the liquidity that your personal network can muster up. These days, with the cost of software approaching zero, some founders at this early stage max out a credit card to stand-up a decent minimum viable product.
Angel investors and syndicates
Angel investors, also known as private investors, seed investors, and angel funders, use their own capital for small startups or entrepreneurs, typically in exchange for ownership equity in the company. Though angel investors are usually individual people investing their own money, the entity that actually provides the capital may be a different vehicle, like a limited liability company (LLC), a business, a trust or an investment fund.
Angel investors often focus on the concept, while venture capitalists often focus on metrics that demonstrate the concept is viable. Angels’ investments often go to helping startups take their first steps. They may provide a one-time investment or ongoing funding to support your company through its early stages.
A syndicate is a special-purpose vehicle (SPV) that pools together angel investors to make a single investment. Syndicate leads are experienced angel investors with track records of successful technology investments.
If you’re looking for mentorship along with funding, then a startup accelerator can be a highly valuable option. However, admission into an accelerator is highly competitive, with acceptance rates often in the low single digits. Many accelerator programs focus on a particular industry or space—like San Francisco’s Acceleprise, which is set up exclusively for pre-seed B2B software as a service (SaaS) companies.
Once accepted into an accelerator, you join a cohort of companies for a fixed period of time––typically three to 12 months––and access exclusive learning and networking opportunities, including meetups, classes, and coworking spaces. In exchange for $50,000 to $150,000 of funding, most accelerators have a non-negotiable equity share percentage, usually 3–7%.
Pitch competitions are essentially a contest where you present your business idea to a panel of experts for a chance to win an equity-free investment. Some pitch competitions don’t require more than a deck and a well-thought-out go-to-market (GTM) business plan. Even if you don’t win funding, competitions could be just the exposure you need to garner interest from venture capital investors who you might otherwise never get to pitch to.
Micro and pre-seed funds
Micro venture capital firms make investments on behalf of third-party limited partners (LPs). In contrast to traditional venture capital, which is used to invest in companies looking to fund growth, micro venture capital consists of smaller seed investments, often not more than $500,000, in companies that have yet to gain traction.
Seed round and seed extension
“Seed” is an apt term for the money that will fuel a startup’s growth. At this point, your startup may still not have any commercially available product. Typically seed funding rounds are still relatively small and directed toward finding viable and repeatable customers and getting clear on the unit economics of the business.
For many founders, seed funding marks the beginning of the race to $1 million in annual revenue. The money may also be used for conducting market research or expanding your team. There are also seed accelerators, like Y Combinator, that give participants the opportunity to demo a solution to major investors.
Seed and seed extension-stage companies are still eligible for angel and syndicate investments, in addition to four other funding options:
Micro and seed funds
Rising demand for early-stage capital in the past few years has seen the emergence of a new asset class called “micro VC.” These specialty venture capital firms typically have $25 million to $100 million in assets under management (AUM).
Equity crowdfunding, also referred to as crowd investing, investment crowdfunding, or crowd equity, enables broad groups of investors to give your business money in return for a partial ownership stake in your company. Equity crowdfunding is commonly offered on platforms, like WeFunder, Republic, and SeedInvest, that provide individual investors with access to pre-vetted startup investment opportunities.
Opportunistic or preemptive Series A
You may be surprised to know that investors can write offers without a full pitch. There are two types of preemptive offers. In the first type, an investor hands over a term sheet to you without first receiving a deck or a full partnership pitch. In the second type, the investor can let on that an offer exists without actually stating the offer. This subsequently kicks off a one-to-one fundraising process on the investor’s timeline.
As the name suggests, multi-stage funds invest in companies at multiple stage, including the seed round. Some firms offer seed funding to entrepreneurs for proof of concepts as well as a “main” or standard venture fund for Series A companies. Others focus on a broader range, from seed through growth companies.
Series A round
Companies at this stage have already developed a substantial user base and proven that they are primed for success on a larger scale with recognition and business traction in the market. Series A financing is typically a company’s first significant round of venture capital, and the checks tend to be much larger at this stage.
What a Series A raise looks like
Series A funding rounds used to go to companies struggling with either the basics of their product or monetization. Today, Series A rounds are getting bigger, and investors are often more focused on growth. Keep in mind that only a single-digit number of startups get early-stage VC funding, according to the Corporate Finance Institute. To be a venture-backed founder, investors what to see proof that your business is scalable, rather than a “lifestyle business” that can be profitable enough for you to succeed personally, but might not be able to grow at a rate that will provide a return on the investment.
When you’re seeking investors for your Series A, you’ll want to look at how to find a fit. Does your startup fit within an investor’s framework? A lot of venture capital firms are thematic with their portfolio and investment strategy. Other firms only focus on one broad industry, like consumer products or tech; others focus more specifically on B2B enterprise tech.
Besides all of the above, other options exist. One is revenue-based financing (RBF). This can be described as sitting between a bank loan and angel investment or venture capital. In an RBF investment, investors don’t take an up-front ownership stake in the business. Instead, they inject capital in return for a fixed percentage of your ongoing gross revenues, which ranged from 3% to 8% in 2020. Your payments will vary based on either your daily or monthly revenue, and your investors will continue collecting returns until the initial capital amount, plus interest, is repaid.
On the plus side, this type of financing can be faster, and it might also help you manage your equity dilution. Some drawbacks: RBF financing will cost you more overall. You’ll also need to satisfy two requirements to qualify: Your business must be generating revenue and have strong gross margins to afford the loan payments.
At Carta, we help startups with fundraising, compensation, valuations, equity management and much more. Talk to us to find out how we can help you grow.