When to Raise Money for a Startup

Every new company has certain items that are needed in order to set it up for success. From purchasing equipment to hiring staff and renting office space, funding for a startup is necessary to propel the business forward. 

While some people are able to come up with startup capital on their own — a process known as bootstrapping — many need to look elsewhere in order to raise money for their startup. 

Knowing when to raise money for a startup helps improve the chances for success. Before developing a plan for startup funding, it’s important that the founders develop solid elements that investors can get behind. In addition to a story and an idea, it helps when raising capital for a startup if there is also a product and some traction behind the idea as well. 

How To Raise Pre Seed Funding

Pre-seed funding is a valuable stage when raising capital for a startup. It’s designed to assist with the initial formation of the company and its startup operations. Pre-seed equity typically ranges from $10,000 to $250,000. This funding round can last between one month and one year with many variations in between. 

Undoubtedly, this stage is one of the trickiest and most challenging. This is true even for those who are serial entrepreneurs or who have a reputation for success.

Speed is an important factor in the funding raising process. Being able to execute on the startup’s ideas and deliver a product so it hits the market within a short time frame are keys to building a reputation for delivering on promises. 

Common pre-seed investors include the founder(s) of the startup, family members, close friends, and supporters of the startup’s concept. 

Because pre seed funding often involves those that are close to the founder – as opposed to venture capital funding sources, for example – many people don’t usually consider this stage to be an actual part of funding. Nevertheless, knowing how to raise pre seed funding in conventional ways, as well as knowing how to get pre seed funding otherwise, are valuable skills to cultivate. 

If the founder of a startup knows how to find pre-seed investors outside one’s immediate circle, the experience can be invaluable in providing assistance with setting the startup for a solid foundation and success. Those people who provide pre seed funding typically understand that quick returns on their investment aren’t usually going to happen. This is a huge benefit for a startup that is in its earliest stages. 

Angel Investors

Angel investors are typically individuals who have a high net worth. They provide startup funding for companies — often with the understanding that they’ll have ownership equity in the fledgling company. An angel investor might also be called a seed investor, a private investor, or an angel funder. 

Knowing how to find angel investors can be as easy as tapping into those people who are closest to the founder: family and close friends. Typically, angel investors for startups provide the funds that are needed to help get the company started. While this might be a one-time event, other types of angel investors provide ongoing support and funding that is designed to help the startup weather the challenging early stages. 

Angel investors are different from venture capitalists. While they both invest money in startups and take calculated risks in the hopes of eventually obtaining a suitable return on their investment, angel investors vs venture capitalists are also vastly different. 

An angel investor uses their own money to invest in a startup — often a friend or family member’s. This investor is often more intent on helping the business succeed rather than making a profit as soon as possible. The terms tied to the startup funding might be more favorable compared to those extended by a venture capitalist. 

A venture capitalist typically uses money that is pooled from large companies, investment firms, and pension funds. They tend to only invest in those startups that have been established or if the founder has a proven reputation for success. 

The average deal with a venture capitalist was $11.7 million, according to the Small Business Administration (SBA). In contrast, the SBA noted that the average angel investment was around $300,000. 

Seed Funding For Startups

Seed funding for startups typically denotes the first official round of funding. It occurs once pre seed funding has been obtained because the business now needs additional capital to grow and flourish. 

Seed funding is designed to allow the startup to focus more precisely on those goals that will lead to its success. Some examples of how seed capital might be used include conducting market research, developing a product that can be released to the market, or fine tuning a marketing strategy. 

Knowing how to get seed funding helps a startup utilize its time and resources more effectively. In addition to angel investors, friends, and family members, other potential sources of seed investment funding include crowdfunding, incubators, and accelerators. 

Series A Funding

Series A funding is often the next step in funding. As one of the ways to raise capital for a company, It is typically undertaken once a business has become more established, has consistent revenue, or has surpassed some other major benchmarks. 

It is typical during this stage of funding, as well as Series B funding, Series C funding, and so on, that venture capital firms will become involved. This traditional route often generates funding between $2 million and $15 million. 

When venture capital firms that are well known within the finance industry — such as High Alpha — back a startup, it is not uncommon for others to also come on board. Using crowdfunding is becoming an option that more companies embrace at this stage of raising the capital they need to move forward. 

Venture Capital

Instructions: What is venture capital? Who are key players in the space? What is the process for raising VC usually like?

Venture capital is financing that is extended by investors to startup companies and other small businesses. The recipients of venture capital financing tend to be those that could potentially have growth over the long term. 

Venture capital vs private equity has essentially the same meaning. Venture capital is a type of private equity that often comes from investment banks, investors who have significant financial resources, and other similar institutions. 

In addition to the venture capital firms noted above, others within this space include First Round Capital, Union Square Ventures, Andreessen Horowitz, and New Enterprise Associates. Though the actual process might differ depending on which firm is used, the following venture capital example outlines the typical process of raising such funds. 

The key players in the venture capital firms are general partners and limited partners. Usually when a company is assessing a startup to determine if it should be funded, there are three primary categories that are used: the capabilities of the team, the design of the fund, and the status of the fund as well as the current climate in regards to investing overall. 

How To Raise Money For a Tech Startup

Knowing how to raise money for a tech startup begins with understanding that there are a number of possibilities. It is also helpful to understand that raising capital is likely to look different for every business. While angel investors like friends and family members might be the first source when a person is wondering how to raise capital for a startup business, they might have access to more funding by going a different route. 

The reality is that most startups today will need to undergo more than one — and probably many — rounds of fundraising in order to reach their goals. Capital raising firms for startups can help reduce the amount of time it takes for the company to see results. 

In addition — even accounting for the success fees for raising capital — a startup could find that its resources are used more effectively when using such a company. Using Crunchbase for raising startup capital, for example, allows the startup to continue funneling its time, energy, and other resources toward its products and ideas instead of devoting these attributes to raising funds. 

Utilizing a company that has a proven track record when it comes to raising startup funding means tapping into its network of investors. This could lead to the startup having greater success in the long term as well as better access to a wider range of investors at each stage of the funding process. 

Instead of devoting months at a time finding and wooing potential investors, startups don’t have to reinvent the wheel. They can simply take advantage of the formula that has already proven to be successful while they concentrate on what they do best. This approach ends up being a winning solution for a startup that might otherwise struggle on its own.