Many entrepreneurs seek early-stage funding for a startup. Some out of financial necessity, some because it has become a mantra within the startup community.
This is what you shall consider if you seek early-stage funding for a startup:
- Pros and cons with early-stage funding for a startup.
- Milestones that make early-stage funding for a startup easier.
- Where to find investors.
- The pitch-deck that you will need.
So, lets dig into each of these considerations before you start to make you pitch for funding.
Pros and cons with early-stage funding for a startup
Early-stage funding for a startup is often taken for granted in startup communities, without considering pros and cons.
Here are 7 questions you shall ask yourself before deciding on early-stage funding for a startup:
- Do you really need outside financing? It can propel your growth, but it comes with additional challenges.
- Do you understand that investors will need their money back, with a substantial premium?
- Will you be able to deliver on those very high return requirements early-stage investors has?
- Is it understood that missing a return requirement milestone leads to difficulties to gain the trust of new investors down the road?
- You do understand, do you, that funding will only last for 12-18 month?
- Do you fully understand the concept of diluted ownership that comes if you succeed and makes multiple fundraisings?
- Can you postpone your first fundraising to get a higher valuation and thereby a much less diluted shareholding 5 years from now?
Most venture capital financed ventures become unsuccessful. The requirements are high, and milestones are difficult to meet. The reality is that starting a business and growing it to the success of investors is hard.
These 4 milestones make early-stage funding easier
When you seek early-stage funding for a startup you shall have the following 4 milestones in place, at the minimum.
- The core team and the CTO shall be in place.
- A Minimum Viable Product shall be available.
- Early sales shall be your proof of concept.
- Sales traction confirms demand.
You shall already have your core team in place, in particular the CTO. Investors invest in people regardless how great an idea might be.
There are plenty of great ideas. The difference to investors is in how great ideas are executed.
A Minimum Viable Product is your solution to the problem you aim to solve. It’s very hard to raise early-stage funding for a startup without at least a prototype or a working solution.
Your first sales are the proof of concept that there is a demand for your product. Your first sales are also a testimony to your ability to land several paying customers. It’s so much easier to find investors if you can sell. It’s essential to grow a business.
Sales traction is the cream of the pudding where you prove that you have a process and an organization that can sell and deliver. Sales traction is a key value driver that makes investors happy.
Where to find investors
Family and friends, and your own saving, are your realistic sources for early-stage funding.
You can approach angel investors when you have ticked off above 4 milestones. Angel investors can often be found at incubators, startup events or Meet Up events.
Family offices, the investment vehicle of wealthy families, and wealthy angel investors can also be contacted via M&A boutiques. That is specialized fundraising advisors working with companies looking to raise a minimum of $5mn, and upwards.
With sales traction comes the possibility to approach venture capital investors. Venture capital look at 1000s of investment opportunities each year and sales traction is your true proof of concept.
Private equity is usually not engaged in early-stage funding for a startup. The concept private equity targets fewer but larger investments than most venture capital investors. Buy-outs of major subsidiary’s or business divisions from large multinationals are common private equity investments.
Best practice pitch-deck
There are plenty of online tools and examples of best practice pitch-deck for early-stage funding. Don’t overdo it.
Investors know that you have an early-stage startup. Pitch-deck requirements are much lower for early-stage fundraising than should you have raised $20-100mn in funding.
A best practice pitch deck used in early-stage funding for a startup include 4 areas:
- Show the problem you solve, and how.
- Indicate the relevant market and your market ambition.
- Is a mini business plan indication what you aim to do next 24 months.
- Include a budget, use of funds description and a financial forecast.
Keep it simple and personal. Early-stage funding for a startup is about a solution, the team, and the potential.
Good luck! Focus on above and your chances increases to succeed with your early-stage funding for a startup.