Startups begin their fundraising process when they are in a position to grow and move to the next level. However, it is important to consider when the right time is to raise your funds due to it being a time-consuming process and also coming with a few potential risks. You need to be sure you are fully ready to approach fundraising and have a thorough plan in place for the next stage of growth.
So to start, let’s quickly go over your potential fundraising options…
Crowdfunding: funding your startups from funds raised by the public and in your circle
Bootstrapping: funding your startup’s growth through your own money and resources
VC-led: funding through private equity investment in your startup
Angel investors: funding from a high-net-worth individual who invests their own money into your start-up
Government grants: funding from a sum of money awarded to your startup by the government to help it grow
Traditional bank finance: funding through bank loans, overdrafts, and credit cards to fund your startup
Let’s move on to the funding rounds (the stages of fund-raising)…
Pre-seed round: When you are at this stage you are at the very beginning of your process. Founders will likely be working with a very small team or alone, and are developing a prototype or proof of concept. The money to fund a pre-seed round usually comes from the founders, family and friends, or potentially an angel investor or incubator.
Seed round: Seed funding may be raised from family and friends, angel investors, incubators, and VC firms that focus on early-stage startups. However, angel investors are usually the most likely at this stage. Seed funding is usually between £500,000 – 2 million, but it may be more or less depending on the company. The typical valuation for a company raising a seed round is between £3 million and £6 million.
Series A: In a series A round, startups are expected to have a plan for developing a business model, even if they haven’t proven it yet. They’re also expected to use the money raised to increase revenue. Because the investment is higher than the seed round, it is typical to raise between £2 million – £15 million in a series A round. However, investors are going to want more substance than they required for the seed funding before they commit. This funding usually comes from VC firms or angel investors.
Series B: At this point, the startup has reached a level where they have found their product/market fit and they need help expanding further. The funds from a series B round can be used not only to increase customers but also to expand their team. A series B round is usually between £7 million – £10 million, with the company being valued between £30 million and £60 million. This funding often comes from VCs, particularly those who were involved in the previous funding rounds.
Series C and more: Companies who make it to series C are usually ready to expand to new markets, acquire new business, or develop new products. Series C is often the last funding round for a company, although some companies do go beyond to raise D, E, F etc funding rounds. For a series C round, a typical amount raised is around £26 million. The valuation of these companies is usually between £100 million – £120 million. Series C funding typically comes from VC firms that invest in late-stage startups, private equity firms, banks, or even hedge funds.
So now we have the background, let’s go back to the basics. When should you consider fundraising for your startup…
Every startup is different, so there is no one-size-fits-all when deciding when is a good time to fundraise. However, when considering when to fundraise it is good to ensure you are in a good position and prepared to take it on. You need to ensure there is a gap in the market for your product or service by validating that there is a problem to be solved, and also how you are going to solve this problem.
Even if you have done all your research and feel prepared to fundraise, there are a few considerations you may want to think about…
Would it be possible to bootstrap your startup for longer or have you run out of resources? If the answer is yes, you can keep bootstrapping and you can collect resources from other places such as expanding your team and upgrading your tools, then it could be a consideration to hold off fundraising for now.
Do you have the time to fundraise? Fundraising is a very time-consuming process, from creating your pitch deck to contacting investors, so you need to make sure you’ve brought your startup to a place where you feel ready to step away from the processes side of things and add in extra time for fundraising.
Have you got enough interest? If you don’t have the interest from your audience, it may be worth thinking about working on this side of the business first as investors may not be as interested themselves in investing in your product if this is the case.
However, with all that aside, let’s now think about when you know it is definitely the right time to begin fundraising…
Have you forecasted that you will run out of cash in the next 3-6 months? Remember to note that fundraising is a long process, so you must plan ahead when thinking about when you want to raise money. If the answer to this question is yes, then it is a good time to fundraise.
Is your startup’s popularity higher than expected? If you are doing better than you predicted when taking your product to market then you may decide you want to do a fundraise to get investors involved. If you can show investors there are high levels of interest in your product, they are more likely to be interested.
Do you need expertise? If you are lucky enough to find the right investors, they can not only bring capital to your startup but also the expertise that may be needed. It’s a win-win!
So now let’s think about figures…what’s the valuation of your business and how much should you raise?
When preparing your financials to pitch to investors, you don’t want to overstep the mark, but you also do not want to under-predict your numbers. So how do you get this right? Firstly, you only need to raise enough money in each round to get you to the next stage of growth.
So to calculate this you will need to look at the following:
Goals – You will need to work out the goals and metrics you want to achieve before getting to the next stage of funding, this will help you work out how much you will need to raise to take you to the next stage.
Runway – How much time can you use the raised funds before running out of money? You need to plan ahead and consider outgoing costs such as employees, marketing, product development, etc.
Valuation – Your valuation will be a predicted self-assessment based on factors within your startup. You need to know your ideal valuation, and then your goal can be to raise enough money to reach the next stage of growth, please investors and also maintain a substantial ownership percentage of the business.
When you think you are ready to fundraise, you can start to create your pitch deck (check out this article here for more on that). It is important to gather all your company’s data, be confident to talk about this with investors, perfect your financials and find investors that are the right fit for your startup!
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