Over the last twenty years, I have mentored hundreds of early-stage startups. Almost all of them have been mystified by the process of fundraising. How do you know how much to raise? When to raise? Where to start?
Most early-stage teams assume there is only one path to startup fundraising—venture capital—but that’s not true. Below are seven ways I’ve raised capital for my own companies. This list is not exhaustive, but it should get your creative juices flowing!
However, before we get to that, you should ask yourself an important question that will dictate which path you take: Are you willing to sell equity?
Are You Willing to Sell Equity?
Let’s say you need capital. Maybe you have competitors nipping at your heels, or you’re in a massive sector, or you’re building a “big bet” business. You may decide to give up some ownership (equity) in your business in exchange for investors’ help accelerating past the competition. Your investors then become co-owners. This can be an excellent option for people with big ideas but tight wallets.
On the other hand, keeping your equity means you own your destiny. If you ever sell, you get all the money from the sale. You don’t have to listen to people telling you how to manage your business. This is often a good choice for people who care more about control over their company’s future and may not need as much help with growth.
Deciding whether or not you’ll sell equity is the first step and will narrow your options down considerably. Ultimately, you need to align the type of funding with the type of business you are running.
4 Ways to Fund Your Company Without Selling Equity
So you’ve decided to retain your equity—nice! Though there are various ways to grow while retaining equity, they typically have the same disadvantages. You may be more constrained in your growth and take longer to exit. You may also not be able to jump past competitors or have the freedom to be as experimental. Let’s take a look:
Bootstrapping is self-funding until your business revenue is high enough to support growth. If your business needs time to generate revenue, you must determine whether you can afford to go without a salary and for how long. If you can stick it out for a while, that’s great! Not everyone can—and that’s OK, there are other options—but this is one great way to hold onto equity.
Revenue funding means growing your business using the revenue you earn from day one. Many businesses can immediately generate revenue, such as virtual personal trainers, consultants, bookkeepers, etc. If you’re starting one of these businesses, you probably don’t need capital to get started.
Grants don’t require you to give up equity and don’t need to be repaid. Many businesses qualify for grants. I ran one business that worked primarily from grants obtained in partnership with researchers at academic institutions. It was a ton of fun, and because I retained all equity, I could still make all my own decisions!
If you have solid credit and your business is eligible, you could qualify for a loan. Debt doesn’t affect equity, but it does need to be repaid with interest. This is a great way to start, as long as you have a solid business plan and repay the loans.
3 Ways to Fund Your Company by Selling Equity
If you have determined that your business and personality are good fits for giving up equity to take in funding, then the next step is deciding what funder type is right for you.
1. Fund Your Company with Angels
Angels are people who have enough net worth to be considered accredited investors. Angel investors come in all shapes and sizes and could have a lot of business experience or none. The important thing is, their money is the same color as a venture capitalist’s—I have a friend who raised $100m from angels for his pharmaceutical company, for example. If you don’t need the prestige signal of VC, then angels can provide more optionality than VCs as a funding source.
Angels are people who invest in early-stage ventures, typically with their own money. They tend to invest in up to twenty companies, rather than hundreds like VC firms. They actively look for investment opportunities and often write checks of $10–200K USD.
- Upsides: With the right fit, angels can really be with you in the trenches. They can move fast, and if you treat them right, they are likely to invest in this and your future ventures.
- Downsides: If you need a lot of funding, you may need multiple angels, and that could result in a very congested cap table. When you need major shareholder approval, you may be tracking down a bunch of people. You may also find yourself wrangling varying expectations, advice, and interests.
Super angels are people who invest in hundreds of companies or who can write checks the same size as a VC. They are generally very private and don’t announce that they are investors. Some investors in my current company fall into this category. I primarily met them at conferences related to my business topic, but I have met others at accelerators and through mutual friends.
A little tip: angels know each other. If an angel invests in your business, ask them for referrals!
- Upsides: They can move fast, often have shorter diligence times (they tend to bet on the person rather than the business model), and can offer a lot of assistance to your business. They can be your lead investor in lieu of a venture fund.
- Downsides: They are hard to find and hard to get a referral for. Most of my angels don’t let their names publicly appear as equity owners.
Angel Groups or Syndicates
These are groups of angels who come together so you can pitch to many at once. They typically want your business to have made some traction, but are still willing to invest early. You can research angel groups through platforms like Gust and F6S.
- Upsides: In one pitch, you can reach a whole room of investors who theoretically could fund your first round.
- Downsides: They often put you through the same diligence as a venture fund. It can be time-consuming and doesn’t always pay off.
2. Fund Your Company with Venture Capital
Venture funding is ideal if your business fits the goals of what venture capital is designed to do: accelerate a business fast and navigate usual constraints with the understanding that there will be an exit. They invest both because a business is solid and because it will grow large enough to make them a significant amount of money. That is their business model.
Not all VCs are the same—there are individual VCs, VC firms, and corporate/strategic venture funds. But to fund your business, all types carry most of the same ups and downs.
Venture Capitalists, Firms, and Funds
Here’s a list of what makes your business a good fit for venture capital:
- You’ve had some traction and proved you can execute.
- You address a massive market that could be radically improved through technology.
- You address a space that is newly formed or underestimated.
- You have the stomach to take a company public or would be willing to sell in 5-10 years.
- You have a team that can address a massive market.
- Your venture is similar to others a fund has expressed interest in (though there’s still no guarantee VCs will understand your opportunity).
- Upsides: Venture funding can help you radically accelerate growth while keeping your total list of investors small.
- Downsides: You could do everything right in your first round with the hottest VC on board, but miss your targets. I can’t count the number of companies I have seen die because the hot VC was unwilling to put in more capital.
Furthermore, funding from a corporate or strategic venture fund carries the risk of constraining your business in the future. If Walmart Ventures invests in your company, will a Walmart competitor want to buy you in five years?
3. Fund Your Company with Family Offices
Family offices operate somewhere between an angel group and a venture fund, and they’re often overlooked. Family offices are essentially wealth management firms that serve ultra-high-net-worth (UHNW) investors. For example, families like the Kochs or Gates will have a group that manages their investments.
Family offices can be harder to find, and not all invest in early-stage companies. But when you can find them, they are fantastic. I can’t stress enough how valuable they have been for the growth of my company.
Typically, I find them at conferences. If you’re looking them up online, start by looking for families known to have invested in similar spaces. Also note that newer family offices are easier to find online.
- Upsides: Usually, the family comes with deep knowledge of business and, accordingly, deep ties in the industry where they made their wealth.
- Downsides: They are hard to find and very private. They often only invest in areas where they have experience (real estate, pharmaceuticals, etc.).
Choose Your Fundraising Strategy Wisely
There are upsides and downsides to any type of funding. VCs can seem like the only legitimate way to grow a cool, successful tech company, but there are many other ways to get a company off the ground. The primary consideration is this:
What’s right for your business?