By Fernando Berrocal

Fundraising may help your startup to expand, but it can be difficult to decide when to begin. That's because obtaining finances isn't as simple as proposing a concept and receiving funding. It's a decision you'll want to consider carefully.

When you take money from investors, you're giving them a share in your startup. As a result, you dilute your ownership and expose yourself to outside comments and ideas. Investors aren't just sponsoring; they're decision-makers who do have a say in decisions like which markets you enter, who you hire, and how you handle product development.

As a result, approaching fundraising with clarity and strategy is crucial. We'll go over the many variables to think about, but first, let's go over the basics of fundraising.

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The stages of fundraising

Fundraising isn't something that happens all at once. There are a few distinct stages of fundraising (or "rounds"), each with its own set of goals and limitations. Let's go over some essential words to have a better understanding of the process.

• Round: A specific fundraising event that a corporation participates in.

• Price Round: A valuation is a type of equity investment that is based on an estimate of your startup's worth.

• Bootstrapping: The process of using your own money and resources to support the expansion of your startup.

• Venture Capital Firm: A sort of company that invests in startups through private equity.

• Institutional Investor: A company that invests in startups by pooling cash from several different investors. Banks, Venture Capital (VC) firms, hedge funds, and family estate organizations are some of the institutional investors.

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• Angel Investor: An individual who makes a financial contribution to a startup in exchange for equity or convertible debt.

• Convertible Instruments: A form of investment that can be converted into equity at a later time. Convertible notes and SAFEs are two common types.

Pre-seed round: Your startup is only getting started in the pre-seed stage. You most likely have a great concept, but no product, customers, or employees. Institutional investors, such as venture capital funds, are sometimes reluctant to invest at this point, therefore many founders use their own money to get things started and build a prototype.

Seed round: A company's seed round is usually one of, if not the first, fundraising rounds. You should have something to demo at this stage, but you may still need to develop a Minimum Viable Product (MVP) and conduct beta testing before releasing a version to the public. At the seed stage, angel investors and venture capitalists are likely to be interested.

Series A: Getting your product to the market, establishing product-market fit, attracting customers, and producing money are all priorities during the Series A round. Because they can see indicators like revenue growth, client acquisition cost, and lifetime value, institutional investors are more likely to come in during this round. However, rather than lending money in exchange for convertible debt, most Series A investors demand instant ownership equity. You'll have to arrange a formal valuation of your startup, which determines the fair market value of your startup's stock, to figure out how much equity they'll get. With your attorney's help, you'll also need to prepare term sheets, which set out the conditions of your investment agreement with each investor.

Series B and Beyond: The purpose of the Series B, C, and D rounds is to extend your market reach, develop your startup internally, and become profitable. You should have a substantial user or customer base, plenty of traction, and a track record of revenue growth by the time you reach a Series B investment. During these later stages, investors generally join in to assist with business development and expansion.

When should you start thinking about Fundraising?

Each startup's journey is unique, therefore there is no one-size-fits-all approach to fundraising. The basic guideline is that you're in a good position to explore collecting funding when:

1). You've demonstrated that there is a problem that must be addressed and

2). You can demonstrate that there is a demand for the solution.

Heavy market research, thoughtful prototype development, and a lot of testing are typically required to obtain such knowledge.

Waiting to fundraise has its pros and cons:

• You need to spark your end user's or customer's interest: The type of product you develop—and the people for whom you build it—can influence when funds become available.

• You've got the funds to keep bootstrapping for a while: Consider the resources you have at your disposal, such as cash, talent, and equipment. You may wish to postpone fundraising for a time if you have enough funds from crowdfunding to continue bootstrapping your startup.

• You don't have the time or resources to invest in pitching: Pitching investors on your concept is a time-consuming process. You'll need to put together a pitch deck, reach out to the proper investors, organize meetings, and set up a time for discussions and follow-ups.

Reasons to begin  fundraising:

• You've already caught the interest of your consumers or customers: If you're still working on your prototype but have a lot of interest in your service, you should take advantage of it and start approaching investors.

• In six months, you'll run out of cash and resources: Fundraising isn't something that occurs overnight. Before you obtain any money, you may need to pitch and talk to investors regularly for three to six months.

• You require further assistance: Fundraising may provide you with more than just funds; it can also provide you with valuable investor support. If you're at a point in your company's development when you need advice from seasoned investors to achieve momentum, fundraising could be a good idea.

What is the appropriate amount of capital to raise?

The simple answer is that you should only raise as much money as you need to go to the next stage of your startup's development. There is no ideal formula, but there are a few aspects of your organization that you may examine to arrive at a figure you can rely on. Here are three things to consider:

Your first milestone: A milestone is a specific goal you wish to achieve before moving on to the next round of funding. Milestones are generally associated with certain corporate Key Performance Indicators (KPIs) that you want to demonstrate, such as collecting 5,000 customers or launching your MVP within a specified date. Timelines for milestones are typically well-defined.

Depending on the stage of your startup, you may just need a little number of funds to accomplish your next goal, or you may need a large amount of money.

Your runway: This is the maximum amount of time you can reasonably fund a startup before running out of cash. If you have $500,000 in funds, and your startup costs $100,000 a month to run, you have five months of runway.

To find out how much it costs to run your startup while working toward your next goal, consider the following factors:

• Your team: How many engineers, marketing specialists, salespeople, and customer service representatives will you need to meet the next goal you've set for yourself? How much will it take to keep your full-time team afloat? 

• Your administrative requirements: How much will it cost to purchase the necessary technology and equipment, hire an office space, and plan for possible travel?

• Your marketing and advertising budget: How much will it cost to establish a website, develop a social media strategy, run ads, and set up multiple distribution channels?

Multiply your company's total monthly spending on employees, administration, and marketing by the number of months you believe it will take to accomplish your next milestone. This will give you a good sense of how much money you'll need to get started on the following phase.

Your ideal validation: Your startup's valuation is a subjective estimate of its worth, but it's also a direct result of two factors: the quantity of money you raise and the amount of equity you've given up in exchange for that amount. During the seed stage, most entrepreneurs give up roughly 20% of their equity, followed by another 20% during the Series A round.

Remember: Valuations are always changing. Your objective should be to raise enough money to reach your next phase of growth, satisfy investors, and retain a respectable ownership proportion while negotiating your ideal valuation.

What to do before you start fundraising:

If you decide that you are ready to begin fundraising, follow this action to ensure your success:

• Talk to other founders: Consider reaching out to other entrepreneurs who have had success meeting deadlines and getting funding. Ask them about what they learned from their rise and what they would change if they had the chance. In particular, ask them about how they established their milestones, how much money they required to advance to the next stage, and whether or not their fundraising goal was realistic.

• Seek guidance from your startup attorney: Your startup lawyer may be able to advise you on how to prepare logistically for funding. You may need to legalize your concept, cross-reference your product or service with competitors, or submit patent applications.

• Collect information: It's important to have the right metrics to back up your startup's potential for development and profit. You should be able to convince investors why investing in your startup is a good idea.

• Crunch the numbers: You should be able to explain your spending expenses, anticipated runway, and funding requirements.

• Prepare your pitch: Before you start fundraising, you'll need to create a convincing pitch deck that describes who you are, what problem your company tackles, and why investors should be interested.

• Choose the appropriate investors: Not every investor is the same. It's critical to approach investors that have previous experience investing in your sector and have shown an interest in entrepreneurs with similar backgrounds and missions as you to increase your chances of getting funds.

Getting started with the fundraising process: When you decide to fundraise and how much you raise is based on your company's specific requirements and goals—and a lot of it is personal to you. Take some time to think about your startup's direction and perform some basic fundraising math to make sure you're ready for the journey ahead.

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Are you looking for ways to raise money for your startup and bring it to the next level? Apply to MassLight’s next batch. MassLight supplies capital and a dedicated tech team. We take equity in return. Have questions? Refer to our FAQ page.

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