By Fernando Berrocal
The process of raising money for a startup can be both a thrilling and frightening experience. A startup owner will finally have the opportunity to raise the capital required for the launch and development of the business. However, you must already be aware of how difficult it is to obtain business financing for that. Additionally, if it's your first time, you might not be sure what exactly to anticipate.
Since you are a beginner, you might have the following questions: When can you raise a specific amount? What do startup investors typically observe? How does your new business stack up against the competition in that specific market?
Additionally, it's the moment when you will have to appear in front of investors and will have to persuade them that investing in your startup is worthwhile for them. Although you may be rather concerned, try not to worry so much since you will learn while doing the process. Every single startup investor has gone through all of this, and the majority of them succeeded in completing the first phase. Even though they have their doubts, worries, and questions, there is information available to help you with this process.
The Pre-Seed Round
Pre-Seed fundraising is the initial phase of startup capital raising. It occurs before the standard seed round. You must know that this is your first significant chance to start developing trusting relationships with investors and discovering what your startup needs. The pre-seed round is a relatively new term that started to gain popularity in 2017. When you want to begin hiring your startup's initial team members, you must raise pre-seed capital. The funds raised will assist in keeping your firm afloat during the initial years when revenue is pretty much scarce or even nonexistent.
Nowadays, a pre-seed round typically ranges from $100,000 to $1 million. The most frequent investors in this round are angel investors or micro venture capitalists that want to become involved with your adventure as soon as possible (in the hopes of being a part of something exciting in the long run). However, keep in mind that this is still early on, so you don't want to give investors a large portion. Aim for 10-20% on average, but draw a line at 25% maximum, and only go that high if you believe it is worthwhile. Make room for potential startup investors since you still have further rounds of funding to raise. The last thing you desire is to finish fundraising with a little portion of your own business.
Having a MVP–and traction evidence–is crucial for raising a pre-seed round effectively. The number of features your product has been not that important to startup investors. That takes effort and money for your business. Until you have raised pre-seed, you should concentrate on gaining business traction–which is harder to achieve. You may use one of the "no-code" platforms to develop a platform even if you are not able to perform coding yourself, so don't worry if you are in this situation. If your concept is simply too excellent, you might want to consider joining a startup accelerator. Naturally, depending on the type of product you're selling, there will be different milestones that you need to meet.
The Seed Round
Since you took your first significant step following the pre-seed round, it's normal to become enthusiastic about the advancement you are making. However, don't stay there or let confidence get the best of you. When you reach product-market fit (PMF), you raise your first round of funding. This is crucial for you since you'll have to convince investors that your product is both what customers desire and what they need. Startup investors regularly will be looking for a minimum of 10% average growth monthly; however, there are more tolerant of significant variations since the mechanism for acquiring customers is still in its early stages.
Your precise route to market dominance may be still kind of unclear. You might anticipate raising anything from $1 to $3 million in this round. The funding in this case is mostly provided by venture capital firms (VC) and a few wealthy angel investors spread across the field. Once more, you'll want to be careful to keep the percentage of your business that you provide to investors to a maximum of 10-15%. Giving away too much will add up rather quickly now that you have several investors interested in your business. Additionally, possible sales and marketing channels should be indicated for business investors. Give investors details on your customer acquisition cost (CAC) so they can determine whether your strategies for attracting new customers have room for future expansion. You will have a secure future as a result of this.
You can fund a Series A if your startup has scaled significantly. Your business should be in full swing at this point, seeing steady market growth (and perhaps even some foreign expansion). Focus for a minute on the idea of "average growth". There will undoubtedly be some ups and downs, but what matters is that you consistently expand by between 10% and 20% month after month. This implies that you won't arouse the faith of any kind of investor if you have 40% growth one month–and 0% the next. It will be challenging to scale if it seems like you have no control over your progress.
The stability, global reach, and steady development of your business are what entice big VCs to put money into it. Since they lack the necessary funds, angel investors find it nearly hard to invest at this level. Now when we're dealing with large numbers, confidence and trust are vitally necessary. You might anticipate raising anything from $5 to $12 million in your seed round. You must be able to demonstrate success in a variety of markets. Additionally, if you are offering your product or service in several places, investors will want to see how successfully you have duplicated or modified your marketing approach for each city.
In conclusion, you now understand in general terms what your business must do for each fundraising round. This information is helpful since, with the help of these benchmarks, you'll be able to gauge how your startup stacks up against what investors typically look for before speaking to a single investor. Knowing what you need at each phase will offer you a significant advantage; knowledge is power! Now that you are aware of what to concentrate on, you may raise your next round of funding without squandering your time or money on the wrong undertakings.