It’s time to dispel a pervasive myth: startups can expand their operations without raising private capital. There is an idea that companies should “bootstrap” their way to becoming more extensive operations. Sure, maybe a small number of companies do grow their business with no capital investment.
But the vast majority depend on different fundraising methods throughout the lifetime of the company. There is no shame in this process, and once you can wrap your head around it (and not feel like you’re begging for a handout), you can scale your operation appropriately.
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Don’t Be Scared of Raising Private Capital
There are different ways to raise capital in business as your company grows. How large you want to scale your business (and how much control you want to give up) will determine your level of fundraising.
The stages of fundraising are:
- Seed Money
- Series A
- Series B
- Series C (and beyond)
Seed money refers to the stage of fundraising where you are getting funds to cover basic operational and startup expenses to get your company off the ground. It may look like friends and family support or angel investors. At this stage, a venture capital firm or individual would not be interested in your company.
Series A fundraising helps you become a more efficiently operational business. Generally, this would be an investment at the hundreds of thousands to the low millions mark. This level of fundraising can be achieved by connection with venture capitalists. However, they are generally more interested in companies that are ready for Series B level support.
Once you are ready for Series B and C fundraising, you are prepared to approach a venture capitalist firm or individual investor to help your business grow significantly. At this stage, your business is ready for optimization and further growth that a large investment would support. Investors would be looking to invest 10s or 100s of millions to help your business become highly profitable and maximize your market share.
Why is the stage important?
Knowing which stage your company is ready for will allow you to target the appropriate degree of raising money. If your business isn’t prepared for venture capital investment, the firm will know it immediately. There is a sweet spot that they generally like to target, which is a company that is not brand new and not one that has been around for a decade or longer.
Venture capitalists are going to be interested in companies that are around the 4th year of business. Thus, they will be targeting startups that show great potential (as well as a keen awareness of their value proposition and strategy to capture the market).
Here are a few very crucial elements that can help you stand out from the rest once you’re ready to start raising private capital.
3 Things To Get Right
Do you want to know how to raise capital from private investors? Here are three things that any venture capitalist will need to see to consider your pitch.
Build A Dream Team
The talent you have onboard will be essential to any firm considering investing in your startup. Even more critical than you pitch, the talent that you can include will build trust and excitement in investors. Your team needs experience, enthusiasm, and a proven track record of helping sell your case.
What is almost equally important are the people and community that surround your startup. The caliber of former angel investors or your current executive team will help build your case as a company worth the investment.
Investors want to see more than just a great idea. They want to see the public commitment and social buzz. So if great people are working with you and supporting you from the sidelines (and talking about how awesome you are), that will go a long way in attracting investment.
Be a Problem Solver
Your startup needs to meet a very specific need in the market. It shows that you have the expertise to understand the market and where your product or service fills a gap.
Your back story or why you have a personal connection to the issue is secondary. Instead, investors want specificity to understand the one main reason your company exists and how you plan to capture the market.
Get Clear On Your Goals
One of the things that are hardest for startups or small businesses to do is to release control. By bringing in a venture capital resource, you are going to be asked for something in return. Try to move away from thinking you are desperate to ask for investors because you have a great company that is valuable.
By exchanging investment for equity, you are genuinely offering the VCs something that will benefit them (and if they have anything to say about it, benefit them richly!).
It’s essential to understand your growth goals because that vision will be necessary for the VCs. Additionally, they will want to see your business expand to a high level to receive a return on their investment and additional profits.
How can a company raise capital without offering something in exchange? If you are not ready to exchange equity for investment (or give up some control), this is not the right option for raising private capital.
Get Everything Ready for Them
A venture capital firm is going to want to see you have all your ducks in a row. They will want to see your company utilize a formal accounting system to understand existing debt and equity. The investors will do a deep dive into all of your back-end business to make sure that everything is sound, solid, and worth their investment.
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