A founders guide to fundraising: What you need to know before seeking startup investors

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Why do founders spend such an inordinate amount of time pursuing investors? For one simple reason: capital is like oxygen for an emerging growth company — without it, no startup can survive.

While identifying, approaching and convincing potential investors to take a chance on your startup might seem daunting and somewhat overwhelming, it doesn’t have to be.

We’ve prepared this guide to help founders like you develop a better understanding of the fundraising process, provide the insights you need to effectively navigate your fundraising journey and offer some tips and strategies for getting your company on the path to fundraising success.

The various pathways to early funding

Even though venture capital (VC) is an important source of funding for startups, it is just one of the many available paths for early-stage companies. Considering options outside of VC can not only expand funding scope, but may also lead to a variety of opportunities that better align with the company’s goals, stage and needs. 

Investor readiness plays a critical role, ensuring companies are well prepared to attract investment, regardless of the financing method chosen. We’ll dive into that below, but first, here’s a look at some of your funding alternatives..

1. Seed stage VC
Seed stage VC provides initial funding for early stage companies to launch their business ideas and validate market potential. Unlike traditional VC, which typically invests in more established firms with proven revenue and market traction, seed stage VC focuses specifically on nurturing startups in their early phases.

2. Angel investors
Angel investors are typically experienced entrepreneurs, successful business professionals or high-net-worth individuals who invest their personal funds into promising startups. In addition to providing capital, angel investors often offer valuable expertise and mentorship to the companies that they invest in.

3. Accelerators
Accelerators are organizations that support early-stage companies through a competitive formal mentoring program. Companies that are accepted will typically give up a small portion of equity to be able to participate in a 12 to 16-week program, gaining exclusive access to guidance from experienced mentors, incredible business connections and pre-seed or seed funding.

4. SBIR grants
Small Business Innovation Research (SBIR) grants are competitive funding opportunities provided by federal government agencies to support the research and development (R&D) projects of small businesses. Early stage companies in particular can benefit from SBIR grants as they may accelerate R&D efforts, help explore innovative ideas, and demonstrate proof of concept.

5. Equity crowdfunding
Equity crowdfunding enables early stage companies to raise capital by soliciting small investors from a large number of investors through online platforms. Crowdfunding not only gives companies access to capital, but can also help gauge business interest.

6. Corporate venture capital(CVC)
Occasionally, an existing business will make a strategic seed investment in an early-stage startup. These investment opportunities generally arise where there is a strategic fit between the company raising funds and the underlying business of the CVC.

7. Customer financing
Sometimes referred to as pre-sale financing, customer financing is when a company collects payments from customers upfront before delivering goods or services. Early-stage companies can use this pre-sale revenue to fund production and development while also validating a market demand with reduced financial risk.

8. Credit lines
Early-stage companies can apply to and take advantage of credit lines as a financial tool that provides flexible access to funds up to a set limit. Unlike traditional loans, credit lines allow businesses to borrow as needed, repay and borrow again. For early-stage companies, this can be ideal for managing cash flow, covering short-term expenses and pursuing growth opportunities without having to issue equity.

9. Revenue-based financing (RBF)
Revenue-based financing is a special form of financing where businesses receive upfront capital and repay it through a fixed percentage of their monthly revenue until they reach a predetermined amount. RBF is particularly appealing to early-stage companies because the repayment amounts adjust according to performance, providing flexibility that helps alleviate financial pressure during low-income phases. Examples of RBF investors include specialized RBF funds, angel investors, alternative lenders and government programs.

10. Factoring through receivables
Factoring through receivables is a financing method where early-stage companies sell their accounts receivables to a third party at a discount in exchange for upfront capital. This allows startups to quickly access funds tied up in outstanding payments that may help support daily operations, development strategies or other types of expenses without incurring additional debt or further equity financing.

Want to delve deeper? Check out our on-demand course at StartUp U: Your Seed to Series A Roadmap.

Are you investor ready? A checklist for founders

Once you’ve finally identified one or more promising potential investors, what comes next? Are you and your team prepared to make a strong, compelling pitch? Are you truly “investor ready”?

To capture investors’ attention and secure their investment, it’s crucial to present a strong and compelling profile of your business. This entails:

• Showcasing the unique features of your products
• Providing a clear financial statement
• Highlighting effective business management
• Emphasizing the expertise and passion of your skilled team members
• Demonstrating your business’s position in the market. 

Additionally, it is essential to ensure that your pitch deck reflects the exceptional quality of your business, both in terms of content and presentation. A professional and well-crafted pitch deck speaks volumes about you as a founder or team and showcases the thoughtfulness and effort you’ve invested in your venture.

1) Shore up your legal foundation

No matter how disruptive, groundbreaking or promising a new product or service, any potential investor will both identify and go to great lengths to avoid any glaring red flags. 

That means your company’s corporate documents — covering its formation, trademark protection, the election of its board of directors and officers and the issuance of founder’s stock — need to be in good order. Before they sign on the dotted line, an investor expects a complete list of all stakeholders in the company alongside proof of compliance with federal and state regulations.

Juggling these high-stakes obligations is undoubtedly overwhelming. As many capable leaders learn throughout their careers, knowing when to seek guidance can make all the difference. 

2) Build your company’s financial model

Include a projected income statement for roughly 3 to 5 years. A successful model demonstrates you understand your market and how the business scales, which is then reflected through the different assumptions you use to build it. Although investors appreciate the challenge of accurately projecting total revenue each year, expect that your model, particularly for the next 12 months, will accurately identify your costs.

As a founder, you’re responsible for never losing sight of your “runway” — how long before you run out of cash. You calculate this by dividing your cash on hand by your monthly burn rate. Your model should reflect a runway that is long enough to get you to your next round of financing or break even under a more conservative set of revenue assumptions. For example, does the business have enough runway, even if you only achieve half of your expected revenue?

3) Be in the right room with the right investors

Regardless of a founder’s preparedness, if a healthcare company pitches to a fintech investor or a seed-stage startup pitches to a late-stage funder, the founder most likely will not make it out of the room with that investor.

While seemingly obvious, too many ignore the reality that securing the investment largely revolves around choosing the right potential investors.

Use available resources to ensure your effort is intentional and targeted. Lean on your advisors — your attorneys, accountants, bankers, etc. — and research platforms. Take the time necessary to explore an investor’s portfolio, the companies in which they’ve invested, these companies’ stages, the industry categorizations and geography to really hone in on your ideal audience.