If you’re intent on turning your barracks idea into a burgeoning startup, there may come a time when you need to focus on securing funding to grow your business.
While entrepreneurial talent is distributed across a wide variety of demographics and geography, investment is not. There are gaps in startup ecosystems and a lack of capital flow to diverse founders, including people of color, women, and veterans. Eighty percent of venture funding goes to three states, and only 1% of Black-led startups are VC-backed. Funding for female founders is stalled at 2.2%.
About 25% of transitioning veterans are interested in running their own business. At least 81% of entrepreneurs do not have access to a bank loan or venture capital. These reasons alone should motivate entrepreneurs to weigh every opportunity to build a sustainable business that is customer-funded. However, there may come a time when you need capital to be a driver for your business.
For many early-stage startups, the use of funds can be challenging to manage, especially when increasing your team’s size and bringing new investors on board. The reality is that there’s no cookie-cutter template for early-stage startups raising outside capital. There’s no one-size-fits-all approach to venture capital. Startups have different funding needs. Below are five things to consider before securing funding to grow your business:
Team
“In a wicked world, relying upon experience from a single domain is not only limiting, it can be disastrous.”
― David Epstein, Range: Why Generalists Triumph in a Specialized World
- In the early stages of building your company, hire generalists over specialists.
- Look for people who can wear many hats.
- Ask a friend, who happens to be a freelancer, to do specific tasks (finance, coding, marketing) x hours a week. Rather than exchange equity, exchange favors. Consider giving the friend equity when the business starts to look real.
- Hire people to help your company grow who know details around your offering and industry that can ultimately move the needle.
- Be hesitant to bring on full-time people. You’ll need flexibility in case you need to pivot (which is highly likely). If you fail, then you’ll be on the hook for the livelihoods of the full-time employees you prematurely hired.
- Consider systems and technologies for payroll, insurance, accounting, banks, etc.
- Don’t undervalue your equity in the beginning. Use foresight. 2% might look small now, but it will mean a considerable amount more when you’re a more prominent, successful company.
Stage
“If you have to ask whether you have Product/Market Fit, the answer is simple: you don’t.”
― Eric Ries, The Lean Startup
- Build a stable of services or revenue streams to get you started.
- Find a way to manage debt and get things aligned for what you genuinely want to do down the road.
- Form plausible hypotheses and raise slowly until Product/Market Fit is proven.
- Measure changes in growth, not totals.
- Traction is a leading indicator that your product might turn into a fundable company.
- Past experiences with taking investment can influence your future fundraising.
- Revenue is more important than investment early on.
- Customer money is cheaper than VC money.
- From the investment perspective, you might be in a better position to bootstrap as long as you can.
Timing
“All overnight success takes about ten years.”― Jeff Bezos, Amazon Founder
- Utilize energy and time.
- Most investors are incentivized to get a good return on investment as fast as possible.
- Think about the amount of time you’ll have to spend on the road fundraising when you could be devoting that time to your product/service.
- Put efforts into building a product and finding more predictable revenue rather than grabbing coffee after coffee.
- What type of company do you want to be when you grow up? You might not need outside investment at all.
- Build a good case for potential investors by forecasting when you’re ready for investment, even if the timing isn’t right today.
Industry Conditions
“The essence of strategy is choosing what not to do.” ― Michael Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors
- Pay attention to trends and the other players in your space.
- Keep an eye on M&A activity, who’s raising, and which investors are active.
- Before considering capital, you should be aware of your industry or startup that is appealing to investors and which ones.
- Outside investor funding is not a realistic option for most startups.
- Understand what each dollar spent is getting you.
Legal
“As you’ll learn, there really are only two key things that matter in the actual term sheet negotiation—economics and control.”
― Brad Feld, Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist
- Read as much about compensation, employee option plans, cap tables, negotiating term sheets, etc.
- Be aware of the legal structures and vehicles individual investors are investing in.
- Identify which structure is best for you, given the stage of your startup. Put a plan in place for the costs associated.
- Make sure you’re asking the right questions and getting the best advice about the after‐tax impact of losses, costs, and implications in the case you decide to convert to another structure.
- Some investors, based on your geography or industry, might favor one legal structure over another.
- Be aware of tax implications across states.
