ruimng L,aplUU JUT I OUT .

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much more powerful fundraising and negotiating position to be in. According to data from Forbes and the SBA ( Small Business
On the other side of the table investors are able to put their money to Administration), venture capitalists fund only about 2 percent of
work with confidence, in a startup that has a product, and one which the opportunities they review. 1 While not all new businesses need
is proven to work. More money just helps to speed up the achieve­ or seek funding, consider that there are around 600,000 new
ment of various milestones, and to magnify the successes and business entities that file each year. In the first quarter of 2 0 12,
strengths. only 3 percent of venture capital (VC) funds went to brand-new
When you are raising money from outsiders, there will be startups, while 97 percent went to ventures that were already
expectations to deliver certain types of milestones in a given time­ running. This information is not to discourage you from your
line. For that reason, it not only helps to have a product on the startup, or from raising capital, but rather it is meant to better
market with some historical data when negotiating your financing prepare you for what you need to do to effectively and efficiently
terms, it also helps to avoid a significant dilution that comes with score the capital you want. While it's important to build the product
raising money as you're working to figure things out, assembling the first, whenever possible, and prove the concept, you can choose to
machine. create a starter version, or MVP (minimum viable product), or
Most startups eventually pivot to adjust to what the market is provide other proof of testing and demand. Define what makes you
telling them. I have yet to see a bulletproof business plan, so it's convinced that this venture is a go, and that it is a good opportunity
important to have proof of concept and validation before taking the for investors.
risk of bringing outsiders into the mix.
Take a moment to think and reclarify why you are raising capital.
The 18- to 24-Month Plan
Consider what it will do for you, and what the opportunity offers to
potential investors. The savviest founders give themselves plenty of time and cushion to
raise the capital they are aiming for, and 18 to 24 months is a good
timeframe.
It's Not as Easy as Reading an Article on TechCrunch Don't worry, this doesn't mean putting everything else on pause,
If people read the weekly headlines on TechCrunch or various or slowing down your startup. In fact, continuing to clock progress in
startup and fundraising blogs, it sounds as if anyone who can fog up a development, branding, your client base, and sales can help in the
mirror can land several seven-figure-plus rounds of funding. Some fundraising process.
people have the impression that if you throw up a crowdfunding Perhaps_ you already have a business plan, and have even started
page, you can land a million dollars to play with as you like. This is selling and building great relationships and establishing distribution
one of the biggest pitfalls facing startups today. It's not that easy-at channels. That's fantastic. But you will need to meld your business
least not for most startups. The truth is that it takes work. It takes plan and your fundraising plan together, if they aren't already a part
effort, time, and an investment in thinking and taking the small of the same document. Perhaps you. initially thought you wouldn't
actions that can create big results. Aside from the right mindset and
expectations, successful fundraising takes making connections, mar­
keting, and proving yourself and the product. It takes strategically 1 http://www.fotbes.com/sites/dileeprao/2013/07/22/why-99-95-of•entrepreneun-should­
rolling out and executing a plan. Often, that requires help. stop•wasting•time-seeking-venture-capital/#48398d84296d.
 6
Sources of Capital

WHAT FUNDRAISING OPTIONS ARE THERE for startups today?

Th.ere are at least 10 different sources of funding for startups,
from seed money to working capital. What are they, how are they
different, what are the pros and cons, and which is right for you and
the current stage of your company?

Bootstrapping
In recent years, the explosion of ''bootstrapping" startups became the
epicenter of many other trends and industries from house hacking to
digital nomads, to the ramen diet (and restaurants), coworking
spaces, and numerous blogs and guides. The power of bootstrapping
\ should not be underestimated, but it isn't always as glamorous as tech
media often portrays.
Bootstrapping really means launching and growing a startup with
resources that you already have, and pulling yourself up with a little
grit and sweat equity. Technically you could be bootstrapping if you
have a six,figure retirement you can tap. Most are working with
substantially less, although it's also true there are plenty of startups
that are now worth billions that were started with $1,000 or less.
 72 THE ART OF STARTIJP FUNDRAISING .)(.n.C.H,..c..> VJ --r·--

juggernaut Berkshire Hathaway, and the companies it owns and n, they have arrived at
When backers decide to back a campaig
operates, is effectively a form of crowdfunding. cess. This is called the act of
the most important step in the pro
What most people refer to as "crowdfunding" today is online web his or her wallet and pl edges
impulse, in which the investor takes out
portals that facilitate and streamline project promotion, and the impulse is the resul t ,of the
money to your campaign. This act of
raising of capital. There are now hundreds of crowdfunding platforms
following:
supporting different forms of crowd.funding, and different niches.
Some specialize in real estate, others in well-vetted startup invest­ e of the campaign
1. Backers connect to the greater purpos
ments, and others in raising money for personal items like food and of the campaign, like the
2. Backers connect to a physical aspect
weddings. Two types of crowdfunding are donation crowdfunding rewards
and equity crowdfunding. lay of the campaign's
3. Backers connect to the creative disp
Donation crowdfunding is epitomized by Kickstarter and Indie­
presentation
\ gogo. These crowdfunding portals allow promoters to raise money in
the· form of donations in exchange for unique perks. a tech-enab led company,
However, in the event you are operating
Via donation-based crowd.funding, donors or backers do not enjoy to go via this route, as there is
it is going to be a little bit complicated
. any ownership or participation in the ongoing profits of a campaign or hange for the contributions.
onl y so much that you can offer in exc g to
business launch. Most individuals donate to facilitate the develop, e definitely not so appealin
Beta test, early access, and T-shirts ar
ment of things they care about, to support causes, and for the prestige
this crowd.
of being among the first to launch a new product. The most-funded different tool altogether
Equity crowdfunding is a completely
Kickstarter as of the first quarter of 2015 was the Pebble smartwatch. The mechanics of equity crowd,
from donation-based crowdfunding..
Between two campaigns Pebble raised over $30.5 million. Not bad for to donationcrowdfunding sites
funding platforms appear very similar
giving away products and keeping all your equity. an imals.
but they are two completely different
In the event you are able to raise money without giving equity investors, angel groups,
Equity crowdfunding enables individual
away, I would absolutely encourage you to go this route. Donation, securities of private compa­
and other capital funds to invest in the s and
based crowdfunding is used nowadays to presell products. It works alue and profits. St artup
nies, and participate in their rising v
particularly well if you are selling hardware products or something tforms to raise funds from a
small businesses are able to use these pla
tangible th at you can give in exchange for the contributions. easing visibility and credi,
much broader crowd online, while incr
Some of the benefits of donation crowdfunding include the , and proving the demand
bi lity, generating buzz, testing the waters
following.
for their product or service.
i n our cha pte r on
We dig deeper into equity crowdfunding
■ Access to capital t successful offerings wil l
understanding the JOBS Act. The mos
■ A great marketing tool to. obtain additional exposure match for the ir offering,
be those th at find the right pla tfor m
■ Obtaining proof of concept qualified investors. (Data
which connects them with ser i ous,
■ It allows to crowdsource the feedback process from potential ome a common precursor
shows that crowdfunding_ h as now bec
customers and offers from ven ture
to obtaining sizab le vent ure c ap i tal
■ Potential free PR
capital firms.)
80 THE ART OF STARTUP FUNDRAISING
,,

7
When you bring onboard VCs that means that you know that if
you invest X, you will be able to produce XYZ. I f you are not sure,
then do not take the money and instead delay until you have a little
bit more certainty on the horizon. We will dive deeper into how VCs
work later on.

Venture Debt
Venture debt is effectively borrowing to· raise working capital and
nderstanding the VC Gar
growth capital. This is a valuable source of funding that doesn't
mean giving up more ownership or diluting equity.
Venture debt financing differs from other sources of money in
that it is normally provided by specialist entities and banks that offer
their services to funded startups and growing businesses. They
FIRMS ARE WITHOUTa doubt the mus,
understand the dynamics of a startup, and will often lend, even
innovation, as t y support the company they may inve
though asset collateral may be weak.
the early stages all e way to IPO--especially those with L
These lenders offset risk by tying loans to accounts receivable,
that have billions o dollars under management.
equipment, or rights to purchase equity in a default. A healthy
In this chapter I uld like to walk you through the
startup can find venture debt attractive in order to allow more time
venture capital firms s that you are able to understand
between equity funding rounds so that more notable milestones can
they operate.
be achieved. These funds can also help speed through milestones
to reach the IPO stage faster. However, it is critical for founders to
ensure their early funding term sheets allow for venture debt- to be Defining Roles in a VC
used as they grow. VC firms have different types ·ndividuals working at
All of the above sources of capital can be used by startups. It is The most junior people want� t be analysts. These :i:
normally not a matter of choosing one or two, but rather putting either MBA students in an interns ·· or people that just
them in the right order to maximize funding, venture potential, and from school.
achieving the best exit or IPO. The main role of analysts is to go l'q, conferences an,
deals that might be within the investmerlt,strategy of the
the VC firm is investing out of. Analys�re not able
decisions, but they could be a good way to ;�our foot ir
and to have them introduce you to someone m

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