Business & Investment

How to Raise Funds for a Start-Up

A business idea? How funding works.

Reading all the stories about raising 500 million by company X or getting a valuation of 1 billion or more, one might think fundraising comes in one or two rounds only. Getting out on the market, getting the money — job done in a week. The reality is different. Fundraising happens in many rounds and needs to build trust within the investor’s community over time, ultimately getting the big IPO or M&A rounds done.

Once fundraising is started, it’s best treated as one of the core processes of the company. Ongoing without an end, just parallel to creating value by building the operations and fuelling the much-needed resource cash into it. How can the fundraising process be broken down into operational goals, and how should they be handled?

Bootstrapping

A beautiful word I learned within the start-up community. It captures the essence of the start of business nicely. It’s the process of starting a business by using a lot of effort and no outside resources. This method is suitable for the short to mid-term.

Many famous companies like Apple or Microsoft started with basically no money, founders with a vision — and a garage or living room. The usual money put into this stage are savings from the founders. Dependent on wealth, it may be as low as zero or higher. Mostly it is about 1,000 EUR to 10,000 EUR per founder.

It sounds like it doesn’t take a company very far. The longer you can bootstrap the company, the less equity you have to give away. Ideally, it makes the company the first revenue. You are funding the scaling of the company out of cash flows generated by revenue.

If you have high hopes or want to scale the business faster, outside money is needed. Let’s look at the equity side first.

Pre-Seed rounds

It’s the first step of getting external capital in. There are not many institutional investors or public funds positioned in that area. Usually, the company is still small, high risk, and a little structured. Some acceleration programs or public organizations might run competitions and play out some non-dilutive funds ranging from a few thousand to about 200.000 EUR.

The usual “investors” at these stages come from a business family and business acquaintances. Ask for support and push the story out in the circle of acquaintances, and there will be people that want to support.

I highly recommend taking only people “Onboard” with industry experience, built businesses already, and relevant networks. Even though it might be tempting to get best friends engaged, always do your due diligence and rethink how they can support the company. Nothing odder than a friend that needs quick repayment in a critical situation for the company.

Seed rounds

Once the first team is formed, the idea is phrased out with more structure; it’s time to go for the real tickets. Still, it is the area where mostly acceleration programs, business angels, and public funds operate. A Central European deep tech early-stage story could look like getting a few 100,000 EUR in by founders and business angels, leveraged with federal funds, and supported with the networks of acceleration programs.

Investment in these rounds is high risk with a lot of potential of failure and little chance to succeed. Thus, providing early-stage parties with significant participation with equity and short-term cash returns should be factored in.

The money is used to structure the company further and deliver more data to follow on investors.

Series A

Once the company moves closer towards the “prototype stage,” it gets attention from institutional investors. Welcome to the entrance to the world of venture capitalists. They provide money to accelerate the development of the company significantly. Venture capitalists don’t invest their own money. They spend money given to them by other investors.

Thus, they are looking for investment cases that provide at least a 10X. Potential to get back 10 times the invested capital. At this stage, the structure of data, business plan, future milestone plans, and exit planning are needed to keep in the loop with VCs.

VCs might still look for teaming up with bigger business angels, family offices, or public funds that also have found their sweet spots in that field. The money raised from these groups is used to structure the company further, build a larger team, get more data, and push beyond prototype stages.

Up to this stage, entrepreneurial thinking is quite narrow. It is mostly working on a single target and proving that the team can develop the product to a point where it becomes attractive to customers and more prominent industrial players.

Series B

As the company grows, value increases. Also, will the funding requirement. It is now about scaling the company. The product or service has proven successful within its respective markets.

The entrepreneurial mindset might change slightly at this point. Money raised at this stage is mainly used for scaling the company further. It might be adding additional product lines to the initial core product, or moving to new geographical territories, adding more use cases to the initial product.

Exit thinking is getting more interested in investors at this stage. The funds involved will be much bigger than the initial friends and family, business angel, or public funding rounds.

Series C onwards

At this point, it is proven that the team has built an organization around a product that has a proven business model on the market. Any money raised at this point serves one purpose: Making the company bigger, serving more customers, increasing its value further.

Investors involved are bigger funds, private equity firms, and venture arms of corporates. They put significant amounts of money into the company. Thus, monitoring their portfolio companies closely with larger teams.

Exit planning: IPO or M&A

With a built success on the market, leading investors through several rounds of funding. A clear track record and a sound future strategy. It is time to switch to new owners to give the initial investors back their risk. Hopefully, making them a sound return to enable them to support the next generation of start-up founders.

One event might be an initial public offering. Making the company public and opening the equity side to an unlimited number of potential investors.

Another one might be getting a strategic partner involved that helps to scale the business further. In the pharmaceutical industry, it is usually a significant player licensing technology and opening its sales engine to bring innovation to many patients.

Also, merging with similar players to form a stronger team and story to serve customers better and increasing value further is one of the strategies in the “endgame” of start-up fundraising.

It´s the destination for many start-up founders. Working in larger corporations is a different kind of game than building a corporation from scratch. Only a few investors like Steve Jobs, Mark Zuckerberg, Jeff Bezos, Bill Gates, or Elon Musk stay on board for the long haul. From the garage scale, the initial idea to become the biggest corporation in the world.

Whatever your spirit is like — short or long term — initially, always stay focused with clear storytelling, team, and milestones to be an attractive target for investors.

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Since 1999 I am an executive, advisor, and coach for companies in various industries. I am specialized in Corporate Development and Finance. From seed rounds to IPO level. I am focused on life science since 2006.