So you’ve started a business, and it’s starting to gain some traction, and maybe you've proven product market fit, too. It's time to accelerate growth! Also, it's time to raise money to fuel that growth!
Raising capital is crucial for startups to survive and thrive in today's competitive landscape. Think of all the benefits an injection of funding and partnership can have for young businesses: fuel to scale into new markets ahead of competitors, cash to ramp up teams and operations, strategic guidance, and beyond.
Many early-stage startups get off the ground through a combination of personal funds, bank loans, angel investing, and often a whole host of other creative solutions.
Whether you're doing this for the first time, or you're getting ready for the next round, this article will take you through proven steps and expert perspectives to help you start raising capital for your startup.
Although every startup has a unique set of circumstances and pacing, we find that a typical capital raise process can be staged in three parts.
- Stage 1: Investor readiness
- Stage 2: Execution
- Stage 3: Closing the deal
So buckle up, fundraising is a wild ride, but with the right preparation and persistence, you'll be raising capital in no time. Let's dive in!
This is the stage that takes the longest time and requires the most work. At a minimum you will need to have the following: business plan, pitch deck, investor data room, cap table model, and required legal documents.
Keep in mind that most investors have seen many pitches and can tell whether you're prepared or not. So you want to make sure to do your best work in this stage. Take time to internalize your mission and vision and let these shape your strategy.
You've got to make investors feel like you can change the world in some way… Make sure you understand where your superpower is and get some coaching and get feedback as necessary.
—Jason Atkins, President & Co-founder at Cake Equity
Fortunately, most of the work done on this stage is not just for investors. Taking time to research, analyze your market, and model financial scenarios are also for you as a startup founder. The information and inspiration you gather in this stage will be useful for you as you stir your business forward.
1. Develop your pitch and business plan
To attract potential investors, you need to develop a compelling pitch that outlines your startup's vision, mission, market research, competitive advantage, and financial projections.
You also need a business plan that's well-researched, concise, and compelling. Utilize charts, graphs, and infographics to present data in a visually appealing manner. Remember, your business plan is the blueprint that will guide your startup's growth and convince investors of its potential.
Create an MVP of your pitch deck
In 10-15 slides, cover what problem you're solving, your solution, business model, team, competition, financials, key milestones, and funding requirements. We say "MVP" because your pitch deck will still evolve as you learn more. Have a room for feedback and iteration.
Build your business plan
This is a more detailed, 30-50 page document that expands on your pitch deck. Describe your company, product, market, strategy, operational details, risks, and financial projections over 3-5 years. Your plan should demonstrate a viable model for high growth and return on investment.
As you are developing your pitch and business plan, get a head start on networking. Actually, this is one of the first few things you should do as a founder, long before you start thinking about a raise. The network you build is like a power tool that you'll keep using throughout your startup's life.
"Raising is about continuing to maintain the relationships with investors before, after, and during a raise—not just for a raise."
—Olympia Yarger, CEO at Goterra
Attend industry events, set up informational interviews, and connect with people who can introduce you to investors. Build genuine relationships and learn from them!
Learn how to craft your business plan and pitch deck from startup founders and investors who've done this before. When you're ready to raise a round, leverage your connections and pitch to as many qualified investors as possible.
Here at Cake we are passionate about creating meaningful networks and partnerships with the people in the startup community. Join Cake's Linkedin community and receive updates about our networking events and learning sessions.
2. Calculate your financial needs
To raise capital for your startup, you need to determine how much money you actually need and set a target funding amount.
Scrutinize your operating costs
Determining your financial needs forces you to really scrutinize your operating costs so that you can create accurate projections for future capital requirements. That makes this a great time to trim the fat and get organized when it comes to expenses.
If you really want to win over investors, you need to be able to show them you’re running a tight ship that’s sure to generate returns on their capital.
Add a buffer for unexpected costs
Raise too little and you’ll be back to knocking on doors in no time, wearing out your welcome as well as diverting your attention away from what you should really be focusing on — running a growing business.
Raise what feels like too much to investors, you may have a hard time getting them to listen and spend much longer than necessary locking down capital.
Add a buffer. It’s better to raise more than not enough.
Have a detailed list
Every single business will have a unique inventory of expenses, but when you set out to calculate your costs, this list should help you get started and make sure no stone is unturned:
- Salaries and hiring costs
- Outsourcing (contractors, research, etc.)
- Technology building and/or acquisition
- Subscriptions to SaaS programs
- Cloud storage
- Legal retainers, fees, etc.
- Office space rent, utilities, parking, etc.
- Any licenses and permits
With your target amount set, you can now determine the best sources to raise funds from, like angel investors, venture capital firms, crowdfunding, or business loans.
3. Determine your funding strategy
You might want to get a cup of coffee at this point (or whatever your favorite drink is!). This is a long one. There are many ways to fund your startup, and you want to make sure that you choose the right one that fits your purpose.
Family and friends
Before preparing for the big raise, asking help from friends, family, and close connections is common step for many (very) early-stage startups.
This is a highly flexible fundraising method for beginner founders. Some “lenders” won’t expect repayment, while others might but with quite favorable terms — such as no interest. In many cases you won’t even need a valuation for your company, because thanks to your personal connection most of your investors here are simply supporting you, no matter your business metrics.
While this is certainly one of the more approachable fundraising options, that doesn’t mean you shouldn’t take it seriously. Use it as practice for when you get to the big leagues. Strive to create realistic projections of capital needs.
And, should Uncle Joe want to receive equity in exchange for his investment, be careful that you aren’t diluting equity early on, as this may be an important bargaining chip as you target bigger investors down the road. Issue share certificates, create term sheets and repayment plans for each investor, and keep your shareholder list up to date.
We believe effective equity management should start as early as possible. If you choose to raise capital from friends and family, consider setting up an equity management software early on to avoid any sticky legal or personal situations later on.
A company is bootstrapped when it’s fully sustained by the founder’s own funds as well as the revenue it generates. A bootstrapped business doesn’t actually raise capital, which means that it doesn’t have any loans to pay back and that no shares (aka equity) are ever doled out.
On the upside, with this strategy the founder remains the sole owner of the business, meaning all decisions can be made unanimously and they don’t have to worry about paying dividends and all the other tasks that come with exchanging equity for cash.
But on the downside, bootstrapped startups often aren’t able to scale as quickly as the funding isn’t flowing as freely. This of course works for tons of businesses, you just have to consider if it’s right for yours considering your place in the market and how competitive you need to be.
Know more about the difference between bootstrapping and raising capital.
A convertible note, also called a convertible bond or a convertible debt, is a loan (aka debt) that can be converted into equity.
When first issued by an investor, a convertible note is your typical loan with interest. However, the agreement is usually that the loan will convert into shares of stock once the company hits a certain goal.
Since convertible notes are most common among early-stage startups, that goal is often the closing of a Series A round of funding. If all goes according to plan, the company doesn’t have to pay back the loan or the interest, and the investor ends up with equity in the company.
This has become a popular way to generate funds because it doesn’t require that a young business have an extremely accurate valuation. The convertible note agreement doesn’t take valuation into account at all, it only stipulates that the company pay the funding back in some way — whether that’s in equity or in cash.
With a convertible note, investor risk is minimized as they’re sure to get their money back in some form. For startups, it provides the capability to extend runway, scale hiring efforts, and position themselves for further fundraising.
The term “capital raise” really just defines the process of a company approaching another company, a private investor, or a financial institution to ask for capital (aka money, cash, or cashola if you’re fancy).
So, how to raise capital? Capital is most often provided in two main forms:
- Debt capital entails debt that must be repaid, typically with interest. Debt capital often comes from financial institutions, and can look like a business loan, a business line of credit, a business credit card, and so on.
- Equity capital is the more common form of capital raised by startups. This fundraising method gives the investor — often an angel investor or venture capitalist — equity in your business in exchange for a cash infusion.
For most startups, a combination of both debt and equity financing is ideal. Explore all your options to determine what will fund your growth while maintaining control of your company. The right capital will get your startup off the ground and soaring!
Crowdfunding is the process of pitching your business to a large audience in hopes that those who are interested in what you’re producing will contribute funds.
You secure funding by pitching to them how your offering will impact their life in a positive way, not by educating them on your business model or earnings projections.
What crowdfunders get in return are perks like discounts, early access, or even input into how your service or product is crafted. Often, no equity changes hands and no repayment is expected — but these particulars depend on the platform you use to raise capital.
This is why, when it comes to crowdfunding, it’s less about valuation and more about having a strong pitch around what you’re building and what it has to offer your target market.
Where does one make this kind of pitch? Today, tools like Indiegogo, Kickstarter, and SeedInvest help new businesses reach the masses.
Crowdfunding is a clever way to not only raise capital but to test market fit, and even start building a loyal following before you have a usable product or service on the market. But it’s important to remember that it can take more time than fundraising strategies that target lump sum payments, as you may need hundreds if not thousands of individual contributions to meet your capital goal.
An angel investor is generally defined as a high-net-worth individual who provides capital for early-state businesses. Most often you’ll see these private investors get involved in the seed round, which is usually the first “official” round of funding a company raises to hire, improve their product or service, and otherwise get moving.
Since angel investors are getting involved at a time when the future of the company is quite uncertain, they’re usually rewarded with relatively high percentages of equity. And in addition, many angel investors don’t just offer startup capital — they come with their own experience and expertise as well as a whole roster of contacts whom they can call on to help as you grow your business. Because of this, angel investors are often seen as partners in a way other investor types and funding sources are not.
Other service providers whom you already work with — lawyers, accountants, etc. — are a great place to start when you’re looking for a personal recommendation on an angel investor. Accelerators also usually provide these types of contacts. And, there are online platforms like AngelList and plenty of alternatives that may help you get started.
Venture capitalists (VCs) are also people who invest in growing companies, but instead of their own capital they’re investing money provided by large companies, investment firms, groups of investors, and other similar sources.
Since venture capital is working with a huge pool of cash, they’re typically looking to invest large amounts in companies that don’t seem super risky, so that returns are all but guaranteed. So many venture capitalists are looking for businesses with a track record of growth, revenue, and the ability to generate investment returns. Their goal is less to provide mentorship and more to provide rocket fuel that boosts your business’ growth — and their returns.
Of course, there are venture capital firms out there who are willing to take on more risk. But they’re still looking for startups that have carefully considered every part of their approach, from growth and spending projections to their business plan, launch schedule, and how they handle equity (an updated and well-managed cap table is very beneficial in this case). These venture capitalists will do plenty of due diligence to ensure taking on equity in a more early-stage, and therefore more risky, startup will be worth their outpouring of cash.
Accessing venture capital is a longer process that requires much research and consideration. Usually, the best way to reach a VC is to get involved with the network that surrounds them and engage with them long before you raise funds.
Business accelerator programs
Business accelerator programs enable early-stage startups access to mentorship, education, a support network of other founders, investor contacts, and other resources.
Immersive programs like this can take place over a few months and their goal is to, you guessed it, rapidly accelerate growth for companies that are just starting out.
Accelerators offer the chance to get connected with investors, but some even fund startups out of their own coffers. In exchange for their services and outright funding in some cases, many accelerators take payment in the form of equity. Some charge a fee, similar to tuition. More rarely, accelerators are free or at least affordable thanks to corporate sponsorships and/or government grants.
“Graduating” from a recognized accelerator — Y Combinator and Techstars come to mind — can lend a startup an air of legitimacy, helping create a ton of awesome fundraising and investment opportunities.
4. Set up your cap table and equity management platform
To raise capital, you need to determine how much of your company you're willing to give up for investment. This is outlined in your capitalization table, or cap table.
In pre-seed stages, you might be able to manage your cap table in a spreadsheet. But when you start raising capital, you can benefit a lot from setting up an investor-ready cap table.
It's very important to not just have the legal and cap table clean, but to be able to speak to the strategy as to why you did it that way, why you split your equity the way you did, and have those answers readily available. Because as the investor, I want to make sure that I can get inside your head and understand your strategy and know that there is a strategy and that there were conversations and thoughts behind those things.
—Cash Allred, Principal at Sweater Ventures
If you don’t already have a cap table in place, now is definitely the best time to tackle it.
Your cap table will provide a comprehensive record of equity. It should get into the nitty gritty when it comes to stockholders as well as option holders, warrant holders, and anyone else with any ownership rights. This document should lay out payment details, vesting schedules, liquidation rights, and any other pertinent details for every equity transaction.
If you think that sounds like a lot of information to manage manually, that's because it is. And this is why you need a cap table management software that will automate most of the math and the admin work for you.
A solid cap table and transparent discussions about your funding needs will help convince investors that your startup is worth backing. Take it from Ellen Dinsmoor, COO of Vow.
The short and sweet of that is the cap table that we use in Cake is our source of truth... At any point in time for the fundraising process, you're going to have an investor reach out and say, what's the cap table look like today? And what's the exact amount of shares that have been vested within your stock option pool?
Cake becomes a very easy one-stop shop where we can go and because we have the day-to-day processes in place where that's updated, then we can very easily go and download what the cap table looks like.
—Ellen Dinsmoor, COO at Vow
A good cap table software is critical to making smart decisions when it comes to issuing equity, and is also pivotal in determining the market value of a company. These are all important information to have when raising capital.
With Cake, your investors are able to manage their own portfolio, and once they're already investing into your startup, they can also check your cap table as needed. This provides the transparency that builds your potential investors' trust as early as the fundraising stage.
5. Prepare all the legal docs
Let's be honest here, this part of the process can be intense — especially if you don’t have any tools with smart automations that can give you a leg up.
While this step is about keeping everything peaceful and above board, it’s also about showing your capabilities and improving confidence with potential investors — and hopefully the outcome of your fundraising efforts.
There is so. much. paperwork. involved in pulling off a successful capital/equity deal, but we’ll just talk about some of the most important basics most entrepreneurs will need to think about.
If you already have shareholders, you need to make sure you’re tracking their information somewhere. A shareholder list documents all the people who actively own shares in a company. Typically it includes their basic contact info, their number of shares, and their price paid. It’s important that this information stays up to date as this document outlines the ownership of a company and is used for investor communication, to dispense dividend payouts, and more.
A terms sheet is a document that basically summarizes the details of a business investment. It’s not typically legally binding, it just offers an easy way for all parties to ensure they’re in agreement about the deal. Not every investor will require one, but you should be aware of them as they can be especially helpful when pushing to close capital with an investor who is short on time.
This document is valuable anytime you have more than one shareholder. What it does is define the relationship between the company and shareholders, addressing things like which decisions require shareholder approval, how shares can be transferred, etc. Often the details of the terms sheet will be rolled into this document and, once it’s signed, the contents become legally binding.
Simplify your capital raise with Cake
Cake helps startup founders simplify their capital raise by automating some of the tedious legal and admin work that usually slows founders down.
Cake's collection of lawyer-approved agreement templates are free to use within Cake. Use them as is, customize them to your requirements, or if you already have existing legal contracts, you can also just upload them to the app.
With legal workflows integrated within our cap table and equity management, startup founders are able to focus more on networking, finding the right investors, telling the startup's story, and delivering the pitch.
6. Identify your investors
Identifying investors for your startup involves a combination of thorough research, networking, and targeted outreach.
There are many investor lists going around in LinkedIn communities and you can leverage what's available so you don't have to start from scratch.
It is important, however, to still build your own list, starting with identifying what you're looking for in an ideal investor.
Profile your ideal investor
Understand the type of investors who could be interested in your industry, stage of growth, business model. Consider whether you are looking for angel investors, venture capitalists, strategic partners.
Now take a minute and write down every quality you would want in your perfect investor. This will help you determine your matches later.
Leverage your own network
Reach out to your personal and professional network to inquire about potential investors. We already discussed tapping family and friends to invest in you. Take it a notch further by talking to colleagues, mentors, advisors, industry experts, and fellow entrepreneurs who may be able to provide introductions or recommendations.
Research and explore
Explore online platforms, such as AngelList, Crunchbase, and LinkedIn, that connect startups with investors. These platforms allow you to search for investors based on their investment preferences, industry expertise, and geographical location.
Research investor profiles. Look for investors who have a track record of investing in startups similar to yours.
Study other startups in your industry that have successfully raised funding. Find out which investors have backed similar companies and consider reaching out to them with a well-crafted pitch.
Get yourself out there!
Attend startup events and conferences. Be prepared with an elevator pitch in case you meet a potential investor from these events. You'll find that these networking events often attract investors who are actively seeking investment opportunities.
Consider joining startup incubators or accelerators that have a network of investors. These programs often provide mentorship, resources, and connections to investors who are interested in supporting early-stage startups.
You know that you have passed this stage when trusted and active investors and advisors give you the go-ahead that you're ready. At a minimum you will need to have ready: pitch deck, brief financial model, dataroom, cap table, essential legal documents, and a comprehensive list of potential investors.
So you've developed your business plan and pitch deck, calculated your funding needs, determined your funding needs, and set up your cap table and equity management, and prepared your legal documents. It's time to execute.
7. Refine your pitch deck and business plan
You already prepared this earlier but surely you've gathered more information in the period of time since you started planning your raise. You might be refining your goals and vision from the time you started, met advisors and mentors who gave you feedback.
Leverage these new information and learnings to refine your pitch. Update your figures and stats where needed. Make sure you've covered the following:
- Your mission and vision - the impact you want to see in the world
- The problem you want to solve - the problem you're solving and your key motivations
- The opportunity - market size of the opportunity, your business model, and how you'll make money
- Your product - what makes it stand out and unique
- Traction and revenue - financial projections and funding asks
- Your team - flex your team's credentials and milestones
Remember, pitching your startup is all about storytelling. Often, it doesn't matter how good your pitch deck is if you can't weave all of these information into a compelling story that will gain the trust of investors.
It's your job to make sure that you're selling who you are, and whether or not you're the person to take this vision to reality, and whether they can trust that you've got that.
—Olympia Yarger, CEO at Goterra
In case you're tempted to pack your pitch deck with information, don't! Keep your deck concise, around 10 to 15 slides. Use visuals like charts, graphs, and photos to bring it to life. Practice your pitch out loud to build confidence for your meetings with investors.
8. Reach out to investors and schedule meetings
Once you have refined your pitch deck and business plan, the next logical step is to reach out to potential investors. Start by contacting those in your own network who match your ideal investor profile.
Send them a teaser version of your pitch deck and ask to meet to discuss your business and funding needs. Just enough to peak their interest.
As you broaden your outreach, focus on investors who have a track record of funding companies similar to yours. Research how their other portfolio companies have performed to gauge their success rate. Tailor your pitch deck specifically for each investor based on their areas of expertise and interest.
While some investors may respond positively right away, most will want to meet in person first to get to know you and your vision. Prepare for these investor meetings by practicing your pitch and anticipating common questions. Come prepared with any reports, financials or prototypes that help tell your business story visually.
Maintain a calm, confident and solution-focused mindset throughout the process.
With persistence and the right combination of preparation, networking and refinement, you will find the right investors and partners to help fund your startup's next stage of growth.
9. Deliver a winning pitch
The time has come. All your hard work and preparation comes down to this moment where you are standing in front of a potential investor (or a panel of potential investors). If you prepared and practiced your pitch, there's really no need to fret.
Your pitch will only last about 20 minutes. Keep in mind that investors are busy too and you don't want to take too much of their time.
Walk through your pitch deck, bringing the same energy and passion that led you to start your business. Be ready to answer tough questions about your model, financials, competition, risks, and exit strategy.
Here are useful perspectives from successful startup founders and experts
When pitching or negotiating a deal, passion is key! Investors look for that conviction, but at the same time want to make sure you have mitigation strategies for potential risks. VCs look for your short term and long term survival goals. Updating your investors lets them know you’re achieving your plans and overcoming obstacles.
—Rohan Workman, Co-founder and CEO of Skalata Ventures
It's your job to make sure that you're selling who you are, and whether or not you're the person to take this vision to reality, and whether they can trust that you've got that
—Olympia Yarger, CEO at Goterra
I see investors focusing a lot more now is less on just pure growth but also they want company sales to prove the ability to actually make money. You've got to be able to demonstrate that you can actually turn a profit if you wanted to, not necessarily they're asking you to do it, but can you actually deliver on it
—Michael Blakey, Managing Partner of Cocoon Capital
Ask questions and take feedback
Remember that investors are not the only ones assessing you, you are also assessing if they're the right fit for your startup.
A big part of a founder's role is to try and find the investors with the mandate that matches what they're doing and then ask the right questions.
—Jason Atkins, Co-founder at Cake
Have a positive outlook at rejections
Rejection can be hard to take, but it offers an opportunity to reflect, improve and try again.
When you come out of a pitch and someone says it's a 'no', there's a million reasons why. It doesn't mean it's a bad business, it doesn't mean it's not a really exciting opportunity, it just may not fit for purpose at that time.
—Paul Naphtali, Co-founder at Rampersand
Don't take it personally, focus on what you can learn from the feedback. Ask investors to elaborate on their reasoning so you understand their perspective fully. Be grateful for their time and honest opinion.
Review your pitch and approach investors again. See what, if anything, needs adjustment or fine-tuning based on their concerns. You may need to sharpen your value proposition, revisit financial assumptions or clarify your business model.
Keep pushing forward. Feedback and rejection are part of the process. The important thing is to learn, adjust your strategy and try again with the next investor. Getting a "yes" often requires multiple rounds of pitching, negotiation and compromise on both sides. Keep honing your business and refining your message to find the right match.
Closing the round
Congratulations, you made it! You won the heart/s of your new investor/s, now it's time to make it official and close the rounds. This stage is about getting agreements signed and ensuring that the money is in the bank.
10. Sign, seal, deliver
Once terms are agreed upon, you need to finalize the legal documents, get your investors sign on the dotted line, and close your round of funding.
This step is really easier said than done, especially when you're doing it all manually. Outside of Cake, this can be a messy process. If you have a few investors with different structure/equity types, it can take weeks of back-and-forths to get the basic documents sorted. Cake automates this process for you.
Cake allows you to send your offers to investors and have them all signed and processed digitally. This includes an automated Subscription Agreement, and the ability to attach your own documents for review (Terms Sheet, Shareholders Agreement etc). You can also use our SAFE & Convertible Note agreement templates, stock option offer letter, and other equity agreement templates should you need them.
This stage alone has many moving parts, and there are also many ways it could all go wrong. Cake helps eliminate unnecessary errors, sparing you from thousands of penalty and excessive late nights fees down the line.
Investors like things to be efficient, logical, and transparent. Cake can help to provide them that peace of mind, essentially making you look good and further establishing your investor's confidence. Get started today!
This article is designed and intended to provide general information in summary form on general topics. The material may not apply to all jurisdictions. The contents do not constitute legal, financial or tax advice. The contents is not intended to be a substitute for such advice and should not be relied upon as such. If you would like to chat with a lawyer, please get in touch and we can introduce you to one of our very friendly legal partners.