As beautiful as the world would be if any company could get any kind of capital from any kind of investor at any time, that is not the world we live in. Yet another variable in the investor funding equation is the stage of development your company is in when you decide to start fundraising.
As we mentioned briefly in our chapter ‘What Investors Look For‘, it’s important to find investors with a history of investing in companies at the same stage that your company is currently in. These investors will know what to look for in your company, what kind of challenges you’re facing, and what kind of timeline they can reasonably expect to be looking at in terms of returns, which will likely decrease the steepness of your uphill climb to earn their attention. Your company’s stage of development will also determine the kinds of information you’ll be in a position to give to investors, and what you’ll want to emphasize on your crowdfunding profile.
For the sake of simplicity, we’re going to break these stages into four basic categories: seed stage, early stage, expansion stage and late stage. For each stage, we’ll touch on what companies in that stage typically look like, what kind(s) of investors usually invest at that point and what kind of fundraising may work well at that stage, as well as a few things to keep in mind about your profile. When do investors invest? Let’s take a look….
The seed stage is what it sounds like: you have the “seed” of a company, but it has yet to grow into the “tree” of an actual business, although you know what kind of a tree it is and how big it is likely to grow.
Seed-stage companies typically have yet to earn any revenue and sometimes don’t even have a product yet. It’s important to emphasize, however, that they are NOT just ideas. If you and your buddy sit down over drinks one night and hash out a plan for the next big fast food chain, and all you have is a few notes jotted on a cocktail napkin, you do not have a seed-stage business, nor are you ready to fundraise as such. Spend at least a few months doing market research, developing a revenue model and talking to potential customers, or risk getting laughed out of the room by investors.
Bootstrapping, friends and family investments, and rewards-based crowdfunding campaigns can all be great funding options for seed-stage companies.
But if you’re confident that outside investors are the right choice for you right out of the starting gate, then you may want to start with angel investors. Angel investors are about equally likely to invest in a company at either the seed stage or the early stage, with around 40% of angel investments happening in each of those two stages. Angel investors tend to have been entrepreneurs themselves, meaning they understand how crucial funding can be to a business in early development. While they’re certainly savvy businesspeople, angel investors are also less likely than venture capitalists to get caught up in bottom lines and profit margins, and might not be as bothered by the numerous unknowns that often come attached to seed-stage investments.
Venture capitalists, on the other hand, tend not to invest at the seed stage because it’s a little too, well, adventurous for them. (Remember, despite their title, venture capitalists do not enjoy taking risks.) That being said, about 7% of venture capitalist investments do come in at this stage, making this an instance when your research into the individual investor will be important. If you find a VC that has a history of investing in seed-stage companies, particularly in your industry, it may be worth a try!
How to Fundraise
In the seed stage, your best bets as far as structuring your fundraise are going to be loans and convertible debt.
At this early phase of your company’s development, chances are that you don’t have equity to sell yet – or, if you do, it’s not worth very much, and you’ll have to sell off large chunks of your business in order to get the money you need. Better to hold of on the equity round until you’ve built a little more momentum, and take the loan route this time around.
Or, if you’re determined to start attracting equity-level attention early on, go with convertible debt: you’ll still be protecting the value of your equity for now, but at the same time you’ll be signaling to investors that equity – and equity-sized payoffs – are to come.
Some Thoughts About Your Profile
By definition, companies in the seed stage don’t tend to have much in the way of traction. Social proof could serve as a powerful substitute there—some kind of indication that customers are excited about your product, or that you have an industry power-player in your corner.
Don’t underestimate the importance of market size, either, particularly if yours is a large one. Emphasize compelling statistics that you can tie directly to demand for your company’s product or service. For example, if 3 billion people in the world blow their nose every day, using an estimated 9 billion tissues, and your product is a patent-protected no-wash reusable handkerchief that eliminates the need for tissues altogether, that’s a powerful piece of data that’s going to show investors that there’s a market for your product and, with enough funding, you’re in a unique position to capture it.
This example brings up another important point: a clear, persuasive problem-solution structure sets any investor pitch and crowdfunding profile on strong footing, but in the seed stage it can be especially effective. With precious little in the way of tangible proof to nudge investors into action, convincing them that the world is incomplete without your product may be the best way to get them reaching for their checkbooks.
In the early stage, the “tree” is now a sapling: your company is starting to put down roots, but it’s still susceptible to a cold snap or insufficient sunlight.
Early-stage companies have usually achieved at least MVP (minimum viable product), meaning their product or service is being provided to at least a small test subset of customers, and is meeting with customer approval. Early-stage companies are also often generating enough revenue to be worth talking about, although that varies from company to company.
The early stage is a great one for investor-based fundraising, because your chances are good with angel investors and venture capitalists alike.
As in the seed stage, around 40% of angel investments go to companies in the early stage. This means that 80% of angel investments happen at the early stage or before, so if angel investors seem like an attractive option to you and you have an early-stage company, it’s a good idea to strike while the iron’s hot.
That being said, the early stage is also the point at which startups attract the most interest from venture capitalists. 44% of VC investments go to early-stage companies, a percentage unrivaled by any other stage. With a healthy amount of evidence that the “good idea” elevator is in fact going up, venture capitalists are going to want to get in on the ground floor – once they’re sure, of course, that it’s going to be worth the trip.
How to Fundraise
At the early stage, there are cases to be made for all three of the investor-based fundraising structures.
With the amount of venture capitalist interest early-stage companies attract, it is a great point to pull the trigger on an equity fundraise. But if you’re still feeling protective of your equity and its value, convertible debt can also be a good choice at this stage. Loans are still an option, too, especially if your company’s needs run toward the more concrete and quickly repayable.
Simply put, when it comes to choosing a fundraise structure in the early stage, your options are pretty wide open, and the structure you go with will mostly depend on the other factors we discussed in more detail in chapter 5.
Some Thoughts About Your Profile
At the early stage, traction is huge. If you can prove that you’ve hit the ground running, that people know about your company and are already using your product or service, it will serve as a powerful indicator to investors that your business is viable, and worth their investment. (Remember: “If they’ve done this much already, imagine what they can do with my money!”)
If your company is already generating revenue, be sure to talk about it: it’s solid, numerical proof that you and your company have the ability to produce results. Even more importantly, show investors how their investment is going to put you in a position to generate more revenue, capture a bigger market share, create more brand awareness. When you’re in the early stage, you have to be poised for growth, or else leave investors wondering where their money is going and why they should give it to you in the first place.
At the early stage, it’s particularly important for investors to know what sets your company apart from, and above, the competition. Don’t make the mistake of putting too many eggs in the “We’re the only ones doing this” basket, either. Even if it’s true that your product or service is 100% unique, to say so and then leave it at that comes off as lazy. It suggests to investors that you haven’t done your research or that you don’t know your industry. Lay it out for investors in concrete terms: exactly who the competition is, what those competitors are missing, and what advantage your company offers that the competition cannot possibly match.
In the expansion phase, your “tree” is getting bigger by the day and is ready to be transplanted into the big forest, where it can grow still further and compete for sunlight with other trees.
Typically what this means in actual business terms is that you have some kind of plan in the works to grow your company – maybe you’re ready to franchise your concept, or add a new product to your brand – and you need capital to make the expansion happen.
Interest from angel investors drops off significantly at the expansion stage, but with 18.5% of angel investments happening during an expansion, it’s far from impossible to get investor support at this point.
Venture capitalists tend to like expansion more, with 26% of VC investments going to expansion-stage companies. “Growth” is a word that a lot of venture capitalists respond to, though not as much as “sale” or “IPO”. If you can put those two ideas together – for example, indicate that you are expanding now in order to sell later – chances are good that you’ll have a venture capitalist’s attention.
How to Fundraise
You’re growing! That’s great! Equity investors are going to want to grow with you – again, especially if that growth is headed in a sale/IPO kind of direction.
You’ll have a hard time making a case for convertible debt in the expansion phase. If your company is doing well enough to be ready to expand, investors will wonder why you’re putting off giving them a share.
If you’re reluctant to give up equity in order to make your expansion happen, better to go for a straight debt structure, especially if your expansion is happening in the physical realm – if you’re adding new locations, for example.
Some Thoughts about Your Profile
It should go without saying that when you’re in the expansion stage, the focus of your crowdfunding profile – and your pitch to investors – is going to be on your new project and how it will help your company grow.
You need to make a case for why expansion is a good idea – both for your company and for your investors. You’ll want to provide research that indicates a demand for the new product among your existing customers, or for your existing product in your new market or area. Revenue projections that point to a significant increase in profits post-expansion are key, as is a clear timeline of how you see the expansion playing out.
All this being said, it’s important that your profile isn’t so forward-facing that it completely ignores where your company is coming from. Your past performance is crucial for inspiring confidence in investors that this expansion of yours is going to be a success. Here, again, traction is key: past revenue performance, marketing successes and customer satisfaction will all serve as proof that you know what you’re doing.
Don’t forget about the competitive landscape, either: whether your expansion project is going to give you the edge you need to conquer the competition, or your existing advantages make your expansion a surefire success, investors need to know where you stand, because it’s where they’ll stand, too, once they invest in you.
A late-stage startup “tree” has strong branches and sturdy roots, and could be on its way to becoming the mightiest oak in the forest.
At this point, your company is mature and secure in its position, but that’s not to say there’s no reason for you to want or need to take on capital. There’s a litany of reasons for late-stage companies to seek funds from investors. As the people who know your company best, it’s up to you to know what your reasons are and make a strong case for them in your pitch.
By the time you get to the late stage, your chances of getting angel attention are pretty slim at only 2%. The odds are better with venture capitalists at 22%, but generally speaking most investors tend to have done their investing already by the time a company hits the late stage.
You can improve your odds of success by finding investors who are exceptions to the rule and have a history of investing late, or who invest in businesses in your industry or area at all different stages of development. Your chances also depend on your reasons for wanting the capital: if it’s to dig yourself out of existing debt, you aren’t likely to see much excitement from new investors.
How to Fundraise
Loans and equity are really the only options for late-stage fundraises and, again, the structure you go with will depend on your reasons for fundraising.
As always, loans are a good choice if your needs are concrete and not very time-intensive, or if you’re not willing to give up more equity than you already have. And at the late stage, equity is definitely a solid option, especially if a sale or IPO is on the horizon.
Some Thoughts About Your Profile
By the time you get to the late stage, you should have generous amounts of traction to inspire investor confidence: strong revenues with a healthy profit margin, significant customer acceptance and social proof and, as ever, the competitive edge to prove that you aren’t about to lose your market share to some upstart company with a flashy new product.
With a late-stage fundraise, it’s important to be clear with your reasons for fundraising, and how investors will benefit from supporting you. You’re not likely to have the same difficulties of an earlier-stage company as far as meeting with resistance for risk reasons, but big risk and big rewards often go hand in hand. If the rewards for investing in your company go down with the risks, investors may wonder if it’s worth their time, and it’s up to you to create a pitch, and a profile, to convince them that it definitely is.
Whatever stage your business is in when you launch your fundraising efforts, you can find the investor support that you’re looking for. As we’ve said before, it’s all about finding the investors that make sense, and choosing the fundraise structure that matches your needs and goals.
But equally important to both of these is making sure that, once you’ve gotten investors’ attention, you’re giving them the kind of information that will take them from stroking their chin to writing a check.
That’s where your crowdfunding profile is a key player in your campaign. Depending on the stage your company is in – whether it seed, early, expansion, or late – there will be different kinds of information you’ll be in a position to give, and different aspects of your business that you’ll want to emphasize. Whatever the stage of your company, think carefully about what you have going for you, and play to those strengths in your profile. The more you do, the harder pressed investors will be to turn you down.