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Lessons From Raising Capital, And Why You Might Want To Wait

Founder & CEO of fashion tech startup Mys Tyler. Sarah is a serial entrepreneur, global citizen (until recently) and consumer marketing pro.

You have stumbled upon a compelling problem that you can solve, research confirms there is a sizable market opportunity and you’ve created a plan and received early validation. So, how do you turn this idea into a business, and how do you raise money to get started?

Within the context of startup fundraising, you may have come across the terms: venture capital, or VCs, bootstrapping, family and friends, angels, family offices, incubators, accelerators and grants. Depending on your background, it may feel like navigating a new board game without reading the rules.

Before you start pitching Shark Tank-style, consider your options and the consequences. Here are some of the downsides to raising capital.

• Raising money takes time and energy and can be a big distraction.

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It takes time to craft your investor deck and get meetings. Meetings themselves can be really draining as well as time-consuming. And it’s a numbers game; you need a lot of meetings to get a few yeses. One founder I spoke to met with an investor eight times before they finally passed.

Government grants often require a lengthy and involved application process and can be so hard to navigate that consultants may be engaged (at a cost, sometimes a success fee) to help prepare the application. The grant process can be slow and, even if successful, can take upwards of a year to see the money. If you’re not successful, that’s a whole lot of sunk time and opportunity cost.

• Early-stage capital can be really expensive.

Valuing a company is often a multiple on revenue, net income or EBITDA. If you’re pre-revenue, then it’s based on projections and how believable your company is based on your team, business model and early traction. As you hit milestones and turn assumptions into real data, your valuation grows. That means the earliest money you take will be the most expensive.

• Managing investors can be difficult.

Suddenly, you’re accountable to other people. They may have ideas and concerns that don’t align with your vision or may want higher levels of involvement that can become a distraction or hard to navigate. Even with the best investors, you now have a new category of business needs and administration.

• There are legal costs involved.

Whichever way you do it, you’ll need lawyers to ensure you have solid agreements in place. These can become quite expensive, so be sure to factor legal into your budget.

If you’ve considered all of these factors and are still ready to make some cash, here are some tips.

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1. Start small.

Raise what you need, not more. Create a buffer because things will always cost more and take longer than you expect; have enough to fund the next raise (which could take three to six months). By doing this, you can avoid becoming too diluted too early. For instance, raising $100,000 at a $1 million valuation means giving away 10% of your company. But maybe it will only cost you $5,000 to build a basic prototype and acquire your first users. It could be that simple to bump your valuation to $4 million, and now you’re only giving away 2.5% for the same amount of capital. This goes on and on. It’s often better to tick a few boxes before you start giving anything away.

2. Create a fundraising plan.

Consider the milestones in your business and how much it will cost to get to each of those. Each milestone reached should correspond to an increase in valuation. Work out your dilution as you move through, and allow roughly an extra 25% dilution at the point that you reach Series A.

3. Consider a SAFE note.

SAFE stands for simple agreement for future equity. These are commonly used instruments in early-stage fundraising. Investors are putting money in today, with an agreement that it will convert to equity in the future at the valuation set at that point in time (this assumes there will be more data to determine a valuation in the future). This is great to reduce the risk of early-stage investing but also defers the process of due diligence to the future when more sophisticated investors join in and can run that process. SAFEs generally involve incentives in the form of a discount, i.e., 20% off the future price, and/or a valuation cap, i.e., if set at $5 million, even if you raise at $10 million, they’ll get in at $5 million (essentially getting a 50% discount).

4. Choose investors wisely.

Make sure you get to know your investors and do your own due diligence. You want investors that believe in the problem and believe in you. They have to trust your ability to run the business and make decisions, and they have to know that it’s tough and that you will make mistakes. You want someone supporting you when it’s tough and confident in you, even when you’re feeling less so. Even better are strategic investors who can open doors, help with promotion or provide expertise in your field.

5. Take the time to understand all the terms.

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It can be so exciting to receive a term sheet that you rush into signing, but first, make sure you understand what you’re signing up for (and how this could impact your future fundraising). A book I’ve been reading (that was recommended by a few people) is “Venture Deals” by Brad Feld and Jason Mendelson. This takes you through the process and terms. Also, take time for your lawyer to walk you through all the paperwork line by line.

Starting a business means a lot of trial and error, mistakes and learning. Even the best-laid plans can lead to unexpected pivots, so I’m a big fan of doing what you can before taking money. I’ve bootstrapped a number of apps, and I’ve fundraised for two of my businesses. I’m heading into another round of fundraising now, and all of the above is on my mind. Whatever you decide, the biggest lesson for startups is to just get started.

Forbes Business Council is the foremost growth and networking organization for business owners and leaders. Do I qualify?


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