Startup Fundraising is messy.
But that’s ok. Like a cheeseburger, messy is good.
When you read announcements about startup fundraising it seems so nice and clean. Most announcements read like “Startup ABC has just closed a Seed round of $1.5 million from investors including Amazing Ventures and Super Duper Ventures, etc.”. Founders are led to believe they can pitch a few Venture Capital firms (“VCs”), have some follow up meetings, and once a term sheet arrives make a few more calls and fill out the round with some Angels full of FOMO. Similar to an Instagram post, the reality of startup fundraising often differs from the truth. This is unfortunate, as inexperienced founders are led towards unrealistic expectations about how the process works which can create inefficiencies in the ecosystem and lead founders away from other options to fund their businesses.
Mostly through startup accelerators that I’ve managed, I’ve invested in and mentored around 75 startups to date, and have noticed a fairly large delta between what startup founders expect when they approach early-stage fundraising and the best option for them to raise capital efficiently. When I was fundraising for my own startups I too felt like there was one main fundraising path to follow. I’d like to see that expectation change, and to see more honesty in the ecosystem around how startups successfully arrange early capital commitments.
The fact is too many founders believe they need institutional funding to get their business to product/market fit, which usually happens right around Series A funding. Angels are an unrealised source of early-stage startup investment that can be accessed quickly and with less risk than institutional money. Don’t get me wrong, many startups simply cannot scale without institutional funding, but at the pre-Series A ramp-up to product/market fit, Angels often fill the funding gap more quickly and at less cost in equity to founders. Working with Angels can also open up new paths to fundraising, including a “drip” fundraising strategy that is more common than most founders realise.
Drip fundraising is simply raising smaller amounts of investment capital from time to time as needed by the business. I’ve seen startups raise millions this way, using $100k to $500k chunks of capital to grow a bit more, raising the valuation a bit each time, in line with the business metrics. Some startups do this until they become cash flow positive, while others do this one to three times and then raise an institutional round. Many founders may not realise that this is another path to growth capital for their business while others may simply not feel confident that they can manage this process themselves, which usually involves the founder “leading their own round” with paperwork and investment terms. However, you can engage mentors to assist you with this and there are more resources than ever to enable you to lead your own drip rounds.
At Accelerating Asia, we invest in and accelerate pre-Series A startups. We define that category as startups that have:
These startups often come into the program with fundraising goals that are along the lines of “We are raising $1 million at a $5M valuation”.
Is this unrealistic? No!
But it might take founders 6-12+ months to close that deal. Meanwhile, startups have people they want to hire and product to build and deploy, not to mention bills to pay.
Instead, what if founders raised $300k at $3M in the next 2 months from Angels. Then make a few resource investments, lower the amount of time spent fundraising, and focus on growth metrics? What sort of fundraising round could a startup look at then? Often, that’s a much better path because the focus can be on business growth and efficiency with less distraction from fundraising, resulting in enhanced metrics and creating a more positive fundraising environment when there’s an approach to institutional investors. Startups in our program can take advantage of our extensive Angel and Family Office network to raise a smaller drip round (or a few), with the advantages of maintaining a less-scary runway, giving away less overall equity per $, and maintaining more control over the direction of their business. While this is easier when a startup is in a program like Accelerating Asia, it can be done without that too.
So, what do startups need to execute on this strategy? At the end of the day founders really only need investment terms and documents for the founders and the investors to sign. SAFE notes are usually the best way to execute drip financing with Angels. There are numerous resources online that provide SAFE note templates, but founders, you’ll want to spend a bit of money for a lawyer or find a legal mentor willing to review before signing. To determine what investment terms (this mainly relates to the valuation cap) are most appropriate for your business and will give a fair value and still attract speedy investment it’s worth talking with some experienced investors and mentors.
Drip financing is not only more efficient for many founders, but it’s more efficient for investors as well. VCs will spend less time meeting with startups that are at too early of a stage to invest in them. Angels will have more opportunity to invest in promising startups and get in early. This generates more energy at the grass-roots level which supports the entire ecosystem, while lending more efficiency to the VCs to focus more on startups that have reached a certain stage of maturity.
So if you’re an early-stage startup that is focused on Venture Capital financing for s current raise, think about using the drip financing strategy. This doesn’t mean Founders stop meeting with VCs, in fact, they should continue to do so. Drip financing can give a VC more confidence that startups have momentum and are on the right track for them to invest in your business in the future. Meeting with VCs can also be a great way to get valuable feedback on the business. But maybe meet with fewer VCs and spend more time with Angels and family offices, creating a more regular source of financing that lets startups grow more consistently rather than working towards larger chunky financing rounds. I’ve found that for many startups this is both less stressful and creates less risk for the startup.
The title of this article calls startup fundraising “messy” and then says that that’s a good thing. The messiness may seem a bit chaotic, but it’s beneficial as it means there are many more paths to successful fundraising than may seem possible to founders. Founders may raise some money from a few Angels on a SAFE, then from a family office on a convertible note, and then eventually from a Venture Capital Fund in a priced-equity round, all at different terms. But when founders meet with your PR team they will likely recommend calling it one “round”. It sounds more organised, more planned, cleaner… but it’s not what’s really happening in most startups.
Now where can I get a good cheeseburger around here?
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