Finding capital is no easy task. Lots of start-ups struggle early on with where to find the capital they need to bring a great product (or service) to market or to tend to a broken technology in need of some work. Funding Your Dreams: Calling All Entrepreneurs, a panel at this year’s WILD Summit, covered just this. Once you’ve determined how much capital you need, how do you put together your fundraising strategy? Who do you ask for funding and are you offering something in return? What do you need to know before you start?
The panelists, Erika Trautman (CEO and Founder of Rapt Media), Sara Rodriguez (Associate Director, Rockies Venture Club), Zubaida Bai (Founder, AYZH), moderated by Elizabeth Kraus (Co-Founder, Impact Angel Group), offered first-hand insight. They suggest a good place to start is with an in-depth look at three ways one can raise capital: accelerators, crowdfunding, and angel investors.
Two of the panelists have participated in accelerator programs and covered some basics.
Erika is a graduate of TechStars. TechStars, the #1 accelerator in the world and based in Boulder, offers companies a grant of $18K and an optional $100K convertible debt note if they are accepted to participate in their program. While they are highly selective (accepting only 70 companies worldwide from thousands of applicants), they run a model similar to other accelerators:
- Accelerator programs typically accept start-ups in all phases of funding pre-venture capital,
- Offer extended and extensive mentorship,
- And provide the opportunity to pitch to Angel and start-up investors for additional capital.
Zubaida participated in the Global Social Benefit Institute an accelerator that “focuses on innovation-based entrepreneurship in service to humanity.” They, along with a handful of fellowship programs (including TED and Echoing Green) helped her create a network to make specific connections and introductions to investors.
Aside from a great idea and a solid team, what does an accelerator look for when selecting a start-up?
- Can they shape you during the start-up process?
- How will they also benefit from your success?
- Will you be able to attract investors? It’s hard for both you and the accelerator to recover from not getting funding after going through their program.
- Erika suggests you start networking with the accelerator of your choice as soon as you can so that when your application comes through they know who you are.
What do they get in return?
- Generally, accelerators make a small investment in your business in exchange for helping you get your idea off the ground.
- This small investment gives them a small equity stake or ownership piece.
- The equity size will vary depending on which stage you’re in and size of your company, but typically ranges from 3 to 7% and is usually given in the form of common stock (not preferred stock).
- Some programs require you to pay to participate.
What is the value of an accelerator?
- Accelerators can act as a validator for your idea, product or service, and give you a voice for the investment community.
- When thinking through which accelerator is best for you, consider your opportunity cost and what you’re giving up.
What do investors think of accelerators?
- Very positive. Accelerators have the potential to attract a lot of investors. High caliber accelerators will also help with introductions to a bigger network, offer legal advice, and education on the financial side, all of which are attractive to investors.
- Sara noted that some accelerator programs are difficult to get into, which can carry weight with investors. She likened this to an HR manager looking at applications for those who are right out of college: the school you graduated from can play an important role in how you are evaluated.
What should you look for when considering an accelerator?
- Do they have a proven track record of raising capital and a top network for you to tap into?
- Mentors do not need to understand exactly what you do, but the accelerator should provide leaders in their field who offer a lot of value from a high-level perspective.
- Reach out to others who’ve gone through an accelerator’s program. Get to know them and their experience. Recommendations from a program’s past participants are taken very seriously.
- The panelists all agree – follow-up is crucial. Make yourself a part of the network you want to be in.
Before launching your crowdfunding campaign, consider the four types:
Supporters make donations to your project and receive nothing in return (beyond the satisfaction of participating in your start-up).
In exchange for a small amount of money, funders receive something. This is the perfect situation if you have a product to bring to market. And Kickstarter is an ideal platform.
- Peer-to-peer lending:
A simple lending strategy where small amounts of money are repaid with interest.
- Equity based:
By far the most complicated. Money is exchanged for a shareholder stake, which adds extra responsibility on the owner’s (your) part.
With donation and rewards-based funding, and peer-to-peer lending, project creators retain 100% control of their products and services.
Zubaida tells us a common misconception here is that if you’re crowdfunding you’ll have success. But that wasn’t her experience. Their campaign flopped. And her lessons are invaluable: Zubaida tells us it was a failure because she, the founder, was not involved from day one of the campaign.
Ensure your success! What to think about while creating your crowdfunding campaign strategy:
- Start by identifying others who can get on board, act as your campaign’s ambassador, spread the word, and help you get traction.
- Crowd funding is a great way to go, but it’s definitely hard work. Go door-to-door and let people know your campaign is coming well before it even starts. Send lots of reminders. Get the word out.
- A successful campaign will raise their first 20% on its first day. This is the springboard you need to raise remaining capital.
- When choosing which model to use, consider rewards. They are more appealing than donations.
Throughout the campaign process:
- Send lots of emails, make lots of calls, and frequently ask your network to help you make your campaign successful. You need them so let them know!
- Make sure you and your team are experts on what you’re asking for and what you’re offering.
- Leverage social media. Ask people to blog and write about what you’re doing. Create some buzz. This buzz isn’t to directly raise money, but rather to create some positive noise about your work so you can raise money.
On a side note, some campaigns are designed to fail. Alternative uses of crowdfunding sites are as a free marketing platform, or to solicit feedback before making decisions about a product (such as color).
What do potential investors think of Crowdfunding?
Also very positive amongst investors. A successful campaign is proof of concept. It demonstrates your ability to execute a plan successfully, that you have the market valuation you need to grow, and that you have backers – people who believe in your and your idea. This is very powerful.
3. Angel Investors
Angels invest their own money directly in your business. All Angels must be accredited investors (have a net worth >$1M, not including primary residence, or have made $200K a year for the past two years).
Here’s where the panel mentions that without a doubt the first bit of money you raise will be your hardest. It’s true. And it’s true for whichever path you chose. But that doesn’t mean it’s impossible:
- Start by identifying your anchor group of capital that will help you secure additional money and essentially lead the investor base. Get to know this group or person well and don’t be shy about frequently sharing business updates with them. They need to be informed.
- Next, who are your (equally valuable as the anchor group) investors who don’t want to be the first ones in the door or very involved on an ongoing basis, but do want to contribute? Identify these people as your follow-on capital. Keep them informed as well. The better an investor understands you and your company, the better chance you have of raising capital.
- Know your team’s strengths and weaknesses and capacity to execute when raising capital and putting together your strategy.
- Ask yourself how many investors you want:
With her first fundraise, Zubaida, aimed for 30 people to each invest $10K, but soon realized this would be inefficient and unwieldy. It’s time consuming to manage that many investors. So she changed gears and focused on fewer people with deeper pockets.
- Consider getting two groups excited about you with competing term sheets.
- Don’t be afraid to tell investors that you have a close date approaching and to ask very directly “are you ready to sign?” You need to create momentum to get money in the door.
- Know when it’s time to stop fundraising. A perpetual cycle isn’t attractive to any source of capital.
- Reach out to your investors regularly: once a month, once a quarter, no less than once every six months. Ask if they have questions for you and give them an update on what’s going on.
- Be flexible!
As with accelerator programs evaluating potential companies, angel investors ask the following when considering an investment:
- Is your market big enough for you to make millions?
- Do they believe in the founders?
- Are you capable of navigating all kinds of obstacles?
- Do you have tenacity?
- Are you a problem solver?
- Will you be successful with execution?
Once you’ve decided how you’re going to raise capital…
Remember your investors are watching how well you manage the process of raising capital. It’s an indicator of how well you are able to execute your plans and ideas. Follow-up is key. Be sure to think through your fundraising strategy before you need money and before you’re running on stress. Lots of people will want to help your company succeed – know your facts so you can answer their questions. Think through everything. Do your proforma analysis. Create a term sheet. Keep momentum high.
And avoid common pitfalls during your first fundraise by getting the right legal advice. A good lawyer will offer you a deferred payment plan. Be sure they have experience working closely with start-ups. There are plenty of highly recommended Colorado-based attorneys . Incorporate your business correctly. Distribute equity correctly amongst founders. If a lawyer isn’t charging you at least $300/hour, it might be time to find another one.
By Catherine Compitello. Catherine is an alternative investment marketing specialist turned entrepreneur. She founded The Farm Above, a sustainable rooftop farming business. New to Boulder from Wall St., she is excited to collaborate with other impact entrepreneurs in the community.
Some helpful resources
Colorado-focused angel group. Offer events and educational resources to both entrepreneurs and angel investors.
A non-profit connecting investors, service providers, and entrepreneurs. Offer regular classes and resources, including early stage valuation, term sheets, pitching guidance and pitching events.