Fundraising Advice for Early-Stage Startups

We’ve all heard about the big venture success stories: companies like Uber, Facebook, and Airbnb took early-stage investments and used those investments to power explosive growth, dominating its industry and creating hundreds of millions of dollars in new wealth for investors. In the media, startup fundraising is glamorized and celebrated constantly – just look at the popularity of a T.V. show like Shark Tank, which has used the tension and high stakes of investment negotiations to enjoy a 14-season (and counting) run.

But there’s a downside to raising money. Depending on which statistics you trust, anywhere from 70% to 90% of startups fail. And while there are legal strategies investors can use to retain some portion of their original investment, it will likely be a fraction of the original amount. A failed venture can also lead to job losses, wasted resources, and in certain cases, personal liability from the owner.

We aren’t here to tell you whether you should or shouldn’t raise money for your business. But as a team of experienced marketing leaders who have helped all kinds of companies achieve growth goals, we can outline the factors you should be considering as you make the decision.

Should you raise money?

According to Paul Graham of Y Combinator, the main trait that defines a startup is the desire to grow quickly. “Everything else we associate with startups follows from growth,” he writes. And when you have a successful product that catches on with your market, the fastest path to growing as quickly as possible is an infusion of capital. By these standards, any startup that has been successful with its target market should look to raise money if they have the chance.

Of course, there are plenty of advocates on the other side of the argument who believe in the power of bootstrapping. Ryan Smith, the founder of the billion-dollar consulting firm Qualtrics and part-owner of the Utah Jazz, writes that “every startup should bootstrap” for three main reasons: it keeps you in a “scrappy” mindset that may teach you skills you didn’t even know you had, it attracts better talent, and lets you maintain control over your company. Combined with the pressure and responsibility that comes with taking outside funding, these factors can lead many entrepreneurs to avoid raising money.

Now that you know the main benefits and drawbacks of both approaches, you have to ponder them in the context of your own goals as a founder. A few things to think about:

• Personal goals – what kind of lifestyle do you want to lead? Is financial freedom the most important thing for you to have, or would you rather sacrifice to build a company that can prosper in its sector and helps as many people as possible? Every founder will have a slightly different ideal lifestyle, even if their broader goals are the same.
• Industry trajectory – try to predict the state of your startup’s industry in the next 5 to 10 years. For example, if you’re in a rapidly-growing sector with lots of prominent, well-established brands, it might be more necessary to raise funds to scale so that you can be competitive right away.
• Business preferences – this defines the structure of your company and your leadership within it. Are you the type of person who wants relatively unchecked control, or would you be okay being accountable to investors? On the other hand, do you mind the lean, conservative approach to spending required by bootstrapping that may temporarily slow your growth in exchange for maintaining long-term control of the company? The answer is likely somewhere in the middle, but you still must determine the exact location for your preferences.

Tips for fundraising

So you’ve decided that raising money will ultimately be a net positive that helps your startup more quickly realize its potential. Before you start cold-calling the closest venture firms to try and set a meeting, remember that raising funds is a skill in itself. Although there’s certainly salesmanship involved, in most cases it’s different than the skills required to manage and grow a startup

Here are our best tips:

Use your existing network

If you truly believe in the startup you’re running, the people you know best are likely the ones who have the most genuine exposure to that belief. In turn, they’ll be more likely to back you with an investment. Sure, not everyone you know will have the capital on hand to invest in a startup. But there are likely more people in your network than you’d think who have some degree of connection to investors willing to back you.

Even if you aren’t directly soliciting fundraising, it can be helpful to meet people like this for coffee or a meal and get advice on your pitch.

Tell a story

Even venture investors – who in many cases have trained themselves to put numbers and profits above all else – aren’t interested in just seeing cut-and-dry statistics about your company’s revenue, retention rate, churn, etc. You need to turn the ideation, founding and growth of your company into a story that excites investors and tantalizes them with an opportunity to be a part of the conclusion.

How do you go about turning your startup journey into a story you can communicate during a pitch meeting? One popular framework comes to us from Pixar, the studio behind some of the most successful animated movies in history. It has six parts:

1. Once upon a time… (explains the current situation)
2. Every day… (mentions an ongoing problem, goal, or event in that situation)
3. One day… (defines an event or concept that changes the status quo – often the founding of your business)
4. Because of that… (what happened as a result of that event?)
5. Because of that… (what happened next?)
6. Until finally… (states the resolution, or where things are in the process of finding one)

This is just one framework to use for making your startup’s founding and growth into a story. Remember, don’t just talk about your personal perspective on the company and what it’s done to date: you should also weave in elements that explain why the business can be successful with an investment.

Practice as much as possible

As we mentioned at the beginning of the section: fundraising is a skill in itself. Just because you are a successful founder and business owner doesn’t mean you’ll naturally be good at convincing investors of your company’s potential.

In his book Build, Tony Fadell, the former Apple engineer who helped pioneer the iPod and co-founded Nest, describes how enchanted people were with the salesmanship of CEO Steve Jobs. His keynote presentations – especially the launch of the first iPhone in 2007 – are still held as some of the best examples of persuasion and marketing in tech history.

But according to Fadell, there was a simple reason behind Jobs’ success: practice.

Steve didn’t just read a script for the presentation. He’d been telling a version of that same story every single day for months and months during development—to us, to his friends, to his family. He was constantly working on it, refining it.

Jobs never had to worry about being unfamiliar with his subject matter or slipping up on the details of what he was selling because he had spent so much time practicing. You should do the same – it’s okay to practice your speaking and presentation skills to anyone who will listen, but seeking feedback from experts with fundraising experience is more valuable than a dry run with a friend or family member.

Final thoughts on fundraising for early-stage startups

Don’t let anyone tell you that you absolutely should or shouldn’t raise funds for your company. A startup should be run the way founders and executives envision, and that doesn’t always mean getting involved with a venture firm for six or seven figures.

However, if you’ve spent time considering the factors we’ve discussed in this article and have come to the conclusion that you want to raise funds, it’s important to start developing and sharpening your pitch as soon as possible.

If you’re looking for help with developing a pitch, marketing your offering, or other critical startup strategies, our team at grwth.co is ready to help. Click here to schedule an introductory call and find out more.