Fundraising 101 – Overview
How to build a successful fundraising strategy & raise the capital you need
Finding funding is typically one of the most challenging parts of starting a new business. The startup world is competitive & saturated, so a great idea and a perfect pitch simply won’t be enough to get your company off the ground. You need a fantastic idea that is unique in your specific industry, a business and marketing plan and most importantly you need knowledge on fundraising mandates, how to raise capital and how to find investors. It is essential to understand that there is a strategy behind the fundraising.
This article provides a general overview of the importance of timing when it comes to raising capital, the differences in fundraising rounds, funding mandates and the various investment sources that are available.
When to start fundraising & why timing is so important
There are many misconceptions about raising capital, and one of the largest is the length of time it takes to complete a funding round. It is very often underestimated and therefore miscalculated in terms of resources and commitment. Unfortunately, it is very rare for a startup to land the first investor they come across after going to market.
Timing is essential – you need to nurture potential investor relationships right from the start.
Mandates & preferences
In the world of startups, understanding mandates is vital when it comes to creating a list of potential investors. A mandate governs the allocation of funds for a specific purpose or style of investment. Understanding mandates is essential when you are looking to raise funds for your startup. In venture capital (VC) there are 3 general factors that govern mandates – region, sector and stage. Although other types of investors such as angels don’t have specific mandates, they do have key preferences and generally follow the same principle of investing in what they know.
On the floww platform, mandates for funds are highlighted on your profile. This makes it easier for investors to determine whether you are a good fit for their portfolio. The platform also allows you to search through 2000 funding partners. We have compiled everything you need to know about mandates in this article.
Types of investors – Angels, Accelerators/Incubators and VCs
There are many different types of investors for funding startups. Some are specialised and only invest in certain stages and funding rounds. As your startup grows, different sources of capital will have different advantages. As a startup founder or CEO, you should have a clear idea about the investment sources available to you. In essence, there are 3 main types – professionals (such as venture capitalist firms), individuals (such as angel investors) and accelerator/incubator programmes.
Depending on the stage & scale of your business, different funding sources will bring you varying amounts of success.
Fundraising stages and where to put yourself
Funding rounds or stages are broken down into different categories. Although these categories are constantly changing as the industry evolves, they are generally classified as pre-seed, seed, growth (series A onwards) and IPO. This is where institutional investor mandates come into play.
Is raising capital a numbers game?
Funding is most definitely a numbers game. Many founders lose confidence in the earliest parts of the process rather than accept that their startup is just not a fit for everybody. In essence, raising money is a sale and selling requires persistence and follow up.
Successfully raising capital is a result of strategic positioning, targeting, mandates and timing. Without a capable and dynamic management team experienced in business leadership, the best science or technology in the world will not be enough to convince investors.
Institutional investors are more likely to invest in companies with management teams that have prior success and know how to bring a reasonable rate of return within a defined timeframe. If raising capital is the next goal for your startup’s growth, then you need to accept that you might need a CEO or CFO to effectively communicate your value proposition. To be successful in raising institutional capital requires a professional strategy. The smartest founders have a strategy for their fundraising and build a plan which they execute with discipline. They know who their targets are, which investor best suits their company and vision and they make sure that they have enough names in their pipeline. Don’t forget – the floww platform allows you to search through 2000 funding partners so that you can find your perfect investment match.
Accepting funding – a bird in the hand is worth 2 in the bush
There is a strategy behind accepting funding. This is directly related to the specific mandates of various funding sources such as VCs or angel investors. When money is raised for a fund, the money is raised from fund investors. These investors may be comprised of large single institutions, other funds, and groups of high-net-worth (HNW) individual investors who will put restrictions on how their money can be invested based on their preferences and in which sector they might specialise. Different sources will specialise in funding specific sectors or funding stages. They might exclusively lead in investment rounds, or they might exclusively co-lead. In VC, there are strict mandates that govern the stage, sector and country.
This is where the strategy of partial closes comes into play. A partial close refers to the scenario in which you receive a funding offer for only a portion of your proposed funding round. Partial closes don’t mean that you need to wait until the end of your funding round to accept a funding offer. Once you have received a decent amount of committed funding you can do a partial close to lock-in that money. It is important to understand that your overall funding round is not yet finished – you are effectively banking the offered amount while continuing with your efforts to raise the total targeted amount of funds.
For example, if you are looking to raise a total of £1mln but receive a committed offer of £200k it is advisable to take the committed amount while continuing your funding round in the hope that you will successfully raise the remaining £800k. If you do not accept a partial commitment when it is offered, you run the risks of running out of money before the close of your round or losing the initial committed amount as the investor may move on.