Did you know that about 70 percent of all startups don’t survive the first five years? The number might be shockingly significant, but very much real. Research by CB Insights pointed out that the main reasons for start-ups' failure include not finding the right product-market fit (42 percent) and the right funding (29 percent). In this article, we will focus on the latter, which can be avoided with proper planning and strategies.
Finding the right funding is a big struggle for most companies. As a start-up, you would want to tackle this challenge by first determining what type of funds and investors you need. These steps are crucial for building your funding strategy.
Let’s say you just started your company, a €50,000 investment is what you need to finish your product. Your generous uncle offers the money for 20 percent in equity of the company. Sounds amazing? Well, that depends on whether you need more investments in the future. Why? When future investors, especially Angels and Venture Capitalists, look at your cap table, they might not like what they see. This example represents one of many elements that investors consider when assessing your business. The factors may vary depending on the stage of your funding lifecycle you are in. What are these stages? What should you do in each stage?
Continue reading below to find out about these different stages or take the Equity Funding Quickscan (*in Dutch*) right now to discover what stage your company is in.
The start-up funding life-cycle
Every business is different from each other. However, in the beginning, we would recommend considering these six major stages in a start-up funding life-cycle.
• Idea Stage;
• Co-Founder Stage;
• FFF Stage;
• Seed Stage;
• Series A (and Series B);
Every funding stage comes with its challenges; here are our tips and tricks for each stage.
Funding stage 1: Idea Stage
You have a great idea but have not set up a company yet. You’re currently doing market research to find the right product-market fit. Is your concept as awesome as you think it is?
When: You have an idea.
Good to know: Make sure to do comprehensive market research.
Type of investors: You and your best self.
Funding stage 2: Co-Founder Stage
Your market research showed that you indeed do have a great idea that can solve a problem that potential customers face. However, you can’t turn your idea into a successful business without help. Time to look for a co-founder! He or she must be the one person that believes in the concept as much as you do, who is willing to put in time and money to get a first Beta version going.
When: You are ready to build the product or service.
Good to know:
- Find a co-founder who adds value to your team;
- Find a co-founder who believes in the idea as much as you do;
- Look into a ‘performance-based’ contract to test your co-founder;
- Find a third co-founder if the business idea is too big for two to handle.
Type of investors: You and your co-founder(s)
Funding stage 3: Friends, Family and Fools (FFF) Stage
At this stage of the funding life-cycle, your product or service is about to be ready, or you just finished it. However, your track record is still somewhat empty. To complete the product and attract your first customers, you need an investment under €100,000.
Angel investors aren’t interested yet, so you must raise money elsewhere. This stage is where your network comes in. That’s why this phase is called the ‘Friends, Family & Fools Stage.’
- You don’t have a minimum viable product yet;
- You don’t have customers and revenue;
- You need money to attract first customers or finish your product;
- You have revenue, but you’re not growing 10 percent a month.
Good to know:
- Don’t get too much cash in yet;
- Sell a maximum of 5 percent of the company;
- You’re asking people that you know for money, so be honest;
- Consider a convertible.
Type of investors: Friends, family, fools or early adopters.
Funding stage 4: Seed Stage
At this stage, you have a minimum viable product, and preferably your first customers. In other words, you have proven that there is a need for your product or service.
Your funding need is often between €200,000 and €500,000. This investment will help you past the upcoming 6-18 months. Keep in mind that your company needs to be evaluated if you want to raise direct equity. In this phase, it’s often hard to negotiate a valuation that both you and the investor agree on. For that reason, we advise you to look at a convertible.
- You have a minimum viable product;
- You make less than €30,000 monthly recurring revenue;
- Your revenue is growing with a minimum of 10 percent a month;
- You’re looking for an investment ranging from €200,000 to €500,000.
Good to know:
- Make sure you and your co-founder(s) still own at least 80 percent after this deal;
- Make sure to start on time;
- Focus on the right match;
- Avoid anti-dilution provision offers;
- Getting this investment can be time-consuming.
Type of investors:
- Angel investors;
- Incubators & Accelerators;
- Family offices;
- Equity crowdfunding;
- Smaller strategic investors.
Funding stage 5: Series A (&B)
The company is doing well and growing, maybe even too fast. To keep up with this growth and become a big(ger) player, you need growth funding. You might already make a profit, but this profit stays behind on your sales. Now is the moment you know that you’re ready for a serious investment of €1,000,000 to €20,000,000.
- The business makes more than €30,000 monthly recurring revenue;
- A pre-money valuation of more than €5,000,000;
- Your revenue is growing 100 percent a year;
- Minimum funding need is €1,000,000.
Good to know:
- Investors would want you and your co-founder(s) at least still own 60-70 percent of the company;
- Don’t focus on just one investment opportunity;
- Focus on the right match.
Type of investors:
- Venture capitalists;
- Strategic investors;
- Super angels.
Funding stage 6: Initial Public Offering (IPO)
The next and last phase would be an Initial Public Offering (IPO), meaning that your company goes public via an exchange market. However, keep in mind that an IPO isn’t a goal; it’s a way to raise capital. If you don’t want to go public, you might want to consider a series B or C, which is an “additional” series A.
When: After at least a Series A
Good to know:
- It’s a way to raise funds, not a goal;
- It takes up a lot of time;
- It takes a lot of time and money to keep your public offering;
- It gives investors an exit possibility.
How can you prepare for the funding life-cycle?
Okay! So, now that you know what the startup funding lifecycle looks like, you might have already located at which phase your company is. Good! So, let’s quickly focus on what you need to prepare for raising funds.
• A killing pitch deck;
• Realistic financial projections (preferably practical worst-case and best-case scenarios);
• A two-pager;
• A business idea in which you are confident.
Building a business is a complicated journey in which you can get confused with where you are standing. It is alright if you don’t see yourself in the stages above. At Symbid, we want to empower entrepreneurship by providing everyone who dares to be different with access to the required funding. Therefore, we developed a quick-scan for equity funding that helps identify your company stage and give advice based on your current position. All it takes is five minutes of answering a few questions. Don't hesitate to check out Equity Funding Quickscan (*Dutch only*)!