Funding a Startup
By Azeem Khan
At one point every entrepreneur decides how to finance their startup, and each one has different demands so the route varies. With Supshot we’re at the point now where we’re looking to start fundraising so I’ve been researching the topic
First, you must decide how much you need to raise. Most startups go through several rounds of funding, which is completely normal so don’t just keep higher numbers in mind. For each round you want to take just enough money to get the company to the next step. Startups usually don’t get this step right, as many are underfunded, and some are overfunded. It would be helpful to founders to understand the funding process better for a host of reasons, but first they need to know where they can raise.
We should start by talking about the main sources of startup funding available.
Friends and Family
Many startups get their first sums of money from friends and family. Whether that number is a few thousand dollars, or if you happen to have that rich uncle is not that important. The main advantage of raising money from them is that they’re easy to find since you already know them. Remember there are definitely disadvantages too though. You’re mixing business and personal, which can be scary. Also, they are likely not nearly as connected as other funding sources like angels and venture firms. Finally, they might not be accredited investors, which could make things sticky later in the event of a buyout or Initial Public Offering.
To qualify as an accredited investor according to the Securities and Exchange Commission, a person must have over a million dollars in liquid assets or have an income that’s over $200,000 a year. You can legally complicate your life if any of your investors aren’t accredited so to keep any regulatory burdens as low as possible, try to make sure your investors are accredited.
Angel investors
These are just individual rich people who can provide capital for the startup in the form of some sort of ownership of your company. More and more these angels have recently begun forming angel groups, which allows them to pool their money for investment purposes, and to be able to provide advice to their portfolio companies. An angel who’s made money in the field you’re in is a great way to go because they understand your situation, and can be a great source of contacts and advice.
Never forget that contacts can end up being more valuable than money in startups. Having smart and influential people by your side that can vouch for you when you’re an early stage company is a great tool that shouldn’t be overlooked.
Angels tend to give more favorable terms than other lenders because they are investing in the person rather than focusing solely on the business. Their main goal is to see the company succeed, rather than getting the largest profit possible so there’s an incentive to work with them for this reason.
A great thing about angels is that they aren’t bound by some of the rules that Venture Capital firms are. Because an angel is using his/her own money there are much less restrictions to deal with.
The best way to find angels is personal introductions, but if that’s not feasible there are other ways. The most effective way I’ve found is to look at the portfolio of companies they’ve invested in, getting in touch with the executives at those companies, creating good relations with them, and then asking for an introduction to the angels themselves. This may seem like a ton of work, but if you’re not willing to put in the work to meet them, you’re not willing to put in the work to make your company succeed. At least that’s what they’re thinking, and I’ve had a bunch of angels express that same sentiment to me.
Venture Capital Firms
There are about 500 Venture Capital firms in the United States. Venture firms are companies that invest other people’s money, and invest very large sums of it. Their average investments land in the millions of dollars range, and because of this they aren’t in the life of a startup till much later. Their performance varies widely, they’re harder to get in touch with, tougher to pitch, and come with much more difficult terms of investment.
Because VCs are investing very large sums of money there will be a host of restrictions that come with that money. I won’t get into those because each term will vary greatly. It’s just something to keep in mind when reaching out to them.
A big change you’ll notice after working with VCs who give you serious funding is that you won’t have complete control over your company anymore. This makes sense. If someone is offering you millions of dollars that you truly need to make your company succeed, then it’s only obvious that you’ll have to offer something.
Just like the angels mentioned above, VCs will prefer to invest in companies through people they know. While this may not seem fair, it’s how things go.
What to know
The most important thing here is to build a good business. Many people tend to forget this while thinking about their revolutionary idea that’s going to change the world. Don’t get me wrong, I don’t think that investors are always people out to save the world by any means, but since you’re trying to get them to invest in you, give them a good reason to.
Sometimes even deals that look like they’re going to go through don’t so never relax until you have the check in hand. It’s always good to keep in mind that deals fall through, people back out last minute, and that it’s a long and laborious practice. Don’t let it discourage you though, and just keep working. When you work hard, things have a way of falling into place.
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Azeem graduated with a B.A in Biology(2010) and M.A in Medical Sciences(2012) from Boston University. After working at Pathogenica, a biotech startup, for a year here in Boston but left to pursue his own startup and take his company to the next level. He’s now working full-time on Supshot, an app that allows people to get paid for the photos and videos they take on their smartphones.