A Guide to Obtaining Startup Investment
How to accelerate your business at the right time with the right partners.
In the last few weeks Lithios has met with a variety of entrepreneurs looking to partner with us to build and improve their core software products. As we work with traditional enterprise and growth startups alike, we do our best to accommodate the unique needs of different businesses. We recognize that small business founders often times are in the greatest need of technology but rarely have the resources they require to build the features and functionality needed to grow more quickly. Today we would like to provide a brief outline for how growth-minded founders can consider varied funding sources and the timing and resources that come with each.
Let’s start with a brief introduction to the varying investment rounds. The type of funding that companies raise is often dependent on their revenue, size, and trajectory. Many factors can moderate what stage a company is in. A simple software company may raise seed funding after having quite a bit of traction and revenue while a biotech company may raise seed money before any traction and revenue at all. The problems these two companies are looking to solve are very different and they have distinct markets and revenue potential. It is critical that a company seeks to align itself with other similar companies in its space to understand the varying milestones they need to obtain so that they can convince investors of the proven value of their solution. As there are many companies trying to solve problems, there are many independent investors across a variety of industries that are willing to contribute capital at different times in a company’s life cycle. These tiers can vary but are often classified in the following ways.
Tiers of Investment:
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1. Pre-Seed (Friends+Family, Incubators, Accelerators, Grants)
This is the earliest capital a company can receive after inception. This funding prepares companies for their seed capital fundraising. Typically Pre-Seed funding is < 150K.
2. Seed (Angels/Seed Funds)
This is the standard capital raised by companies with some market traction. This capital is traditionally raised by individual investors or small groups of investors. Typically Pre-Seed funding is < 1.5 million.
3. Series A and Beyond (Venture Capital)
This is later-stage growth capital after a company has traditionally been operating for a few years with a successful trajectory. This capital is most often raised from large venture capital firms who are primarily interested in a multiple financial return. Typically Venture Capital is > 1.5 million.
Early Stage Investments
Most very early stage companies raise initial funds from investors that believe in the team and the initial promise of a startup’s idea and less about the execution/traction of the business. As the company becomes more mature and continues to execute on its strategic roadmap this is when more sophisticated investors often join funding rounds. Within early stages of development incubators/accelerators are often a great fit for companies to get a little bit of capital while receiving the mentorship they need to better execute. In general, I think that it is critical for founders to seek the “smartest” money they possibly can obtain whether it is through an incubator/accelerator or whether it is through an angel/venture investment. It is critical to recognize that some investors may have more connections and helpful advice to give than others, especially if they have domain expertise from the same industry. Aligning your company with the right investors can help set it up for success in ways that capital never can. Building a network of customers, investors, and advisors is one of the most beneficial activities a founder can take.
As companies grow, obtain additional customers, and execute on their vision they will require larger amounts of capital to scale their operations and team. This is where seed funding, series A, and other forms of funding come into play. Within these rounds founders often times give up more control in their company in order to get the cash and connections they need to take it to the next level. Venture Capital funding (traditionally Series A and beyond) serves as dry powder to simply accelerate growth. VCs often make bigger investments 1.5m+ based on a growth formula that has been proven to work for the company. These investors care about the team and the traction but often care more about the financial multiple of their return so that they can repay their fund investors. At these rounds, it is always important for companies to consider the control/terms of the deal as they may be less founder friendly. After all, the majority of founders will no longer be with their company when it receives Venture Capital.
In conclusion, there are a variety of stages and mechanisms for founders to obtain the funding they need to fuel their growth. It is critical to find the right investors who can support your efforts outside of just providing capital. With the right funding and support, companies can build better products and provide solutions to market problems more quickly.
DeShawn Brown is the CEO of Lithios. He has a passion for developing intuitive product solutions for both startup and enterprise clients. In his free time he loves to weave sweetgrass baskets.