The dominant narrative of business growth focuses on “unicorn” startups, helmed by eccentric-but-brilliant Silicon alley technocrats. Venture capital firms pour money into the promise of their businesses, convinced that it’ll someday be profitable and result in a lucrative exit or IPO.

Despite this common plot, the actual number of startups and small businesses that attain unicorn status is very, very small. It’s unlikely that as you build your business, you’ll get millions in funding right out of the gate. In fact, 77% of small businesses rely on personal savings for initial funds — and a third start with less than $5k.

Fundraising isn’t for the faint of heart. Whether you’re looking to follow a more traditional, venture-backed approach or want to explore other options, finding the right investors while growing your business can take years.

So how do you go about getting investors to get excited about your business, especially if you don’t quite fit that stereotypical founder mold? 

Know why you want funding in the first place

“I’m the female founder of a breastfeeding technology company based in the state of Maine. People aren’t pounding down my door offering me funding,” laughs Amy VanHaren, CEO and founder of Pumpspotting, a startup focused on removing barriers around breastfeeding and baby feeding in the workplace. “I started self-funded because I wanted to make sure there was a product-market fit and that the idea was resonating. It was risky, but seeing that success [with my own funding] felt so good.”

VanHaren began her business in 2016 with savings and tried alternative funding methods like starting a Kickstarter campaign, applying for grants and pitch competitions, and raising a friends and family round. She eventually closed her 1st pre-seed round of VC and angel funding for $1.5m in July 2021.

Startups can raise millions of dollars and still crash and burn — often because they take funding before they’re ready to execute their concept, or because they feel pressured to raise venture capital as a way to validate their ideas. For instance, 60% of companies that raise a pre-seed series fail to proceed to the next round, according to TechCrunch.

Rather than pursuing funding right out of the gate, VanHaren recommends thinking methodically about what the money will achieve, and why you need it. “Funding is most effective in helping you advance to the next milestone and should align with the growth stage that you’re at,” she says. “We didn’t take funding until we were really on a path of scale and growth, because we saw we were in a position with our business model that funding would unlock real impact on our community.”

Anna Ford, co-founder and CEO of online book club community Bookclubs, had a similar funding journey of using Kickstarter and friends and family, then landing a $1.5m pre-seed round in 2020. “Once I realized how large our weekly and monthly organic growth rate was, I knew that wow, if I had some resources to really develop the product, there’s a big opportunity here,” she says. “Don’t fundraise just for the glory or validation in the funding. Make sure that you’re using capital to answer a question or add more value, letting money follow the story instead of the other way around.”

Before you think about taking money from any source, make sure you’ve evaluated your business model and your own goals. Ask yourself:

  • Is my product-market fit solid?
  • What is our current operating budget?
  • What is the next growth milestone we want to hit, and what would it take to get there?
  • What will this funding achieve, specifically? (A new hire or team, product development resources, marketing and advertising, and so on)
  • How much funding do I need to achieve that goal?
  • Am I ready for external opinions to shape my business?

The different types of investors for startups

Before you set off in search of investors, you’ll want to think about the different types of funding you can use for your business. 

There’s no one “right” way to choose a type of funding — you may end up using all of these at some point in the lifetime of your business:

  • Bootstrapping: Self-funding your business through existing resources you already have, such as personal savings, your home or apartment, and your personal computer. This allows you to maintain complete control over the business and run a lean organization — but it can limit your growth or cause you to take shortcuts or hacks that make it difficult to scale later. This is also the most personally risky option, as it all comes down to your own cash.
  • Crowdfunding: Using a platform like Indiegogo, Crowdfunder, or Kickstarter to tap into a larger community of potential customers, with easier entry points for them to invest in your business (as low as $10 or $20, as opposed to millions). This gives you access to a new customer base and funding, but most platforms require you to raise the full goal amount to receive the money. Plus, it often means you’re on the hook for a gift or product in exchange for the investment.
  • Small business grants: As a small business, you’re eligible to apply for a range of federal, state, and nonprofit grants to finance your venture. While every grant has a different application process, they often come with some level of support, such as a residency, team of advisers, or access to spaces and equipment you wouldn’t otherwise be able to obtain. Unlike loans, these don’t need to be repaid.
  • Small business loans: You can also apply for a loan through your local banking institution. The US Small Business Administration, a federal agency dedicated to helping small businesses and startups, offers a variety of financial tools such as 504 loans and 7(a) loans, as well as short-term programs like covid relief. This process helps you get money when you need it, but unlike other types of funding, you’re expected to pay back your loan, potentially with interest.
  • Startup accelerators and pitch contests: Participating in a small business or industry accelerator program can provide access to funding, pitch contests, and a deep network of experts looking to give back to other entrepreneurs. While applying and participating in these programs can take a lot of time and energy, it’s a great way to build relationships, crystallize your strategy and product, and plug in to local resources and funding.
  • Friends and family: Similar to bootstrapping, a friends and family round is usually a small fundraising series built out of the founder’s personal network. This type of “pre-seed” round is designed to help get your business off the ground. Most of the time, this does not require you to offer equity or other stake in the company.
  • Angel investors: Angel investors are professional, accredited investors that are not necessarily associated with a larger company or fund. They invest their own money into your venture, and are often willing to take bigger risks on businesses they’re passionate about. Adding angel investors may require you to cede some element of control, such as giving them a role as an adviser or board member, or providing equity.
  • Venture capital: The most traditional source of startup funding is through venture capital firms, which have large pools of investor money and can provide significantly more cash than the other types on this list. These firms expect an equity stake in your company, plus influence on your business decisions. They may ask for participation on the board or executive leadership. 

How to find investors for a business

Finding investors takes a lot of work, especially for female and BIPOC founders. Getting a seat at the table is just as much about networking as it is about the quality of your product.

“It’s very much about relationships,” says VanHaren. “For us, we’re a femtech company focusing on the future of work, so for me to find angel investors or VCs, I’m looking on LinkedIn or Googling people and firms that are passionate champions of the type of work we’re doing in the space. You need to put yourself out there.”

Finding investors starts with expanding your network. “As we started to build relationships with angels and venture funds, we realized that everybody knows everybody in those circles, so you need to ask for those introductions,” says VanHaren. “It can also be geographically or through programs and groups, like female founder groups or boot camps, so you can be in a place where people are having those investor conversations.”

How to choose an investor

Then, it’s about matching those investors and funding types with where your business is in the growth cycle, and not taking on more than you need at a given time. “Some investors only want to invest in a moonshot,” says Ford. “I wanted to build our business in a methodical, step-by-step way, and so those investors generally aren’t a fit for me. Be OK with saying no if it’s not a fit.”

Once you’ve started those conversations, it’s important to make sure you choose investors that fit your business vision and values.

According to Ford, “You’re judging them just as much as they’re judging you in terms of what value they bring to what you’re building. As a female founder, I wanted gender equity on my cap table, and now that the team I was building was something that I could be proud of.”

It’s easy to get dazzled by the prospect of any kind of funding, but remember that many investors come with an expectation — a board seat, a decision-making role, a financial return. “I’ve had a number of moments talking with potential investors where I felt like they weren’t seeing the vision of where I wanted our business to go, or they had very strong opinions on our path, and it didn’t feel aligned,” says VanHaren. “You have to know if you take that money, they’re going to steer you in a certain place.”

Think of your investor discovery calls as discovery for both of you, not just a chance to run through your pitch deck. You want to ask them:

  • What types of communications do you have with the founders you invest in, and how often?
  • How do you help your founders beyond capital investments, and what does that look like?
  • Which of our growth milestones are you most excited about?
  • What has impressed you the most about some of the founders that you’ve worked with?
  • When things get tough in the business, how do you show up?

Fundraising is one of the most challenging elements of being a founder

Fundraising isn’t easy for any entrepreneur, regardless if they’re spinning up a pre-seed round or hitting their Series C or D. “There are times when you’ll have a lot of doubt about your path, but the thing to remember is that everyone goes through it, and it’s all part of the process,” says VanHaren. 

Remember why you’re doing what you’re doing, and what that funding will unlock. “I started this business as a personal project in 2015, and didn’t receive funding until 2020,” says Ford. “But now, we’re serving 275k readers with book clubs in over 70 countries in the world. It’s been a grueling way to do it, with a lot of my own personal investment and time, but it’s because I love this company and I love this community.”

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Originally published Apr 18, 2022 6:00:00 AM, updated April 18 2022

Topics:

Entrepreneurship