Raising Capital Guide

A lot has changed since we published our first capital-raising guide more than 10 years ago. The biggest difference is deal size. A decade ago, we capped seed money at around $1M and Series A at $10M. Now, the average Seed Round is more than $3.5M, and the average Series A capital raise is more than $15M.

However, while the average deal size has certainly gone up, venture funding has returned to more traditional levels and valuations since 2021’s record-breaking year. The dramatic shift is somewhat masked by the pockets of target technologies that are still experiencing very optimistic valuations (i.e., AI).

Even though the capital picture keeps changing, we think we still have the fundamentals right in this document. Our goal, as always, is to remove the mystery with a step-by-step guide to raising funds for your business, from bootstrapping to $20 million+.

Accessing capital from third parties can be mysterious to many companies seeking investment. You can remove the mystery by following sequential steps, whether you are personally bootstrapping your business or taking venture or private equity money.

Concept Company: $0 to $2 Million

Fundamentals of Raising Capital

There are a number of reasons why bootstrapping your first round of investment is recommended by us. Most importantly, you will be demonstrating disciplines and processes that will greatly aid you as you pursue the big money. Before you go on a hunt for dollars, here are some fundamentals to get right immediately.

Nice, Simple Structure

Be sure that from a legal entity structure you are set up as simply as possible. You want to attract equity investors based on your ideas and operational abilities; they can get spooked if you have an unusual legal structure or equity split. For example, maybe you’ve gone to a handful of friends and family and raised $100,000.

That’s not a problem. However, if you have 25 investors at $2,000 apiece, the red flags start to go up. Also, if you have employees, have you implemented a bona fide stock option plan, or are there just handshake agreements? An LLC structure is typically best. Remember: institutional investors won’t put money into an LLC – you must be a C Corp. However, it’s an easy, $1k procedure to change an LLC into a company. Simplify your structure and ownership as much as possible.

A decade ago, we capped seed money at around $1M and Series A at $10M. Now, the average Seed Round is more than $3.5M and the average Series A capital raise is more than $15M.

Narrow Market Focus

Most start-ups try to do too many things and wind up failing. It is especially important to maintain focus with limited capital and manage cash flow effectively. Pick your best opportunity and go deep into it. Once you’re a leader in that area, then you can expand. If you’re trying to build seven different tech applications at once, you’re headed for failure. Also, exploit a good market; don’t build a new one. Better to have a good technology application in a receptive market than a great piece of technology looking to find a market.

Think “Medicine” before “Candy”

Part of your narrow focus should be to solve a fundamental problem not addressed well in your market. Perhaps there’s an underserved or overlooked customer segment. Maybe there are painful inefficiencies no one can seem to solve. Much better to have a product that solves a problem than something that is really cool and sexy.

Constantly seek “IP”

If you don’t have a lot of customers or revenue, you can still be a draw with Intellectual Property. Think in terms of IP protection for whatever you are building. Remember, too: it is much harder to defend a proprietary process than a proprietary product. Your IP may be intriguing enough to attract investors, even without a substantive customer base, if you’re addressing a specific pain in an established industry. This can make your business an attractive investment opportunity.

Raising Capital: Less than $2M

We like raising money, and there are many ancillary benefits beyond the obvious access to new cash. Whether it’s a strategic lender, angel investor or venture capital, you will be getting both confirmation of your growth plans and new ways to take your company to the next level.

Angel investors and early-stage VCs used to dip deeper into start-ups. However, most want to see at least $1 million in annual recurring revenue (ARR), and a path to product/market fit.

With all that said; however, we typically recommend that up to the $500,000 – $2M level, owners try to raise the money on their own. Here are some recommendations for boot-strappers:

Raising venture money should not be a first option

Organic growth is always best. As you move toward market validation of your product or service – as well as later funding rounds – gaining traction in niches, winning new customers and creating commercial viability will be big considerations in attracting investors. However, if your scenario dictates that time to market and technology obsolescence are incredibly pressing issues, you may have to find capital quickly. Those instances are rare, though. Show you can gain some traction on your own.

Investors want to see owner skin in the game

Angels, VCs, banks and private equity firms will want to see owners have equity in their own company. Equity can be straight cash, money from friends and family or even “sweat equity” in the form of quitting a full-time job to pursue their dream. In short, they want to see commitment. Remember: friends and family is fine but keep it simple. A handful of friends and family contributing money is straightforward; however, a bunch of small contributors might spook institutional players. For example, 25 people contributing $5,000 a piece spells trouble.

Work in Concentric Circles

Seek money from your personal professional network first and then work in concentric circles of contacts to expand your reach. Approach your prospecting the same way LinkedIn builds connections.

Seed Investors: $2 Million to $8 Million

Typically, in this stage, an entrepreneur is seeking $2 million to $8 million, and – as a general rule — the entrepreneur or company should not surrender more than 25% of their ownership to obtain the capital.

We’re taking a look at four areas of focus in engaging with an angel investor or seed venture capital company. They are: Timeline, Commitment & Preparation; Capital Objectives & Uses; Generating Investor Interest; and Your Presentation.

Timeline, Commitment & Preparation

Prepare yourself for what’s involved in terms of timeline, and the work commitment needed by you. It is significant but the right partner can guide you through the process. Securing funding can happen quickly or it can take up to 6 months, which is often surprising and disappointing for companies.

The level of commitment needed from first-timers who are raising money is frequently underestimated. There is also a 10 or 12-step process to work through from establishing a fund raising team, developing your pitch, generating interest, first meetings, company visits, working through term sheets, the due diligence process and working through a successful closing.

It is, by necessity, time intensive. TechCXO has been through this process with clients scores of times, and while commitments to invest can happen quickly, the process behind that commitment remains fairly rigid.

Setting Capital Objectives & Uses

In the seed round, we know the capital sought is $2 million to $8 million. The key perspective for owners to have is, “This is the only money I’mever going to receive.” Many clients are excited by the capital infusion and look to do things that don’t acquire customers or build infrastructure, such as lease great-looking space, for example. Don’t make this mistake. Be prepared to answer in detail how capital will be used to access markets, win customers, and add capabilities. Your interagent or advisor, such as TechCXO will be able to coach you in developing assumptions that drive this conversation.

Generating Investor Interest

Your advisor is going to be a tremendous help in activating your funding search, generating interest and meetings, and building your syndicate. Your lead can also do the heavy lifting associated with preparing for due diligence, establishing the deal structure, and negotiating deal terms. They will need to know your business thoroughly and have a reputation and track record that helps draw an investor audience. However, even with all that work done by a third party, you, the entrepreneur will have to be the all-important person pitching investors on the business story, the revenue model, the strategy, and key success factors.

Preparation of your Presentation & Pitch

At the seed investment stage, you are selling a concept. This concept is that (1) Your tech product, service or application will effectively meet an unmet need or problem in the market, and (2) You and/or your team have unique knowledge to meet that need. We find that nearly 80% of investors’ willingness to invest in a company at the seed stage depends on the founder or founding team. They want to know if you or your management is capable of fast, successful growth and if you’ve done it before. We take clients through an extensive checklist of key issues to address from defining the market and if the team knows how to access it; barriers to entry; and exit strategy.

VC/Series A: $8 Million to $20 Million+

The Series A stage separates the girls from the women and the boys from the men. This tough trial is, after all, appropriately difficult as you’re typically asking for $2 million to $10 million from investors. You will also be offering up to (but not in excess of) 30% of your company.

Before you’re ready to ask for Series A money, we frequently refer to going through the “Trough Period”. You’re moving from a highly conceptual solution and niche market identification to real proof that people will buy your product and repeat going through your sales and fulfillment processes. This time is both exciting and frustrating for most companies. You’ve received some credit (and money) for your ideas, but in a 6-12 month period of proving your technology, you’ve likely spent a lot of money to add team members, work through sticky execution issues and understand intimately the pitfalls of what it will take to get your business scaled.

The pitch you will deliver in the Series A stage is most significantly different from earlier pitches in one way: proof points. Here are four guidelines to prep your case in Series A.

There are four fundamentals that you should pursue before chasing the big bucks.

Product / Service Validation

The chasm is wide between a Beta product in start-up and a market validated product with early customer traction. You don’t have to have all of the answers for becoming a commercially viable and scalable business but you do need to show a way across that gap and point to some success you’ve had in achieving it, even if that success is inconsistent. You will want to be fastidious about capturing your financials but also codifying your fulfillment processes.

Conversion / Competitive Insight / Revenue Predictability

Your sales and marketing processes are becoming more refined…or they should be. Start building conversion and retention metrics and real revenue forecasts into your business. You’ve already done work on pricing, competitors and market needs when you were describing your niche in earlier stages. Now, refine those insights based on experience. For example, are you changing pricing, using promotions, adding service contracts? Be ready to articulate the shifts you’ve seen from early assumptions to more proven experiences.

Reference Clients

You will need the credibility of pleased customers, even if it’s a handful or a couple of referenceable clients. Make sure your marketing is capturing case studies, video testimonials or other proof that you are not just winning new customers but retaining them.

The Road Ahead: Team, Processes and Capital Uses

The ubiquitous question remains, “What will you do with they money?” All of your answers should point to scaling and adoption. Systematically walk through how new capital will help you improve on points 1 and 2 through new team members, technology, customer acquisition and fulfillment. Your investors need to see the road to you scaling by winning and pleasing an exponential number of customers.

The Pitch

The capital raising process is part of a natural progression for a maturing company. It is in many ways a litmus test for your success as a going and growing business. The capital raising process forces you to really dig into your business and to articulate its differentiators, key messaging, pricing and customer insights, and future projections.

It may be the healthiest strategic marketing and sales endeavor you enter. Here are critical areas for you to work on at all stages of raising capital.

Create and Refine Your Pitch Focused on Two Areas

Your innovation is going to have to pass the “Sniff Test.” That is, does your concept or product make sense to people immediately, especially those people with no expertise in your market.

Focus on something that eases pain in a specific market and create your elevator pitch. Part two is to sell yourself as a credible CEO.

By some estimates, 80% of the decision criteria for early investors is betting on you as a horse that they want to ride and not necessarily betting on the race they want to be in.

Clear the Technology Hurdle

You’re going to have to demonstrate to prospects that your technology actually works. It doesn’t have to be a completed product but there must be a lab demo that it works.

We take clients through an extensive checklist of key issues to address from defining the market and if the team knows how to access it; barriers to entry; and exit strategy. The components of your pitch and presentation will include:

• Building your compelling story and “elevator speech”;

• Having a clear, concise executive summary;

• Viable investor presentation;

• A complete marketing/business plan with clear assumptions; and

• Clean financials of your business as it stands today.

Right Track or Wrong Track with Investors

Here’s reality: there are no second chances with prospective investors, and you need to be prepared to shift mid-pitch if you feel you’re not getting traction.Your interagent or lead, such as TechCXO, does a lot of heavy lifting in marketing you to investors, performs the majority of due diligence, establishes deal structures and prices and generally preps you in driving your success.

However, investors want to hear from the principal, particularly early-stage investors. You need to be attuned to the “watch-out” signals from investors.

No Questions

The worst thing is to pitch and hear the crickets chirping: no questions. If you get back blank stares or indifferent expressions, immediately ask directly for what issues they see in the business. Do not let up until some kind of conversation starts. You need to flesh out any open issues.

Track the Line of Questions

Questions that are not clarifying questions and sound more like objections will generally fall into five categories:

• Underwhelming Management – They don’t believe management is mature or capable enough
• Too Big a Leap – They are not buying that the leap can be made from start-up to a scaled business, e.g. it takes too long or there is no clear link to a broader market
• Business and Management Don’t Match – The business models’ success factors don’t match management’s capabilities, i.e. management team’s skills aren’t a fit
• Revenue Model – The revenue model is a stretch because too much capital or time is needed or
• Complicated Story – The business story is too complicated due to lack of focus, too many variables or a high education hurdle.

How well you manage these objections can determine if the conversation continues. After the meeting, here’s a quick check of items to determine if you are in the game with investors or out. You’re in if they:

• Ask to meet more of the management team
• Ask for customer lists and references
• Schedule an on-site visit
• They simply call you
• They send technical experts for more information
• Send a checklist or follow-up questions

If the silence is deafening, you may simply not be a fit for their portfolio. However, if no one is calling, re-evaluate and simplify your story, your market focus, the time to profit, management’s strengths and a nice, simple business structure.