Startup funding for a high growth business is acquired in multiple rounds throughout the business lifecycle. This funding cycle applies for most high growth businesses — including mobile, web, manufacturing and other tech industries, as well as consumer brands. This lifecycle is different for small businesses that only need enough funding to get the business off the ground.

High-growth startup funding is
typically split into three rounds:

• Family, Friends and Founder (FFF) capital
  – ranging from $25,000 to $1,000,000
• Seed Capital from Angel Investors
  – ranging from $250,000 to $1,000,000
• Series A and Series B capital from Venture Capitalists
  – ranging from $3,000,000 to $10,000,000

The most important principle of startup fundraising regardless of the targeted round of capital is:

Raise enough capital to achieve a set of milestones that will allow the company to attract the next round of investment.

Initial capital from friends, family, and founders (FFF) should be used to achieve the milestones that will attract seed or angel investors and the use of your seed or angel funding should be directed towards achieving the milestones that will attract Series A investors or venture capitalists.

Milestones Needed to Raise Seed
Capital From Angel Investors

You may have self-financed the initial startup costs and/or raised FFF capital without a business plan, but in order to attract seed investment from angel investors you will need a comprehensive plan. This should be complete with extensive market research and a detailed financial model. A major piece of the business plan will be your capitalization strategy demonstrating the milestone timeline discussed above as well as the effects of accomplished milestones on the company’s future valuation.

Depending on the complexity of your product you may or may not be able to complete a working prototype or beta version with your seed capital. If not, at the bare minimum you will need an interactive wireframe or home made prototype to demonstrate product features and functionality. You will also need proposals for the cost to develop the minimum viable product (the features that allow the product to be deployed).

Seed investors heavily weigh the importance of the startup team when evaluating an investment opportunity. The reason is simple, the company will face adversity, things will go wrong and the plan will change. With the right team in place, the company is more likely to overcome obstacles, fix the issues and adapt the plan. If you cannot afford to hire the individuals with key expertise, you may need to bring them on as co-founders with an equity stake or hire a part-time, interim individual or company. You can also bring these skillsets to the organization via a board of advisors. In any case, you should plan on having a team member, service provider, or advisor for every part of the business other than your area of expertise. For example, if you are a tech expert launching a mobile app, you will want a team member, service provider, or advisor fulfilling the roles of CEO, CFO, sales, and marketing. At this stage, it is fine for one person to fill several roles so long as they have the expertise to fill these gaps at their fingertips.

Be sure to budget a small amount ($2,500 — $5,000) of your startup capital to ensure that you legally setup your firm. Work with a lawyer to ensure that you are setting up the business according to what’s best, given your goals and capitalization strategy. It’s better to pay a little now and get it right rather than have to go through the costly and arduous transition down the road. There will be some additional legal fees to complete the paperwork to close the fundraising round.

If your business can secure any intellectual property rights now would be the time to do it. Common types of IP rights include copyright, trademarks, patents, design rights, and trade secrets.

While all of these milestones are vital to the success of raising seed capital, market validation is towards the top of the list. In your pitch to FFF investors you told them that there was a need for your product in the market. In your pitch to seed investors, it’s necessary to show investors that this need is real. If you were able to build your product or a working prototype or beta version, it’s time to get either paying customers or free users. Obtain customer feedback and demonstrate that your product is fulfilling a real market need.

Angels are well known in the entrepreneurial world as private investors that financially back startup companies. They are typically around 45 years old with an annual income of $90,000 and have experienced a high enough degree of business and/or entrepreneurial success that allows them to be deemed an accredited investor, meaning they have a net worth of at least $1M.

Unlike venture capitalists, angels are not professional investors that represent an outside company. Instead, they invest their own resources into the company. As a result, angels tend to give less money to entrepreneurial companies than VCs do and invest earlier in the startup lifecycle.

Angel investor groups are organizations made up of individual accredited angel investors brought together under the purpose of creating efficient financing presentations, pooling investment funds, and learning from one another. Angel groups saw a huge rise around the 1980s and 90s as the Internet’s influence grew and helped to establish networks of private investors. Because many individual angel investors are not listed in local directories, angel groups are an easier way for entrepreneurs to get their foot in the door with angel investments.

The amount of angel financing is rather large. According to Venture Research at the University of New Hampshire, 2008 saw angels invest $19.2 billion into the hands of new ventures. Collectively, angels typically invest no less than $125,000 and rarely more than $750,000 per startup. Each individual investor typically invests around $37,000 per startup.

Angels invest across industries as demonstrated in the sector breakdown below:

• Healthcare: 16%
• Software: 13%
• Retail: 12%
• Biotech: 11%
• Industrial/Energy: 8%
• Media: 7%
• Other High-Tech: 33%

Time Efficiency: For both entrepreneurs and angels, an established angel group can provide the most efficient way of finding an investment relationship. This is due to the fact that entrepreneurs can present their business plans to many angels at once. For example, an entrepreneur can present to roughly 50 potential investors at once – much more effective than 50 individual presentations. It also allows for angels to hear multiple presentations within a day and be able to measure their options against a broad spectrum of choices.

Pooled Investments: An average angel will invest $37,000 in a company. Because of each angel’s monetary limitations, individual angels often collaborate and pool their funds into group investments in order to increase the amount of investment into the startup at hand thereby increasing the power of the angels’ negotiation terms.

Due Diligence: A comprehensive background check of investment opportunities allows angels with expertise in areas such as finance, law or marketing, to assess the opportunities for the best potential for return on investment. By working together as an angel group to conduct due diligence, angels research and validate both financial and legal documents as well as marketing strategies presented by an entrepreneur.

Social Benefits: Both information flow and learning from one another are benefits of being involved in an angel group. These organizations often provide specific training services, group and committee meetings, as well as lectures and discussions that would broaden knowledge and enrich the investment experience for members. Finally, there is a social benefit to surrounding yourself with people of similar interests. Here, mentors can be found, business relationships jump-started, and friendships created.