Tag Archives: Seed Capital

How Long Does It Take to Raise Capital?

How Long Does It Take to Raise Capital? from The Startup Garage

How Long Does It Take to Raise Capital?

Welcome to video Fridays
from The Start Up Garage

A place where Tyler Jensen, The Startup Garage’s founder, answers questions directly from viewers

Key Take Aways From Video:

1) The average time is somewhere between three to six months for both you Angel round and your Series A round.

2) It really breaks down into three major steps. There’s preparation is step one. Pitching and due diligence is step two. Negotiating and closing the deal is step 3.

3) Preparation, this can take anywhere from one to three months on average

4)Pitch your potential investment opportunity to them. If they’re interested they’ll move into due diligence, which means they want to find out a lot more information out about you and your business. This step two can take 1-3 months as well.

5) Negotiation and closing the deal. Getting all the terms down that you and the investor will agree upon into some legal documentation. This can be done anywhere from one week to one month.

Complete Transcript below:

Question= “How long does it take to raise capital?”

Tyler Jensen: That’s a great question, one that I get all the time. The answer is that it varies. The average time is somewhere between three to six months for both you Angel round and your Series A round. It really breaks down into three major steps. There’s preparation is step one. Pitching and due diligence is step two. Negotiating and closing the deal is step 3.

In step one preparation, this can take anywhere from one to three months on average. This is where you put together your business plan, your pitch deck, your capital strategy, and achieve any business milestones that investors are going to want to see before you raise capital.

Once that is all done you go into pitching and due diligence. This is where you identify the potential investors, contact them, and then pitch your potential investment opportunity to them. If they’re interested they’ll move into due diligence, which means they want to find out a lot more information out about you and your business. This step two can take 1-3 months as well.

And then if you get through that process and they’re still interested, then you move into negotiation and closing the deal. This si simply getting all the terms down that you and the investor will agree upon into some legal documentation. This can be done anywhere from one week to one month.

Whether you have a question about your business plan or you’d like to discuss our business plan writing services, feel free to contact us for a free consultation!

What Type of Funding is Best for My Company?

What type of funding is best for my company? From The Startup Garage

What Type of Funding is Best for My Company?

Welcome to video Fridays
from The Start Up Garage


A place where Tyler Jensen, The Startup Garage’s founder, answers questions directly from viewers

Key Take Aways From Video:

1) There are really three main sources of funding, and to determine which source is right for you, you need to know what stage your company is in and how much money you need.

2) Those 3 main sources for funding are:
– Friends, Family, and Founders
Angel Investors
– Venture Capitalists

3) Generally family, friends, and founders are the first one and they invest anywhere from $25,000-$250,000 and they do it right as the idea is getting started.

4) Angel investors typically invest $250,000 – $1,000,000 and they want to invest after you got a business plan going, a team, maybe you’ve got a prototype developed.
They want to see some traction with your business.

5) The last stage is a Venture Capitalist. It’s also called a Series A. Then you could have Series B, C, and so on.

Complete Transcript below:

Question= “What type of funding is best for my startup?”

Tyler Jensen: Yes, this is a very common question that we get all the time, and it can be totally overwhelming and there’s all this information out and it’s really hard to get through all the details of it, so I’m going to try and simplify it in the answer. There’s really three main sources of funding, and to determine which source is right for you, you need to know what stage your company is in and how much money you need. Those 3 main sources for funding are:

1. Friends, Family, and Founders

2. Angel Investors

3. Venture Capitalists

And they go in that order to determine your stage. Generally family, friends, and founders are the first one and they invest anywhere from $25,000-$250,000 and they do it right as the idea is getting started. The next one is angel investors and they typically invest $250,000 – $1,000,000 and they want to invest after you got a business plan going, a team, maybe you’ve got a prototype developed — They want to see some traction with your business. The last stage is a Venture Capitalist. It’s also called a Series A. Then you could have Series B, C, and so on. That comes along once you’ve taken that angel money and really gotten some customer traction and you’ve proved your model, you’ve proved your metrics, then the Venture Capitalists come in and that money’s really used to scale out, whether that be nationally or internationally it’s really for a large scale plan.

Nicole: If you have a question, feel free to post it below and we’ll see you next Friday.

Whether you have a question about your business plan or you’d like to discuss our business plan writing services, feel free to contact us for a free consultation!

Free eBook: Raising Capital From Friends, Family & Founders

Guide to Raising Capital from Family, Friends and Founders from The Startup Garage

Free eBook: Raising Capital From Friends, Family & Founders

Download the Capital Raising Guide for startups. This overviews best practices for raising money from the first people you go to — your family, friends & founders.

Dealing with money in personal relationships can get a bit tricky. Raising Capital From Friends, Family & Founders will cover fundamental concepts, legal issues and material you’ll need. It will help prepare you for the difficult conversations and in some cases enable you to avoid them altogether.

 

Business Plan Basics

The first installment of The Startup Toolkit Series from The Startup Garage is Business Plan Basics.
Business Plan Basics covers the fundamentals for creating an effective business plan.

How to Allocate Friends and Family Capital

Allocate Friends and Family Funding with The Startup Garage

How to Allocate Friends and Family Capital

The most important principle of startup fundraising that every entrepreneur needs to know is: raise enough capital to achieve a set of milestones that will allow the company to attract the next round of investment. The use of your initial friends, family, and founders (FFF) capital should be directed towards achieving the milestones that will attract seed investors (likewise, the use of your seed funding should be directed towards achieving the milestones that will attract Series A investors). Below are the milestones that you will need to achieve in order to attract seed investors and therefore the milestones that you should invest your FFF capital.
 

Business Plan

You may have gotten through your FFF round without a business plan, but in order to attract seed investors you will need a comprehensive plan 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.
 

Product

A fair amount of your FFF funding will likely go towards product development. Depending on the complexity of your product you may or may not be able to complete a working prototype or beta version with your FFF capital. If not, at the bare minimum you will need an interactable wireframe mockup that demonstrates the product. You will also need proposals for the cost to develop the minimum viable product (the features that allow the product to be deployed).
 

Founding Team, Key Hires, Advisory Board

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. But, if the right team is in place the company can overcome the adversity, 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 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 following roles 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.
 

Legal

Be sure to budget a small amount ($2,500 – $5,000) of your FFF 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 transition down the road.
 

Intellectual property

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.
 

Market Validation

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, you will need to show investors this need. If you were able to build your product or a working prototype / beta version of your product it’s time to either get either paying customers or free users. Obtain customer feedback and demonstrate that your product is fulfilling a real market need.

Milestones That Friends, Family, and Founders Care About Before Investing

Seed Stage Milestones from The Startup Garage

Milestones That Friends, Family, and Founders Care About Before Investing

The most important principle of startup fundraising that every entrepreneur needs to know is: raise enough capital to achieve a set of milestones that will allow the company to attract the next round of investment. As a startup with zero to very low revenue, your friends, family, and cofounders do not expect you to have achieved very many major milestones. Nonetheless, there are a few key milestones that you will need to achieve in order to get them to sign over the check.
 

Business Plan

Ideally, you will have a business plan with complete market research and a financial model. You will need demonstrate the product, its advantages, who the market is, how the business will run, capital requirements, and financials demonstrating the financial model. If your product is not developed, you will need some sort of mockup.
 

Personal Investment

Investors at any stage like to see that you have committed personal funds in addition to sweat equity. First, if you aren’t willing to assume any of the risk, neither will investors. Additionally, by putting some skin in the game you are showing your commitment to the company.
 

Capital and Milestone Timeline

Part of your pitch documentation needs to be centered on your capitalization strategy. You will need to reverse engineer a timeline of capital infusions based on the key milestones that you will achieve with each round of capital. You will want to demonstrate this timeline and the strategy behind it as well as the effects of accomplished milestones on the company’s future valuation.
 

Market Validation

You likely will not be in a position to achieve the ideal form of market validation: paying customers. However, you may be able to secure letters of intent, customer surveys, or even customer endorsements based on mockups that you have shown them. Market validation can also come in the form of successful companies selling similar products. If none of this is possible, you will want to convincingly demonstrate that there is a real need for the product in the market.
 

Prior Success

The best milestone that you can achieve to raise your chances of obtaining friends, family, and founder funding is prior success. Ideally, you will want to demonstrate prior startup success as well as prior success with raising capital. If you are a first time entrepreneur you can demonstrate prior career success and entrepreneurial skillsets.
 

Want To Learn More?

ebook-capital-raising-from-fff

Download our free Raising Capital From Friends, Family & Founders eBook.

This book overviews best practices for raising money from the first people you go to — your family, friends & founders. Dealing with money in personal relationships can get a bit tricky. This guide will cover fundamental concepts, legal issues and material you’ll need. It will help prepare you for the difficult conversations and in some cases enable you to avoid them altogether.

The JOBS Act Negative Impact on Friends and Family Funding

Seed Funding and the JOBS Act from The Startup Garage

The JOBS Act Negative Impact on Friends and Family Funding

2012’s Jumpstart our Business Startups Act, known as the JOBS act, went into effect last month encouraging entrepreneurs and exciting the startup community. This act intends to increase jobs by making it easier for businesses to raise money to grow and expand their operations. One provision of the bill – the ending of the ban on “general solicitation” – can be seen as a breakthrough, but in some ways, it is actually restricting funding sources for new companies.

Many entrepreneurs and small companies first turn to their family and friends for donations and support when launching a business. It is also a smart way to get feedback from people you trust and a great starting point before you approach investors on a larger scale. This JOBS act provision makes it so that once a startup approaches accredited investors (based on $200,000 annual income or more, or $1 million net worth excluding a personal residence) the family-and-friend funding source is then banned.

The entrepreneur can still approach family and friends, it just needs to be at a much earlier stage. Once emails or online posts sound like fundraising campaigns, it becomes general solicitation. The two can’t occur concurrently. Another uncomfortable position is qualifying if your friends and family are actually “accredited investors.” This requires 3rd party verification from a combination of IRS forms, bank statements, consumer reports and written confirmation from brokers, attorneys or CPAs. Investors at a friend and family level may be unwilling to supply such personal information. Legal experts still consider this a grey area and advise founders to limit the paper trail of funding discussions with friends and family. Based on recent national security and NSA headlines, it would be safe to steer clear of this topic in any online communications.


Want To Learn More?

ebook-capital-raising-from-fff

Download our free Raising Capital From Friends, Family & Founders eBook.

This book overviews best practices for raising money from the first people you go to — your family, friends & founders. Dealing with money in personal relationships can get a bit tricky. This guide will cover fundamental concepts, legal issues and material you’ll need. It will help prepare you for the difficult conversations and in some cases enable you to avoid them altogether.

Raising Startup Capital Through Convertible Debt Financing

Convertible Debt Financing Capital from The Startup Garage

Raising Startup Capital Through Convertible Debt Financing

Most startup founders do not have enough capital to launch their companies and need to raise money at some point. The first milestone in a new startup’s financing is called ‘Seed Capital’ which refers to the initial investment raised by the founders from their friends and family, or commonly referred to as FFF (Friends, Family and Founders), who mostly use their personal assets. It is used to cover initial expenses until the company is able to attract the attention of venture capitalists. FFF investing is not a short-term play and mostly investors do not get a return on their investment immediately. The return only happens when there is an exit via acquisition or an IPO.

 

Raising Angel Capital

Individual investors who provide financial funding to startups are called ‘Angel Investors.’ Angel investors may invest individually or as part of an angel group, which are usually local organizations made up of Accredited Investors*. Some well-known Silicon Valley angel groups are Band of Angels, Sandhill Angels, TIE angels and others.
Per SEC rules “accredited investors” need to meet one of the following criteria:

1. Have an annual income of $200,000 or more per year for past two years (if married, $300,000 jointly with spouse) with a reasonable expectation of the same income level in the current year or

2. Have $1,000,000 in assets excluding the value of their primary residence.

*The above definition of accredited investors is being currently reviewed by the SEC in terms of current financial thresholds of income and net worth.

Convertible Debt Financing

Since investment in a startup is risky and most people are reluctant to contribute funds, startup entrepreneurs can use different ways to make funding from FFF look less risky. Among the most common methods of funding used by startups when raising seed capital is “Convertible Debt Financing.” “Convertible Debt” is a loan, which is automatically converted to equity at maturity or upon the closing of a round of financing. Convertible debt must have interest rates at the Applicable Federal Rates (AFR) published by the IRS monthly at AFR Rates. Bridge notes/loans are an example of convertible debt. Convertible debt provides startups with a relatively easy way to procure financing. Various terms such as price cap, discount, conversion to equity, etc., can be incorporated in the agreement at the time of financing.

Pros and Cons of Convertible Debt

Pros of convertible debt:
• Startups have to pay simple interest and not compound interest.
Cons of convertible debt:
• On maturity both accrued interest and principal are due.If maturity date is reached and the startup is unable to secure a round of financing, note holders can force the startup into bankruptcy.
• With many investors and many notes with different maturity dates in a seed or a financing round, calculating interest payments can be time consuming and complicated.
Example: An angel investor contributes $300,000 convertible note to a startup. The terms of the note are 10% discount and an automatic conversion after a financing of $1,000,000. (Note: The discount is appropriate as it is a reward for early investors to invest in a startup, which has zero or little funding). Let us assume there was a financing of $1.5m and the share price is $1 for the current round of funding.
While others get share(s) for $1, the angel investor gets it for $.90 ($1 * 90%) since there is a 10% discount. Shares received by angel investor for $300,000 investment = $300,000/$0.90 = 333,333 shares.
Return on investment = ($333,333 – $300,000)/$300,000 = 11%.

In addition to convertible debt, other methods can be used to pay back FFF such as:
1) Fixed repayment schedules tied to company’s future cash flow(s)
2) Giving equity in the company
3) Giving non-voting stock

NOTE: Angel investors are typically allocated common stock, the same class of stock as owned by founders, as opposed to preferred stocks, which are offered to VCs.

Arushi Bhandari, CPAAbout The Author

Arushi Bhandari, CPA, MBA blogs regularly at www.startuptaxaccounting.com. She recently published an ebook with insights about the impact of JOBS Act & Dodd Frank Act on startup funding, terms like angel, accredited investors, venture capitalists, stock options, Restricted Stock, RSUs. It gives in depth examples & templates explaining documents like Term Sheet, Cap Table, Convertible Securities plus the importance of 83(b) filing.

 

Links to Download Arushi’s eBook
Apple iBook: STARTUP Financing, Equity and Tax
Kindle edition STARTUP Financing, Equity and Tax

Startup Funding Preparation: Approaching Friends and Family

Seed Funding Preparation from The Startup Garage

Startup Funding Preparation: Approaching Friends and Family

Starting any business will require some initial capital, even if only to register the business. Most startups will have additional expenses to develop the product or service, acquire a physical location, pay employees, market the business, etc. Unfortunately, angel investors and venture capitalists are rarely interested in funding a company at this stage.  There are many reasons why they don’t fund companies  early on, one of which is because the amount of capital that a company needs at this stage typically ranges between $15,000 to $40,000, much less than what these investors want to invest.
 

Startup Funding Options

This leaves startups with two options, obtain a loan or get funding from friends, family, and/or founders. Obtaining a loan can be difficult as the business does not have any assets.  Not everyone wants or is eligible to obtain a business credit card.  Friends and family are often a good alternative for entrepreneurs in this stage and their funding can come in the form of a loan or in exchange for equity in the business.  Lastly, many entrepreneurs seek out a co-founder who can come on board to finance the business’ initial expenses and bring on expertise that the original founder may lack.  In any case, an entrepreneur will need to prepare some tools to help them pitch their idea to their friends, family and/or potential founder.
 

Startup Funding Business Plan and Pitch Materials

Before you begin asking friends and family for a loan, it is imperative that you have put in the time necessary to write a business plan. Even when a business plan is not completely necessary to receive a loan from your friends and family, we believe it is a moral obligation to go through the business planning process in order to protect the investors’ money.  At the minimum, you will need some form of documentation to help pitch the idea, whether in the form of a written document or a presentation.  Your documentation should clearly portray your product and/or service and it should include two main points: 1) what problem in the market does the product/service solve; and 2) why does the product/service solve it better than the competition. It may be helpful to examine who the competition is, their pricing, their main features, etc. You will want to identify your target market, state why this market is attractive, and ideally, quantify the size of the target market. You will also want to demonstrate your sales and marketing strategies for gaining your target market’s business. Next, you want to demonstrate who will run the business and how the business will be run. You should also be prepared to provide some simple financial projections. These should include projected revenue, the cost of your product/service, operating expenses, and profit. You should show how the business will grow overtime and demonstrate the drivers of that growth (i.e. hiring a sales rep, growing the marketing budget, etc). You can wrap up your presentation by showing how much capital you need to raise and what it will be spent on. Lastly, you may want to develop a contract outlining the terms of the agreement or at least be prepared with some ideas of potential terms that you would like to discuss.

Want To Learn More?

ebook-capital-raising-from-fff

Download our free Raising Capital From Friends, Family & Founders eBook.

This book overviews best practices for raising money from the first people you go to — your family, friends & founders. Dealing with money in personal relationships can get a bit tricky. This guide will cover fundamental concepts, legal issues and material you’ll need. It will help prepare you for the difficult conversations and in some cases enable you to avoid them altogether.

Drawbacks of Startup Funding From Friends and Family

Friends and Family Drawbacks from The Startup Garage

Drawbacks of Startup Funding From Friends and Family

Part 2 of the two-part series considers the potential drawbacks of raising startup funding from friends and family. Part 1 detailed the benefits. Most of the drawbacks relate to interpersonal issues that can occur. It is important to take the business relationship seriously. Be transparent about the risks, lay out the business plan for the money they provide, and get everything in writing. If you can invest your own personal finances first, friends and family will be more willing to match your contribution.

Pressure

It takes a special pair of people to not let money get in the way of their relationship, and there is no exception when it comes to borrowing for business. There is always a risk of losing longtime friends or straining family relationships if your startup fails (which 90% of tech startups do) and you are unable to pay back the money loaned to you. Each party should go into the deal professionally and be aware of the potential risks involved with the investment. Make sure the investor is financially secure and understands that they potentially may not see the money again.

Benefits Beyond Funding

Friends and family usually bring nothing more to the table as an investor besides the initial capital.
Investors can give you business advice whereas family and friends may not be able to. Investors can give guidance along with money since they have experience working with startups.

Lack of Clarity, Meddling, Whose In Charge?

Often friends and family do not realize how risky startups can be. They want to support you, but sometimes do so because they expect to make a lot of money from your business. It is important to extremely formal and ask your business attorney to draw up documents on what your friends and family should expect to get out of this investment, as well as all the loan details.

Friends and family frequently have an extremely limited ability to evaluate the potential of your business, though they tend to give advice because of their monetary stake in the company.
With these types of loans it is possible that the friend or family member may feel that they have a right to make business decisions and put their two cents in. If it becomes an issue, you have to remind them that the loan did not buy them a stake in the company and that you will be in charge of the daily business operations

No Credit Reporting

If you get a loan from a family member or friend, it is not reported to the credit bureau. Even if you paid your loan back as agreed upon, your credit score will remain the same, making it just as difficult to get a loan from the bank.

Want To Learn More?

ebook-capital-raising-from-fff

Download our free Raising Capital From Friends, Family & Founders eBook.

This book overviews best practices for raising money from the first people you go to — your family, friends & founders. Dealing with money in personal relationships can get a bit tricky. This guide will cover fundamental concepts, legal issues and material you’ll need. It will help prepare you for the difficult conversations and in some cases enable you to avoid them altogether.

Benefits of Startup Funding from Friends and Family

Benefits of Friends and Family Funding from The Startup Garage

Benefits of Startup Funding from Friends and Family

During the early stages of a business, the founding team should discuss the startup’s funding strategy. Based on cost and revenue predictions, long-term funding needs can be projected. Mobile apps must spend $30,000/year in marketing to be a top earner. SaaS business models are unprofitable for the first 12-24 months of a given customer’s life.  If initial startup costs are low for a first-time entrepreneur, friends and family financing should be considered. Part 1 of this two-part series explores the benefits of raising money from friends and family.

Funding is usually obtainable quickly due to your existing relationship.

Your friends and family already know you, so they can easily trust and have faith in your business venture. Investors want to get to know you before investing, and it can usually take a few months before you see any money.  Another advantage is you do not have to go through the steps of applying for a bank loan, which could take weeks for approval. The loan process is simplified when asking someone you know. Typically you will receive the money once they say yes, but be sure to make things official by signing a promissory agreement.

If they can trust you, then an investor is more likely to trust you as well.

Family and friends funding is only the first round of funding for your company. Investors are more inclined to give funding in the next couple rounds if they see that the people closest to you trust you and are willing to invest in your idea.

Lower interest Rates

A huge and important advantage of borrowing money from friends and family is that it is very unlikely they will demand a high interest rate on a business loan. Of course, it depends on the relationship and the situation, but it is possible your family member may offer you the money with no interest rate at all. This gives you more money and allows you to focus on developing your business, especially since most lenders are hesitant to lend money to startup companies without a proven background and reputation. If these lenders do decide to loan you the money, interest rates can be very high. As with all business deals, make sure to put the deal in writing and make sure every party understands and agrees to the terms before signing the paperwork.

The investment terms are usually more flexible and potential exists for numerous equity or pay back methods.

It is important for all business loans, even those financed by family members, to be properly structured especially when it comes to the repayment terms. Family members may be more flexible and arrange more favorable repayment terms, whereas other lenders normally will not be. As stated before, make sure the terms are written down and understood to avoid any misunderstandings and disputes down the road.

They can give you the extra push that you need.

Knowing that your loved ones have invested in you, you may be motivated to do more than what is expected of you to be successful.  Your family and friends will also most likely be more forgiving than other investors during your business ups and downs when it comes to repayment and

 Want To Learn More?

ebook-capital-raising-from-fff

Download our free Raising Capital From Friends, Family & Founders eBook.

This book overviews best practices for raising money from the first people you go to — your family, friends & founders. Dealing with money in personal relationships can get a bit tricky. This guide will cover fundamental concepts, legal issues and material you’ll need. It will help prepare you for the difficult conversations and in some cases enable you to avoid them altogether.