Raising Capital - Give Me Money…I Think.

While many entrepreneurs and startups are able to operate cash-flow positive companies that do not need any form of outside investment, that is not always the case. So while we understand that debt is commonly a starting point for many businesses, this Post will speak more to the entrepreneurs and startups that seek to raise capital through equity rather than debt. There are many methods to raising capital through equity, and this Post could be far more detailed regarding those instruments, the goal of this Post is to discuss the various stages of fundraising, and what each stage looks like rather than the specific equity tools that could be used. For a more detailed discussion, please reach out by email and we will be happy to discuss your options!

Pre-Seed Round

Pre-Seed fundraising often occurs prior to any institutional or “venture” investors. This “round” can obviously look drastically different depending on your company, product, or service. For this Post, we will discuss two investment types:

1. Founder Funding

   In our last post, we discussed Founder Shares. However, a Founder might want to increase their equity in the company through a later investment as well. This is a great option in the scenario that a founder has extra capital to contribute, but prefers that the equity be in a different form than already held Founder Shares.

2. Friends and Family

   A Friends and Family raise is quite common. While some of you may be thinking to yourself that you don’t have friends or family who like you this much, let’s think of this round as being quite vague. Simply put, this is a type of raise that doesn’t always include accredited investors. Each investor may contribute a relatively small amount in exchange for equity.

Seed Round

A Seed Round is often-times the first investment from sophisticated or accredited investors. While it doesn’t generally include venture capital funds, or at least not large funds, most investors in a Seed Round are not first time investors, and are contributing at least $25,000 in exchange for their equity stake.

1. Friends, Family, and Founders

   All of the above may be involved in a Seed Round. If their previous investment seems to be doing well and capital is available, it is quite common for early investors to tag along for the next round as well.

2. Angel Investors

   While you may have had “Angels” in your Pre-Seed Round, it’s very likely you will have Angels in your Seed Round. An Angel is an individual who generally contributes at least $25,000 to an investment. While there are Angel Funds that you may be familiar with, for now we will assume that an Angel is one (1) person.

3. Crowd Funding

   Crowd Funding has become far more prevalent in recent years. It is a great way to allow many small investors to contribute to a project but to do so as part of a larger “fund”. There are websites and apps that facilitate this action. Give the nascent nature of this method of fundraising, be sure to do your homework and work with an attorney who is familiar with the changing laws that accompany.

4. Venture Capital

   While a Seed Round does not tend to have involvement from major venture capital firms/funds, it is entirely possible that individual venture capitalists or “micro” venture capital firms/funds would get involved. Micro funds are becoming more and more common, and tend to be very regional, so depending on your location, there might be a great possibility for your company.

Series A

Up until now, you’ve been dealing mostly with friends, family, and individual investors, or at least smaller firms. But now that you’ve taken their money and built out a great working model, put a rockstar team in place, and often times simply need capital to scale, you’re going to need to get some institutional investment to reach your potential. Investors in a Series A will sometimes overlap with your current investors, but this is the stage that traditional venture capital funds tend to get involved.

1. Friends, Family, Founders

   Similar to your Seed Round, some of these investors may tag along depending on their financial position.

2. Angel Investors

   These are likely Angels who put forth or were capable of putting forth far greater than the previously mentioned $25,000 investment. Think very high net worth individuals most likely.

3. Crowdfunding

   This is doubtful, but with crowdfunding developments, anything is possible. However, it is more likely that traditional institutional investors will not want this component to a Series A Round.

4. Venture Capital

   This is the Round where venture capital firms tend to start buying up a lot of equity. Maybe some smaller funds that bought into your company early will tag along if they can, but many times, larger venture capital firms will seek to own a large stake in your company, which may make it impractical for earlier investors to participate in this round.

Series B – ?

We won’t spend a lot of time discussing Series B and beyond. Once a company reaches Series B, investors will likely be larger and larger venture capital firms. There are some firms that are thought of as “late stage venture capital” and B is likely where these investors would begin to enter. At this point, the company is continuing to scale, hiring experienced executives, and either trying to grow its market share by user or consumer growth or by acquiring competitors or complimentary companies. These goals often continue into later rounds if there are any, and can sometimes accommodate for expenses related to an IPO or similar placement.

While we could spend an entire post discussing some of these later rounds, strategic acquisitions, accelerator programs, and other items, we hope that this Post has been high-level informational, and that you have a better idea what various investment rounds look like from a company perspective. It is good to remember that each company and entrepreneur is different, and to remember that each round can look drastically different in reality than what you expect when you begin seeking capital. But if you have any questions along the way, Williams Law is here for you!

Tune in next time for our final installment of this Startup Series, where we will discuss acquisitions - because maybe another company just received Series C fundraising and hopes to purchase your baby to increase their market share!

-Trent Williams