Understanding the basics of fundraising for early-stage startups

Early-stage startups are businesses focused on product development, building a customer base, and creating defensible value in the market. These companies might have a brilliant idea, a dedicated team, advisors, and supporters. They could even generate revenues to some extent. But to get the startup off the ground, capital is essential.

Fundraising for startups is not a one-off thing. A startup needs subsequent rounds of funding, and the funds can have multiple sources. The funding rounds are a series of investments that raise capital. The fundraising process for every startup is similar regardless of the industries they're operating in. As a startup becomes successful, each funding round serves as a stepping stone towards more significant growth.

The stages of fundraising and startup growth

Pre-seed and seed: Funding rounds begin with an initial pre-seed and seed round. The pre-seed funding stage usually refers to when the startup is trying to get its idea off the ground. Pre-seed funding can initially come from "bootstrapping" – where the founder invests their own money into the business. Funders of this round can also be the founders' close friends and family members. The pre-seed is followed by a seed funding round.

In the seed funding round, the funds typically come from angel investors and early-stage venture capital firms – who invest in exchange for stakes at the company. Angels give capital to startups at very early stages – when the company might not even have revenue, traction, or a minimum viable product (MVP). The seed funding from angel investors helps the startup finance its first steps. A startup typically tries to develop its product in this stage. Funds can be raised from multiple angel investors, and the seed funding amount can range from anywhere between $10,000 to $2 million. (That's around BDT 10 lacs BDT to BDT 17 crores).

Series A: Startups with an actual and profitable business model will raise funds on this round for long-term growth. Investors, especially VCs will look for a higher IRR (Internal rate of return) and startups need to have a viable strategy to raise funds from them. The investment amount on this round can range from $2 million to $15 million.

Series B: This round indicates the growth of the startup. A startup is expanding and has an established customer base growing steadily in this stage. The funds raised from this round helps startups transition into well-established companies. Series B can generate from $15 million to $25 million, but the investment can also surpass that amount.

Series A and Series B rounds range on average between $1M–$30M.

Series C and D: Startups continue to fundraise in round C and/or D with further expansion plans at a higher level. These startups can have a value of at least $100 million and are highly successful businesses. In rounds C and D, startups want to create new products, acquire new companies and expand their reach through entering new markets. In such a case, they can raise more than $50 million. Investments in these rounds are no longer for early-stage startups – they are called late-stage funding.

Since this article isn't contextualized for the Bangladesh market specifically, it is good to note that the funding amount does not indicate the rounds. It depends on a lot of different factors. The investors and the stakeholders of companies raising funds in their late stages are typically ramping up for an exit.

A startup can exit in one of the three ways –– Acquisition: Another company buys the startup, including the shares of investors and founders. IPO: The company gets listed on the public stock exchange. Secondary Sale: A secondary sale is the sale by an existing stockholder of shares in a private company to a third party that does not occur in connection with an acquisition of the company.

The funding range in every round can vary depending on which market the company is operating in. For example, Series A funding amount in Bangladesh can differ from that of India's. It also depends significantly on which stage the company is in its life cycle. While $1 million can be seed money for one company, it can be post-seed for another.

Creating an investor pitch – the first step

Raising money through the funding rounds is dependent on the business pitch made to the investors. A compelling pitch deck about the business that touches all the essential aspects without taking much time from the investors helps smoothen the fundraising process. Before creating the pitch, founders should have a thorough understanding of their business model, products, and services. Knowing what sets the business apart from competitors and the industry is also a core requirement for a good pitch.

What makes a good pitch deck – the basics to start with

According to experts at Sketchdeck, a pitch deck should not be more than 10-12 slides. In a report published by Forbes, the companies that raised the most amount of capital in their early-stages amid a challenging financial environment had one thing in common--none of their pitch decks had more than 20 slides.

The most important slides are the problem and solution, business model, target market and market size, founder/team slide, and traction (if any).

Overstuffing the presentation must be avoided. It should concisely put together the business idea and specific details such as financial projections, future roadmap, etc.

Hristo Odiseev, CIO of Bertelsmann's rtv media group, says, "The average time an investor spends on your pitch deck is close to but under 4 minutes."

His statement's learning is that the slides should be skimmable while telling a brief story about its operations. Using statistics and charts over words, adhering to large fonts, and setting a slide limit can help founders deliver an effective presentation within this timeframe.

Knowing when to raise funds for early-stage startups

The right time to fundraise for early-stage startups depends on why the startup needs to raise money. Fundraising blindly without a plan can cause more harm than good for the company. Setting specific, measurable, and achievable goals that are time-bound is essential when crafting a fundraising strategy.

The money that a startup wants to raise should accomplish milestones for the company. These milestones can be grabbing a market share or figuring out a market opportunity. The timing of fundraising plays a big role in this as well.

Startups should raise money from a position of strength. A good indicator of strength for the startup would be when it has figured out what the market opportunity is, who the customer is, and if it has a product-market fit.

Moreover, founders should think out the fundraising funnel early on to not run out of money abruptly. They should efficiently reduce cash burn by carefully planning out the startup runway –– which is a crucial tool for budgeting, strategizing, forecasting and fundraising throughout the company's lifecycle.