Bridging the Gaps in Business

Owners should be familiar with various methods, such as:

- Equity financing: Raising capital by selling shares in the business.

- Debt financing: Borrowing funds that need to be repaid with interest (e.g., loans, bonds).

- Crowdfunding: Raising small amounts of money from a large number of people, usually via online platforms.

- Grants: For nonprofits or specific types of businesses, grants can provide non-repayable funds.

- Venture capital/Angel investors: Investors who provide capital in exchange for equity.

- Donations or Sponsorships: Common for nonprofits or community-oriented businesses.

- Bootstrapping: Using personal savings or revenue to fund business growth.

You should define your goals clearly: Are you raising money for a specific project, operational costs, or to scale your business? Understanding how much you need and why you need it helps shape your strategy. 

Equity fundraising involves selling ownership in your company in exchange for capital, while debt fundraising involves borrowing money (which must be repaid, often with interest). Each has its pros and cons, and you should weigh the impact on your ownership and financial obligations. 

Consider who is most likely to support your business or nonprofit:

- Angel investors and venture capitalists are typically looking for high-growth startups.

- Impact investors seek businesses with social or environmental missions.

- Corporate sponsors might be interested in aligning their brand with your cause.

- Small donors may contribute via crowdfunding platforms.

- High-net-worth individuals or institutional donors may be relevant for nonprofits or certain types of businesses.

Investors expect a return on their investment (ROI), either through dividends, interest, or equity appreciation. Donors, especially in the nonprofit sector, may expect recognition, updates on how funds are used, or to see a social impact. For corporate sponsors, it could be brand exposure or marketing opportunities. 

General Ownership Guidelines by Stage

To keep ownership reasonable across stages, here’s a common guideline:

- Founders: Aim to retain 50-70% through Seed, around 30-40% post-Series A, and ideally, over 20% post-Series B. 

- Investors: Each new round will see cumulative investor ownership grow, but founders typically try to avoid cumulative investor ownership exceeding 50% before a possible exit.

These percentages are averages, and a lot depends on the negotiation, company valuation, and specific funding environment.

Ownership Guidelines by Stage Summary

Equity given up at each funding stage depends on factors like market conditions, your company’s traction, and how much capital you need. Generally, startups retain enough equity early on to maintain leverage for later rounds. Here’s a common equity dilution breakdown across each stage:

1. Pre-Seed Stage (Very Early Stage)

- Typical Equity Given: 5-10%

- Goal: Build a prototype, conduct initial product-market fit testing.

- Investors: Often friends, family, angel investors, or incubators.

- Capital Raised: $50k to $500k, depending on the startup and industry.

- Dilution Impact: Minimal, as this is the first stage and usually involves smaller amounts.

2. Seed Stage (Early Traction)

- Typical Equity Given: 10-15%

- Goal: Product development, early user acquisition, and validating the business model.

- Investors: Seed funds, angel investors, or early-stage VCs.

- Capital Raised: $500k to $2 million (industry and company-dependent).

- Dilution Impact: Adds up but can still be managed well if valuation is strong.

3. Series A (Growth and Scaling)

- Typical Equity Given: 15-25%

- Goal: Scale the product, expand the user base, and demonstrate consistent revenue growth.

- Investors: Venture capital funds focused on early growth-stage companies.

- Capital Raised: $2 million to $15 million, depending on the market and industry.

- Dilution Impact: Significant, as investors are seeking a sizable stake to account for risk.

4. Series B (Expansion and Market Share)

- Typical Equity Given: 10-20%

- Goal: Expand into new markets, scale operations, and optimize revenue channels.

- Investors: Larger VC firms or late-stage funds interested in scaling businesses.

- Capital Raised: $10 million to $50 million, often higher for high-growth industries.

- Dilution Impact: Usually less than Series A in terms of percent equity given up but may still reduce founder control.

5. Series C and Beyond (Late-Stage Growth)

- Typical Equity Given: 5-10% per round (often multiple rounds)

- Goal: Enter international markets, add new products, or prepare for IPO/acquisition.

- Investors: Private equity, late-stage VCs, and sometimes strategic corporate investors.

- Capital Raised: $50 million to $200 million, depending on the scope of growth.

- Dilution Impact: Small percentage, but the valuations are much higher, often allowing founders to retain more control.

 Before seeking equity investment, you need to establish a reasonable valuation of your business. This is the price investors will pay for a stake in the company, and it’s critical to back this valuation with data (e.g., current revenue, future projections, market size, and potential growth).   See our Fundraising Tools for the Valuation factors that will be considered.

Fundraising requires preparation, including:

- Pitch deck: A concise presentation that communicates your vision, business model, market, team, and financials.

- Business plan: A detailed document covering your business’s objectives, strategies, market analysis, and financial projections.

- Financial statements: Profit and loss statements, balance sheets, cash flow forecasts, etc.

- Executive summary: A brief overview of your business or nonprofit that summarizes your key points.

- Legal documents: Depending on the fundraising type, you may need incorporation documents, term sheets, or investment contracts.

Fundraising can take longer than expected, ranging from several months to a year or more, depending on the type of capital you’re seeking. Owners need to account for the time required to network, pitch, negotiate, and close deals. 

Fundraising, particularly equity fundraising, often involves strict regulatory requirements. Owners should:

- Understand securities laws (such as SEC regulations in the U.S.).

- Ensure compliance with tax laws.

- Seek legal advice to draft contracts and agreements 

This should be based on a detailed financial analysis of your business. Consider:

- How much capital is needed to reach key milestones.

- The runway the funds will provide (i.e., how long the funds will last).

- Future operational or growth needs for team and hiring plans.

- Don’t raise too much, which can lead to dilution, but ensure you have enough to meet your objectives.

Investors typically look at:

- Revenue growth

- Contribution margin

- Profit margins

- Customer acquisition cost (CAC)

- Customer lifetime value (CLTV)

- Burn rate (how quickly you’re spending money)

- Break-even point and projected profitability

Understanding and communicating these metrics is essential for investor confidence.

To note:  The CEO/Owner should be doing most of the talking because it is an orange flag if the CFO or COO are doing all the talking on the numbers.  Investors want to see that the CEO has a strong understanding of the business’s financial health and growth trajectory asthe CEO is expected to have a broad vision but also a solid grasp of details, especially on the financial side. 

Owners should be aware of:

- Dilution: Giving up too much control or equity.

- Debt obligations: Inability to repay loans or interest.

- Rejection: Fundraising is competitive, and many pitches are turned down.

- Investor influence: Some investors may want significant control over business decisions.

- Legal risks: If agreements are poorly structured, they could harm the business long-term.

Successful fundraising is not the end of the relationship. You must:

- Provide regular updates on the business's or nonprofit's progress.

- Report on how the funds are being used.

- Be transparent about challenges or changes.

- Engage with donors/investors through meetings, newsletters, or reports.

Fundraising is often iterative. To attract future funding, you should:

- Meet or exceed the milestones outlined in your previous rounds.

- Strengthen your brand, market presence, and operational efficiency.

- Continue networking with potential investors and supporters.

- Have a clear plan for future growth or impact.

Depending on the complexity of your fundraising goals, it might make sense to hire an expert or consultant to help:

- Refine your pitch and materials.

- Identify and connect with the right investors.

- Navigate legal and financial aspects.