Startup Fundraising Playbook
How to Secure Funding for Your Startup: Aligning Investment with Your Business Goals from Concept to Series A
In the current fundraising game, getting into traditional VC can be a real challenge, especially if you're a first-time tech founder trying to figure things out.
If you're a founder reading this, think of this post as your ultimate guide to raising funds that actually match your startup's goals, from your initial idea all the way to Series A.
I’ll guide you on balancing these two key goals while tackling these crucial questions:
How much cash do you need to hit your next big milestones?
What dilution should you be cool with for each funding round?
Here, dilution means the slice of your company’s equity you’re handing over to investors for their cash.
In future posts, I’ll also break down alternative fundraising strategies, like bootstrapping and applying to top accelerators like Y Combinator, so you can weigh all your options.
Roadmap
We’ll kick things off by using this Product-Market Fit (PMF) guide as our roadmap. It’ll help us zero in on our business goals and fine-tune our fundraising strategy to hit them right on target.
Remember, the real product development journey is often messier than this guide makes it seem.
That said, this guide is still a solid tool for syncing your fundraising game with your business goals.
So, let’s imagine we’re first-time founders with a small network, looking to kick off a B2B enterprise software startup. Here’s a quick look at our fundraising roadmap.
Idea Phase
In the first phase, your main mission is to validate the market opportunity by really getting to know your customer’s pain points.
“Around 35% of startups crash because there’s no real demand for their product.” — This is where problem validation and customer discovery come into play.
During the pre-launch stage, focus on uncovering your customers' core issues through discovery interviews. Before you take the plunge and quit your day job, make sure you’ve nailed down these pain points. Read more.
Since these customer chats only need a few slides, some questionnaires, and your time, there's no rush to officially start the company or dive into fundraising just yet.
Concept Phase
In the concept phase, our goals are to:
Prioritize Key Problems: Take the insights from your customer discovery interviews and identify the most pressing issues.
Design a Solution: Start ideating and designing your solution, from initial mockups to prototypes.
Since this phase involves early product design, which might range from mockups to prototypes, you might need a small amount of capital to get things rolling.
This is also when you can think about officially starting the company—at least part-time.
Key Considerations:
DIY or Hire: Can you handle the early product design yourself, or should you hire or outsource a UI/UX designer/engineer?
Bootstrapping: Can you cover all the ongoing costs yourself, or will you need external funding?
If bootstrapping isn't an option, plan for a $100,000 budget to cover initial costs and iterations. Here’s what you can consider:
Company Setup: Use Stripe Atlas to register your company and open a business account with neo-banks like Mercury. Given recent banking issues with SVB and First Republic, make sure to thoroughly vet your banking partner.
Raise Funds: Aim to raise $100K in a Friends & Family round, including any angel investors from your network. Use Simple Agreements for Future Equity (SAFEs) for early-stage fundraising. Here’s the SAFE document template.
SAFEs save you $25-50K in legal fees compared to issuing equity directly.
Set a “generous” $3M post-money valuation for your startup at this stage.
Equity and Cap Table: Start with 10,000,000 common shares and create an option pool for employees, advisors, and consultants.
Note that SAFE investors won’t appear on the cap table until their investments convert in a future priced round (e.g., Series A).
Track potential dilution with a separate table. After the Friends & Family round, the founders’ ownership is estimated to be around 89.2%, factoring in SAFE dilution and the option pool.
Build Investor Network: Start planning your future fundraising by connecting with investors in these categories:
Angel Investors: Reach out to operators and investors like myself and my network at Hustle Fund Angel Squad.
Micro VCs/Small Funds: Look at funds with a $10M or less size, and syndicates like PaperJet Ventures.
Institutional VCs/Seed Funds.
Before we move to today’s special content on startup fundraising playbook, I’d like to invite you to The Angel & Accelerator Online Conference where 1,000+ angel investors, venture capitalists, family offices, & startup founders will be joining live at 9:30 PM IST on 28th August.
The panel of investors includes Techstars, AngelList, Antler, HustleFund, Idealab, Everywhere Ventures, B Capital, PSL, The Council, SparkLabs Group, +30 other VCs. It will be moderated by journalists from TechCrunch, Business Insider, & The Information.
Committing Phase
After refining our product concept, our next move is to launch a beta version for our early adopters. It’s also time to make our first key hires, particularly for engineering and design roles, based on our needs.
We'll aim to raise a $250K pre-seed round at a $6 million post-money valuation. This budget assumes we’re running a lean operation—no founders’ salaries and fully remote work.
Fundraising Strategy:
Angel Investors: Target value-added angels for this round, with checks as small as $5K. While the individual amounts may be modest, these early angels can bring significant value through their network, including introductions to other angels and institutional VCs who could join your cap table down the road.
Example: Freshpaint’s post highlights how a single $5K angel investment contributed to over 50% of its seed round.
Value-added angels/operators can provide crucial support, from making warm intros to sharing expertise in product design and go-to-market strategy, to offering reputation boosts.
Pitch Deck: Develop a pitch deck focused on our founder/market fit narrative, market size, and key learnings and traction to date.
Equity and Dilution:
The table below outlines potential SAFE dilution after the pre-seed round. We estimate that founders’ ownership will be around 85.0% post-funding.
Validating Phase
During this phase, startups often spend a lot of time experimenting and pivoting from their initial ideas before things start to click. There’s a significant risk of running out of funds as founders frequently underestimate the time required to build and find product-market fit (PMF), and may realize their capital needs exceed initial projections.
In this phase, our goals are to launch Product Version 1.0 and demonstrate that our product is hitting key metrics that will position us well for Series A funding.
What to Expect:
High Hurdle to Series A
In today’s fundraising climate, B2B enterprise software startups face a steep climb to secure Series A funding. An experienced early-stage VC shared some key insights:
“Sector relevance is crucial. I have portfolio companies with under $1M ARR that have secured Series A because they’re in the GenAI space. Some companies at $2.5M+ ARR also manage to raise. Conversely, companies with $2M+ ARR might struggle depending on their market and vertical. Growth rates are a key factor too.”
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