Techniques for Raising Startup Capital in Small Markets

The process of raising capital for startups in smaller cities is more difficult than those in more populated areas such as Silicon Valley. Strategies for fundraising need to be adjusted to accommodate the various types of investors that are available.

Startup hotspots like Silicon Valley, Austin, Boston as well as New York City are becoming increasingly distinct by the “infrastructure” (incubators, accelerators angel networks, etc. ) which aids in the growth and creation of companies that are new. This social infrastructure helps raise capital at an early stage in these markets much easier than other locations.

If you’re not in a hot startup area but you’ve got a good idea for an enterprise There are methods to raise the funds needed to begin. Based on my personal experiences of raising more than 40 million in equity pre-seed plus over $200 million in total equity, $110 million in venture debt and $365 million of permanent debt to finance privately held businesses located in southeast US Here’s a helpful guide to raising substantial start-up capital for companies in the early stages in smaller markets.

If you’d prefer to skip to two sources that I consider to be the most beneficial, go towards the section of Angel Investors and Strategic Partners.

The Stages of Investment for Young Companies

An early stage business develops in four stages that take it from the initial idea to the final product that is commercially available.

Phase Idea MVP Market Test Commercial Product

Description The founder identifies an unmet market need, and proposes the solution is unique to meet the demand, and then forms an entity to explore the possibility. The company creates a minimum-viable solution (MVP) to evaluate its solution on the marketplace. Tests are conducted in the market to collect feedback from customers and to determine the product’s viability. MVP Version of product refined by learnings gained from the market tests. Then, it is launched commercially.

The initial stage is nearly always self-fundedsince only a little capital is usually needed to develop an idea, create an early business strategy and then create a legal entity. It’s not always a good idea to quit your job in this point.

The challenge of fundraising really starts when the MVP stage is completed. It is at this point when significant capital will be needed to develop products marketing and sales, preparation of patents and more. to get the business up and running. This is also the point where founders are at the point where they must take a break from their jobs and dedicate themselves to the venture full-time. This typically means that the need for capital to pay salaries or payments.

For many businesses needing capital, stage MVP or Market Test phases can be around $500,000-$1 million, or more for concepts that have significant capex or product development requirements. It’s a huge amount to put into a business that isn’t yet proven to develop a product that its customers are willing to pay for.

Let’s discuss the most likely places to find this capital.

Self-funding

Self-funding is great, if you’re able to manage it. You do not lose any of the upside potential due to diluting. It’s not a loss to have control over the business. You won’t hold back product development or market entry while looking to get capital. The main disadvantage of self-funding is that you do not have any other investors that could be beneficial strategically, or in subsequent financing round.

The second sentence is that self-funding only effective if you can perform the process “comfortably,” i.e. the loss of your investment will not significantly alter your lifestyle. Keep in mind that only 10% of startup companies are successful. Take a look at the following real-life examples of three friends who chose to fund their own startup.

  • THE ULTRA RICH ENTREPRENEUR

The first person to invest then lost $20 million, which was the cost of starting the first professional sports team. But their net worth was around +500 million dollars and the loss (4 percent of his the net worth) was not a major issue, but it was not devastating. Let’s strive to reach the point where a 20 million loss isn’t catastrophic!

  • THE RICH ENTREPRENEUR

Another friend put up $15 million into an early stage venture, but was unable to recover the whole amount. Its net worth stood at “only” +/- $20 million at the time this occurred. He’s working hard to ensure that he can live the life that his family has grown used to at the 20 million net worth which would have allowed him to retire in a comfortable manner a long time ago.

  • THE RISKY ENTREPRENEUR

The last person put in $100,000 to create the company of software that eventually sold for millions. The $100,000 represented everything that he owned when he started the company. In retrospect, this appears like a fantastic investment however, after hearing him talk about how difficult it was for his family members to have been “all-in” for years as growing the business and acquiring more customers, he might have done better by raising capital from outside and sacrificing some of the benefits to ease the burden.

The most important thing to remember about self-funding is if you’ve got an impressive wealth and a good business idea that doesn’t need more than 5-10 percent of the capital you have, you should stop in this piece and begin working in bringing your product to the market. If you’re not in the fortunate 1%, continue reading for other insights.

Friends and Family

Professional investors in VC will tell you they will only invest in companies that have confidence and confidence on the leadership team. This is especially relevant in companies that are in the very early stages of their development since Murphy’s Law applies and the success of a company often is dependent on the capability of hard-working, committed intelligent, resilient, and innovative founders to respond to the new challenges they face and continuously adapt to be successful.

If you think you’ve got the qualities required, perhaps that your friends and family members do as well. If they’re prepared to invest, ensure that you provide them with an honest economic agreement and have counsel document it. Make sure they agree to all standard statements about their understanding and acceptance of the risk associated in the deal. If you’re in the 90% and your business doesn’t succeed, it, the last thing you’ll want to do to exacerbate the pain is to go out with your family and friends because you felt deceived.

If you have chosen your parents carefully and have the money you require, then best of fortune to you. Many entrepreneurs don’t have this option. However, others prefer to maintain an unambiguous distinction between their professional and private lives.

While not a new notion, the emergence of business incubatorsand accelerators as a prominent force in the startup community is relatively new. These organizations – which are more prominent in the most renowned hubs of startups usually provide affordable workspace along with mentoring and networking opportunities to young businesses. In a small percentage of cases they can also offer the necessary capital to a select group of businesses. More often they provide assistance in enhancing business plans, creating proposals for fundraising and establishing relationships with investors who might be interested.

Particularly for new entrepreneurs or those with little experience in fundraising, this kind of support can be useful. But the most important point is receiving advice instead of money. You’re not able to pay bills using advice. The advice you receive without financial stakes could also be a useless distraction that steers you in different directions.

Crowdfunding

Crowdfunding is an incredibly new idea in the US and was made legal in 2016 by the JOBS Act. There are a sort of crowdfunding platforms available each with their specific niche.

I’ve heard about the successes of companies who raised funds through crowdfunding, however I’ve never tried this myself. However, I did have a great time researching the concept during my last venture that was one that was powered by AI. SaaS product that was able to enable live bidding on products and services. It was initially targeted at those in the industry of golf. It was ultimately an easy decision to not pursue crowdfunding for several reasons, among them:

(a) High Success Ratio

My research found that the rate of success in raising capital of a significant amount was very low. If I had been looking to fundraise $50,000, then I could have attempted it. However, I came to the conclusion that the chances I had of reaching the goal of $500,000 or more were not very good.

b) Disclosures

I was not a fan of posting a lot of my personal details about my company that potential crowdfunders would need to be able to access online for potential customers and potential competitors to see. Actually I didn’t wish my customers to learn that I was in need of funds, since most customers don’t want to do business with companies they feel are insufficiently funded and who may not have enough capital to back the products they offer.

c) Competition

My perception, whether right or not is that the process of crowdfunding was typically a matter of style over substance. The firms that did well in the crowdfunding arena had attractive marketing materials, as well as intense social media marketing campaigns , which were not always in line with the high-end investment opportunity. I thought it was difficult to distinguish my option from the plethora of other opportunities that were “dressed up” to look attractive to the novice investors who provide the majority of the funds on these platforms.

However, the concept of crowdfunding for products (not equity) has two significant potential advantages:

  1. There is no requirement to surrender any equity to get the money.
  2. In raising funds through the platform you’ve proven that customers are willing to purchase the product. This is an excellent chance to test your business plan.

I don’t recommend you to avoid the crowdfunding method, particularly when you’ve created a something that’s attractive to consumers that could be possible to sell pre-sales of. But, I’ll tell you that it is clear my opinion that this is not the solution for the majority of early-stage fundraising issues. I also can tell you that my views are supported by a number of startup company lawyers I’ve worked with for a long time and have seen other clients who have failed to raise funds through different crowdfunding platforms.

Government Contracts or Grants

Government grants and contracts are fantastic when you can find them. This is basically free money that is used to pay for the development of products and could even be used to generate revenue. It’s not necessary to surrender any equity or debt, and the government doesn’t generally care whether your company is located in Silicon Valley or Death Valley. In my experience, funding from the government is very lengthy to seek and very difficult to get.

I have worked for both an NASA contractor as well as an Fortune 500 defense contractor early in my career, I realized that many procurements for government (i.e. the solicitations for proposals that you have to respond to in order to get grants or contracts) can be “wired” for the companies who are working with the procurement agency for a lengthy period (often years) to receive the money allotted. Therefore, the chance of a new company spotting the appropriate request for procurement when it requires money, and submitting a proposal and obtaining an award for a contract within a reasonable timeframe is at best very slim.

Through the years I’ve attempted several times to compete for government contracts that seemed to be in point with what my initial-stage company was doing. I’ve never won one. I have three acquaintances who been successful in obtaining government funds for their startups. In each instance they were part of the field of government contracting and had a customer from the government request them to establish an enterprise to offer the customer what it required but couldn’t find through other avenues. The situations were a long time in the making and, in each the government conducted an open procurement to obtain competing bids prior to awarding contracts to friend’s businesses. It isn’t a good idea to be the one who is making an alternative bid.

Business Plan Contests

It’s not unusual for universities and angel investor networks incubators, and other similar organizations organize business contests to test plans. In most cases, there’s an award of money for the business that is deemed as the winning one.

From my experience, the value of the prize is usually less than $50,000. The highest amount I’ve seen is $100,000. While these numbers are important, the issue of fundraising we’re trying to resolve typically is $500,000 or greater. Therefore, I don’t think this option as a viable solution.

However, I would like to point out that these kinds of contests provide additional benefits for new entrepreneurs as well as inexperienced fundraisers, in that you usually undergo a process that requires you to improve your business plan and develop your pitching abilities. This is especially beneficial when you eventually raise “real funds .”

Angel Investors

If you’ve reached this point in the post You’ll be glad to know that I’ve left some of the most effective for last because one of two promising funding sources for startups are set to be addressed.

In the past I’ve received a large amount of cash from angel investors to fund startups in the early stages of their development in small regions in the Southeast US. When I say angel investors, I’m referring to individuals who are not “friends and family.” There are also “super angels,” who actively look for deals and invest substantial amounts of capital into the deals or invite an entire group of investors into the deal, too.

The record I have for me is $1,000,000 from one angel investor in one deal. In a different deal there was one person who invested $25,000, however it was just one of the more than 40 angel investments the investor had made. Additionally, the investor brought in 5-6 of his regular co-investors.

This is a fantastic illustration for how angel investors may bring value beyond the capital they invest. They often know of others who are interested, or they may have information about your product or company which can prove advantageous. It is never a bad idea to have a team of highly educated, well-connected investors who have a stake in the success of your business.

I also want to be sure to make an additional point that I separate the individual angel investors from the angel investor syndicates that typically adhere to the institution-based VC concept of the early stage. i.e., “call me back when you have $500,000 of annual revenues.”

These are great guidelines regarding angel investors.

  1. They usually invest in things that they are passionate about and know.
  2. They love to invest along with their fellow investors.
  3. Just like family members and friends You must be extra vigilant to ensure they are aware of the dangers and are prepared to lose everything they have invested.

How do you find angel investors that might have an interest in the venture? The simple answer is that you must network in a frenzied manner!

Here’s an illustration. My last venture which was a SaaS business that focuses on Golf, I was able to raise $1.2 million from more than 25 angel investors to finance the creation of an MVP and conduct the market test. But I also spoke to over 200 people and angel investor groups looking to raise money. I ended up having three main groups of investors:

  1. My golfing friends from the region
  2. A business colleague from an earlier successful start-up and his golf friends
  3. Golfers of a club located in Chicago one of them was the brother-in law of one of my closest friends

Everyone were golfers which is why they were able to appreciate the advantages of the company’s product. Everybody knew at least a few others who were investors in the deal, and even one who was familiar with me personally and could speak for my character. For everyone it was not “their first rodeo,” they’d previously invested in startups before and knew the risks they would be taking. When they read the subscription agreement that contained five pages of risk-related aspects, they were not worried about the risk.

Although it may be the obvious, in order to draw the attention of angel investors you require an attractive investment opportunity, and be presented in a professional manner. Watch out for my next post on how you can get both of those elements right.

Strategic Partners

I’ve also raised plenty of cash over the years for startups in very early stages through strategic investors. For clarity that I’m talking about operating businesses and not the corporate venture funds that make up significant in the VC market currently. The great thing about working strategically-focused investors that they usually:

  1. Do not care about the location you’re in.
  2. View numbers like $500,000 as rounding errors.
  3. can create significant added value for your business more than the money you put into.

The only thing I dislike about getting capital from strategic sources is that it usually isn’t as quick as you’d like it to be because big corporations often be afraid of making poor decisions to the point that they overdo due diligence. It’s tough to maintain patience when you’re anxious about the possibility of making payroll however, it’s usually worth it.

The key to attracting the most strategic investors is:

  1. Have a concept for a product that is compelling and synergistic with them
  2. Finding the right person within the organization to present your idea
  3. Structure the deal in a way that it earns operating income their way, and not an increase in your equity investments

I’ve never seen an investor from a corporation write a check to be an investor who is passive. But, I’ve received a large amount of money from big corporations , such as when I:

  • The company licensed their technology and then requested the licensor to put money into the investment in order to “buy up” the royalty percentage.
  • The exclusive rights to manufacture were granted to an Fortune 500 company that had lots of excess capacities for manufacturing.
  • Sold the first 10,000 units of our (to-be-designed-and-built) product to a Fortune 500 company that wanted to get a leg up on its competitors.
  • We’re committed to making our unique financial products accessible via an industry leader’s widespread distributor channel.

In all cases the strategic investor not only could reap potential benefits through the equity it held, but also had a very tangible potential for upside in terms operating profits. For me I was content if the investor was able to make profits on the operating aspect because it meant my business was doing very well. In addition it is a fact you’ll meet potential investor, I was able to mention that one of our existing partners is (large known and famous) XYZ, Inc. We were able to convince them that our product was liked enough that it made a decision to invest in our company. The implied credibility can be very beneficial for startups that are still in the early stages of their development.

Get Your Business Plan Right and Stay Focused

Fundraising for startups in smaller markets is extremely difficult, yet it’s feasible. If you’ve identified an opportunity that is worth exploring and have a well-thought out business plan as well as a well-thought-out fundraising strategy One of the strategies described in this article could be a good fit for you.

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