Forming your own start-up is simultaneously invigorating and terrifying, and equally challenging and rewarding. However, amongst all of the many mountains that budding entrepreneurs need to master, perhaps the highest and steepest is that of securing initial funding. In this post, we will explore the realities of a start-up’s first funding round and share some handpicked funding tips.
Read on for our 5 top, practical raising funds tips.
About Our Five Top Funding Tips
Before we dive in, it is important to point out that this post is focusing on the finer technicalities of your first funding round. As such, we will not spend any time advising you on how or where to find the finances or how to interest investors. Instead, this piece presumes that you already have prospective funding in place and now you just need to know how you should proceed (hint, very, very carefully!).
1. A Lot of Legal Back and Forth
When it comes to business funding, nothing should be left to chance. As much as possible all eventualities need to be considered and properly documented in contracts. This basically means that there is likely to be rather a lot of legal exchange with your prospective financiers.
Unfortunately, this legal back and forth can get expensive. And the expense is not something a start-up really wants before its funding is actually in place. Still. This step is very important as it clarifies exactly how much of an interest and how much control your financiers are going to get.
It is a good idea to try and find a lawyer who specializes in working with start-ups and to make sure you have some cash so you can pay the lawyer independently of your funding.
2. You Are at a Disadvantage for Negotiations Against “Industry Sharks”
The chances are that this is your first time fundraising for a startup. Conversely, though, it is most probably not your financer’s first rodeo, and as such, they have the advantage of familiarity not to mention ready access to legal expertise.
While your financier does want to support you and does want your start-up to succeed, your interests are not perfectly aligned. They may use their clout to try and railroad yours to serve theirs. Moreover, you may well not be aware that this is happening until it is too late.
This is why proper legal representation is important, as is ‘trusting your gut’ and setting very clear boundaries for what you will and will not accept.
3. Neglecting Important Details
Echoing the above, if you don’t have experience it’s easy to neglect certain requirements which may prove important over time. For example, what are the default terms going to be if you are unable to repay your financiers in the agreed time? Do they get to assume control of the business?
Other details are things such as franchise rights – if you want to franchise your idea in the future, does your financier have an interest in that?
It is vitally important to think very carefully about every aspect of your business before approaching these negotiations. This ensures that you do not overlook any key details. Once again, having sound legal advice will help here,
4. Exchange Rates for Foreign Currency Funding
A lot of financiers interested in working with startups are based outside of the US. For example, India and the Gulf States both have a rich start-up culture. US-based entrepreneurs may find more sympathy when courting prospective investors in these regions.
This can mean having to change the funding you receive from rupees or rials into US dollars. This can prove expensive depending on how you handle it.
For example, pretty much all banks apply foreign currency transaction fees and also apply foreign currency exchange rates that are 2 – 4% below the market rate. Not many startups can afford to waste 4 – 5% of their start-up financing on bank fees and so receiving a large investment in foreign currency is best handled by using either a current broker or a dedicated money transfer specialist. These companies offer much better deals.
5. Estimating How Much Equity to Diverge
Ok so you accept that you are going to have to give up some equity at the seed round in order to secure funding, but the question is how much? Firstly, the more you give up, the less you keep for yourself but also, the more you surrender now the less you have to offer later to second or third-round prospective investors.
There is no right answer here. Many industry experts will tell you that 10 – 20% is normal and that anything over 30% is concerning. Ultimately though it will come down to the finer points of what exactly your initial seed investors are offering. Plus, how much further fundraising you think you may need to explore later on.
For example, if your business plan suggests that you will be “good to go” after round 1 and will not require much more investment then you can afford to give up more. Just as long as you do leave a little leeway in case things do a bit awry further down the line and you are forced to into further fundraising.
Final Thoughts on Your First Funding Round
That’s all the startup raising funds tips for today. As you can see, contacting your first funding round for your first start-up is not easy. There is a lot to juggle and a lot to think about. Still, hopefully, these funding tips were of some help to you.