A Guide To Raising Money For Startups

Founder of Julian Everly Creative Ventures Inc.

Raising money can be a daunting task. Many times our limiting beliefs, lack of contacts, uncertainty and just plain doubt keep us from raising or understanding how to raise money.

There are many sources that can detail the different funding rounds for startups, but I would like to explore a general view of raising money first, followed by the reasons why business leaders and entrepreneurs might want to raise money. As the founder of multiple startups, I want to take a look at raising money through the lens of three phases and one reason:

Phase One: Pre-Launch

Each phase has its own unique needs and challenges to take into consideration. During the pre-launch phase, your company may need funds to develop a product, hire the right personnel or create a marketing buzz around your service.

For example, when my team launched a cryptocurrency in 2018, we performed a modest pre-launch raise in order to pay for marketing expenses. This need was in stark contrast to my experience when I launched Shotzu, a bulk product photography platform, in 2015 and didn’t require capital for marketing. Our business model was B2C (business to consumer), or in other words, retail sales. Being that we were targeting individuals and not companies and we needed a huge number of sales at launch, we needed to pay for advertising in order to get our product in front of as many people as possible.

During the pre-launch phase, new startup founders should avoid the mistake of raising money and allocating a large portion of it to unnecessary line items that increase the burn rate. The burn rate is the pace at which a startup spends capital ahead of generating positive cash flow. I’ve seen how this is an area that kills many companies. In some instances, the pressure to continually raise money benefits a company, but for most I’ve found it’s a detriment. For example, many times new startups successfully raise capital and spend it on expensive offices, salaries and areas of the business that aren’t directly developing the product/service or launching it successfully. Avoid spending raised capital on vanity or unnecessary expenses that increase the burn rate, and stay lean and scrappy.

Phase Two: Post-Launch

In this phase, a company may encounter challenges that require capital. Post-launch, a new founder is focused on revenue growth and product saturation. Funding is needed for marketing, development, increased operations, branding and marketing. At this stage a company is still figuring out if their pre-launch value proposition is accurate or if they need to pivot.

Hopefully your hypothesis about your customer was correct and your product’s value proposition holds up. In this case, figure out what methodology is causing the fish to jump in the boat. It takes capital to do A/B testing, focus groups, polling and other marketing tactics to understand what your customer likes about your product. Additionally, your operations will increase, and you’ll need more resources to support your vision.

If your value proposition didn’t hold up, you need to fail fast and pivot quickly. Once you have learned what didn’t work from your pre-launch offering, it’s now time to learn from the customer what does work and revamp. In my experience, pivoting can require additional capital that you may not have forecasted. When raising money at this stage, show investors that you’ve learned a valuable lesson and that customer interaction has shown you where you can find success in the marketplace.

Phase Three: Scaling

Scaling is my favorite phase. The scaling phase occurs after a founder has realized the correct combination of elements to create the magic formula that accelerates the growth of their baby startup. I tend to wait to raise capital until this phase. Why?

1. You have figured out what is working and what isn’t without burning through a significant amount of capital. 

2. You have mitigated the risks early investors will encounter and positioned your company nicely as a safe investment.

3. You have created a “money machine” ready to takeoff.

For example, with my next generation retail candy experience startup, I purposefully did not raise capital for the pre-launch and post-launch phases. This startup has been scrappy, tested the value proposition, failed fast and figured out what the customer wants. As a founder, I now know that when I put $1 into the product, I get $5 out of it; therefore, it’s time to raise as many George Washingtons as possible and turn them into Lincolns!

Determining A Valuation

Last but certainly not least, determining your company’s valuation is a reason outside of these three phases that I’ve observed a business might raise capital. I’ve found this is the equivalent of putting points on the scoreboard. It is important for your investors as well as you and your team to understand where you stand in the marketplace amongst your competitors. Investors want to know that they are investing in a winner, a potential “unicorn” and raising money, no matter what the funding round, helps determines your valuation.

Raising money to determine your valuation can also be used as a key marketing strategy for a startup. A successful raise, high valuation, marquee investors and great timing can bolster your brand.

Placing thought into the correct time to raise money is as much a strategy as any other strategy you employ to grow your startup. Envision funding as a means to not only pay for costs but as a lever to launch your project to the moon!

The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

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