The 7 Sources of Startup Capital
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Figuring out who to raise money from and why will save you time and yield better results. Here are some potential investors to consider for your startup:
1. Friends and family
Often, the first check comes from a family member or a friend. In theory it is a lot easier to close them because they already know you. In practice sometimes this is awkward, and may lead to awkward situations in the future. For example, if a friend gives you $10,000 and the company goes belly up, you may lose this friend.
Think carefully before taking money from family and friends. It can be awesome or could be bad. Every situation is different. Another thing is that friends and family members may not clearly understand the risk and how startups work. Take the time to educate them, and if they get it and still want in then you are all clear.
2. Angel investors
Angel investors put in between $10,000 to $100,000 (lower is more common), and can participate in priced or debt rounds. Angels can be valuation sensitive. It is important to distinguish between active or professional and occasional angel investors.
Ask them how many deals they do per year, and look them up on AngelList. If someone only does a few deals a year, only talk to them if they approached you, someone gave you a warm intro or they have relevant experience and background in your space. Otherwise, infrequent investors should not be on your target list. Occasional angels will take longer to close, and will be more flaky.
Active or professional angels do at least six deals per year. Expect to close them within the first three meetings. It is totally fine, and a good idea, to ask them if they are interested at the end of the first meeting.
Before you meet an angel understand what they are interested in. Don’t go after people randomly. It will be a waste of time. Confirm with whoever introduces you that the introduction makes sense. Target well.
3. Angel groups
An angel group, as the name implies, is a pool of investors sharing deal flow. Angel groups can do priced rounds, and if a significant percentage of the angels in a group are interested, they can lead your deal.
Angel groups meet regularly, and have regular pitch processes. Some do more due diligence than others, but typically several members of the group would be assigned to do the diligence if your initial pitch goes well.
Your check will typically range from $50,000 to $500,000. These groups are not syndicates, and unlike AngelList syndicates, they don’t have carry fees. Angel groups are also valuation sensitive, and will typically price the rounds lower compared to venture capitalists.
4. AngelList syndicates
AngelList syndicates are the most effective way these days to raise money on AngelList. Syndicates are formed by influential angels, and investments range from a few hundred thousand dollar to more than a million. The key thing is to identify investors who have significant syndicates on AngelList and get in front of them.
If you can get such angels excited, he or she will run the syndicate. For example, the angel might put in $50,000, and then another $250,000 will come via a syndicate. The amount raised via syndicates varies, and is not guaranteed.
5. Micro VCs
These investors are either individuals writing $100,000 or more checks or a firm with $10 million to $50 million under management. They are basically angel investors with larger amounts to invest. They will commit to invest or will say no after two or three meetings. They may lead, and be comfortable with either debt or equity.
Micro VC funds will likely take longer, and would not be too far off from a typical VC. Micro VCs in New York City typically invest $250,000 to $500,000 and can price and lead your round.
These investors care about ownership, but to a lesser extent than a typical VC. They are not looking for 20 percent of your company, but more likely 8 to 10 percent and then invest more in the next round (depending on the size of their funds).
Like with angels, you need to decide if a specific micro VC is right for you. Spend time studying their portfolios. Not only do you need to understand each fund, you need to understand each partner. Partners have different experiences and focus areas and different preferences for companies as well. Target specific partners at a specific fund.
Traditional VC firms have funds ranging from $100 million to $500 million. For seed deals, they would do as low as $250,000 to as high as $2 million. Typically, between $500,000 and $1 million is these investors' sweet spot. They really care about percent of ownership, and would likely only do the seed if they think they can do series A as well. That is, they would want to buy up the ownership to be at 15 to 20 percent after a series A round.
Note that some funds may not have the capital because they are in between funds, but they would spend the time with you anyway. It is probably not the best use of your time though.
Figure out who will be the partner on the deal. With larger firms it is not always obvious. Look at how many companies they are involved with and ask them how many companies they typically manage. In a $150 million to $300 million fund, a partner is investing in eight to 12 companies at any given time. Research how many investments the partner has to understand your chances.
Ask them what their process is like and how to best follow up. Each firm may have a unique process and you need to understand it up front so you can know what to expect. Set up clear next steps and follow ups. Be direct, and ask if they are interested in continuing the conversation. Try to avoid the vague state of maybe.
7. Mega VCs
Mega VCs are firms that have more than $1 billion under management. These include Andreessen, Khosla, Kleiner Perkins, Sequoia, Bessemer. Research if the fund has a seed program. If they do, figure out who runs it and what the process is.
It is likely that there is a partner in charge of seeds and the process is compressed compared to raising more capital.
Recognize that VC funds need to deploy large amount of capital per deal to be able to return their massive funds. Rather than spending time trying to get their attention for your seed round, it may make more sense to start building relationships with them for a series A and B round.