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Startup funding: How to start fundraising

29 February 2024
The Carta Team

Fundraising can supercharge your startup’s growth, but it’s tricky to know when to start the process. Raising funds isn’t as simple as pitching your idea and receiving money; it’s a choice you’ll want to think carefully about.

Each time you receive money from investors, you’re giving them a piece of ownership in your company. This dilutes your personal equity – reducing your share of proceeds in the event of an exit – and opens the door to outside feedback and opinions. Investors aren’t just sponsors; they can influence marketing, hiring and product development, especially if they have a seat on your company’s board of directors.

In this guide we’ll cover everything you need to know about fundraising, from different types of investors and funding rounds to how you can prepare for your next raise.

Fundraising 101: Types of investors and funding

Let’s start by reviewing some core fundraising terms and concepts, including different types of investors and ways to fundraise.

Types of investors

Capital can come from virtually anywhere, but these are some of the most common sources of startup financing:

  • Angel investor: someone who uses their own money to invest in a private company.

  • Venture capital (VC) firm: firms that pool outside capital to invest in private companies, usually high-growth startups.

  • Institutional investors: typically large asset managers that pool funds from a variety of institutional and retail investors to back growth-stage or pre-IPO startups, as well as other asset classes like private equity and public market investments. This category can sometimes extend to banks, hedge funds and family offices.

  • Accelerators and incubators: programmes that provide guidance, mentorship and fundraising support for startups in exchange for an equity stake – and sometimes also a cash investment – in the company.

  • Bootstrapping: the process of using personal finances, revenue and free or low-cost resources to build a business without outside investment.

Types of startup funding

Your funding options will vary depending on the stage of your company. Most startups aim to raise enough capital to make their cash runway last until the next funding round. Over the last few years, startups at every stage have been leaving longer between funding rounds. In the second half of 2021, the average time between rounds was 452 days; this increased to 498 days in H2 2022 and peaked at 550 days in H2 2023. As a result, companies may be required to raise even more funds at each round to extend their runway.

Typical fundraising options for founders include:

  • Convertibles: for some companies, seed-stage financing is unpriced because it’s often quicker and easier to use convertible securities (such as convertible notes, SAFEs and advance subscription agreements) instead of issuing preferred shares.

  • Priced rounds: when a startup is raising a round of financing by issuing preferred shares at a specific valuation. Most series fundraising (i.e. Series A and beyond) takes the form of a priced round.

The funding structures listed above can have different characteristics, depending on the terms and conditions of the agreement or how the money is distributed. Rounds may take shape in the following ways:

  • Down round: when a company raises a VC financing round and the pre-money valuation of the company is lower than the post-money valuation of its previous round, resulting in a lower price per share. 

  • Up round: when a company raises a funding round with a higher valuation than its previous round, resulting in a higher price per share.

  • Tranched financing: a type of financing in which investors release funds in parts when a company hits certain milestones, instead of providing one lump sum

  • Bridge round: extra money a company raises between priced rounds that helps founders extend their cash runway until the next round.

Alternative fundraising options

There are many other ways to fund your company, including:

  • Venture debt: a bank loan for companies between venture capital funding rounds, with less associated dilution for shareholders.

  • Equity crowdfunding: the process of collecting small contributions from a large number of people, typically through online crowdfunding platforms. Some of these platforms specialise in fundraising for businesses and can distribute the company’s pitch to a large group of general investors ( unaccredited investors included).

  • Other sources: some companies might qualify for public or private small business loans, small business grants or other business credits with a longer payoff period.

Rounds of funding

Now that we’ve covered the fundamentals, let’s dive into the different stages of startup fundraising. Each funding round has a different purpose and process.

Pre-seed round

If you’ve identified a market opportunity, started building a minimum viable product (MVP) or have a prototype of your product, then your company is likely in the pre-seed stage. 

Pre-seed funding is often used to develop a promising idea or vision; investors are essentially making a bet on the founder and the market before any product-market fit – or even a true product – has been established. Investing at this stage means taking on a lot of risk. As an alternative to pre-seed funding, many startup founders use their own money to get operations off the ground and build a prototype (known as “ bootstrapping”).

Pre-seed rounds can come from various sources:

Angel investors

Angel investors (otherwise known as “angels”) use their own capital to invest in entrepreneurs or small startups, typically in exchange for equity in the company or a future right to receive equity. While angels are usually high-net-worth individuals investing their own money, the entity that actually makes the investment may be a different vehicle – such as a business, a trust or an investment fund. 

Angel investors typically help startups take their first steps, either by providing a one-time investment or ongoing funding throughout the early stages of a company’s lifetime.

Syndicates

A syndicate is a group of angel investors who combine their resources to make a single investment in a company through a legal entity called a special purpose vehicle (SPV).

Friends and family

This type of initial funding will depend on the liquidity that your personal network can pull together. 

Bootstrapping

Some early-stage startup founders self-fund by using savings, maxing out credit cards or leveraging initial revenue from the business to develop an MVP.

Accelerators and incubators

If you’re looking for mentorship, startup accelerators and incubators (such as Entrepreneur First and Founders Factory) can be extremely valuable funding options. However, admission into an accelerator is highly competitive, with acceptance rates often in the low single digits. Many accelerator programmes focus on a particular industry or space – for instance, SuperCharger Ventures is set up exclusively for European EdTech startups, while Zinc VC provides a platform for launching mission-driven businesses in the UK.

Being accepted into an accelerator means you’ll join a cohort of companies for a fixed period of time – typically three months to a year – and get access to exclusive learning and networking opportunities, including workshops, events and coworking spaces. In exchange for £50,000 to £150,000 of funding, accelerators commonly take a non-negotiable equity share of between 3% and 10%.

Pitch competitions

Pitch competitions allow entrepreneurs to present their business idea to a panel of experts for a chance to win investment. All you need to participate in some of these contests is a pitch deck and a considered go-to-market (GTM) plan. Even if you don’t secure funding, competitions provide an opportunity to pitch to investors you might otherwise not get exposure to.

Micro and pre-seed funds

Micro VC firms pool money to make investments on behalf of third-party limited partners (LPs). In contrast to late-stage venture capital, which is used to fund high-growth companies, micro VCs make smaller seed investments – often £500,000 or less – in companies that haven’t yet gained significant traction.

Seed round

Startups usually raise a seed round in the early stages to fund a variety of business needs, including product development and growing the team. Even if you have a product you can demo by this point, you might still need to create a user-ready MVP and conduct beta testing before launching your product in the market. 

The types of investors that may be interested at the seed stage range from angels to VC firms specialising in seed funding. Typically, seed rounds are relatively small. According to Carta data, the median amount raised at seed in 2023 was £1.8 million, compared to £8.8 million raised at Series A.

Seed-stage companies are still eligible for angel and syndicate investments, in addition to some other funding options:

Equity crowdfunding 

Equity crowdfunding – also referred to as crowd investing, crowd equity or investment crowdfunding – enables a broad range of people to give your business money in return for a partial ownership stake. Equity crowdfunding is commonly offered on crowdfunding platforms, such as Seedrs and Crowdcube, that provide individual investors with access to pre-vetted startup investment opportunities.

Multi-stage funds

A multi-stage fund is a single fund that invests in companies at multiple stages, including the seed round. Some firms offer seed funding to entrepreneurs, enabling them to develop proof of concept for their idea or product. Others may provide “main” or standard venture capital to companies at Series A and beyond. There are also firms that invest across the whole spectrum, from seed to growth companies.

Convertible securities

Investors in a seed round may sometimes provide cash in exchange for convertible securities – such as convertible notes, SAFEs or advance subscription agreements (ASAs) – rather than actual shares. Unpriced rounds like this allow founders to raise money while postponing protracted negotiations over the company’s valuation. Convertible securities are then converted into equity shares at a later date, usually during the first priced round.

Series A

Around the time you’re ready to raise a Series A round, you’ll be focused on launching your product, demonstrating product-market fit, acquiring customers and generating revenue. Companies at this stage have usually established a strong user base and can show evidence of traction in the market, proving they’re primed for success on a larger scale. Series A is typically a company’s first significant round of venture capital funding, and the cheques tend to be larger at this stage.

What sets a Series A round apart?

Institutional investors are more likely to come in during Series A than an earlier round because they can see metrics on revenue growth, customer acquisition cost (CAC) and lifetime value (LTV). Instead of investing capital in exchange for convertible securities, most investors in the Series A round want immediate ownership in the form of preferred shares, with all related rights and preferences.

To determine how much equity investors will get, you’ll need to negotiate a formal valuation of your company and, with the help of your lawyer, any term sheets you receive. A term sheet outlines the terms of the proposed investment and serves as the basis for the definitive legal agreements.

Series A rounds can vary in size, depending on market conditions and a startup’s unique circumstances. In 2022-2023, the median amount of Series A funding raised by companies using Carta was £8.2 million.

Series B, Series C and beyond

The money raised at Series B, Series C and Series D can be used to expand your market reach and grow your team. By the time you reach a Series B round, you should have a substantial user or customer base, plenty of traction and a proven record of revenue growth. Investors usually come in during these later rounds to help with business development and international expansion.

At this stage, and especially from Series C onwards, new “growth-stage” investors may sign on. These institutional investors – which can include private equity firms – typically write big cheques for mature, low-risk companies that are more likely to go public or be acquired for a large sum.

When should you consider fundraising?

Every company’s trajectory is different, which means there’s no perfect time to start fundraising. As a general rule, you’re in a good position to consider raising money when you’ve identified a legitimate problem or need and can demonstrate demand for the solution.

Getting that information usually involves extensive market research, prototype production and lots of experimentation.

Fundraising example

Let’s say you want to create a service that bundles TV streaming platforms into one central hub where customers can see all their viewing options without having to switch between apps. Before starting a priced round of fundraising, you decide to conduct market research about your potential customers, build a prototype and a website, spread the word about your service and encourage consumers to sign up for a free trial. If you get a lot of signups, this can be used to show evidence of demand to prospective investors.

Bootstrapping your way through a successful experiment is a positive sign that you might be ready to raise funds, but it’s not an automatic indicator. Before you start raising a priced round, a few other factors could come into play.

Reasons to wait before fundraising

  • You need to generate more interest from your end user or customer. The type of product you build, and the people you build it for, can dictate when funds are available to you. For example, some investors won’t fund a consumer-focused product until there’s a long waiting list of interested customers, whereas the number of customers needed to demonstrate traction may be lower for B2B companies.

  • You have enough resources to continue bootstrapping for a while. Consider the resources already at your disposal, including cash, talent and tools. If you have enough capital from crowdfunding or friends and family to continue bootstrapping your company, you may want to delay fundraising for a while. However, if you don’t have enough money to hire the right team or continue to develop your product, it might be time to consider raising money from outside investors.

  • You don’t have the time or bandwidth to prepare an investor pitch. Getting your idea in front of investors takes a lot of work. You have to create a pitch deck, contact the right investors, schedule meetings and carve out space for ongoing conversations. If your focus is still on building and refining your prototype, you may want to hold off on pitching until you have a stronger foundation.

Reasons to start fundraising

  • You already have a lot of traction with end users or customers. If you’re still working on a prototype but can already see clear demand for your product or service, you may want to run with it and start reaching out to investors.

  • You’re going to run out of cash and resources in six months. Fundraising doesn’t happen overnight. It can take three to six months of regular pitching and investor conversations before you receive any money. To avoid falling behind or missing opportunities to get in front of customers, you may want to start looking for funding before you need it.

  • You need more support. Fundraising doesn’t just give you capital – it can also provide valuable support and mentorship. If your startup is at a point where you need guidance from experienced investors, fundraising could be a smart choice.

How much capital should you raise?

Figuring out how much money to raise is a complicated process at best. Raise too much money, and you risk overdiluting your ownership stake in your company and making it difficult to raise another round at a higher valuation; raise too little, and you risk not having enough resources to hit the milestones needed to successfully raise your next round. 

The simple answer is that you should only raise as much money as you need to get to the next phase of your company’s growth. While there’s no perfect formula, there are a few areas of your business you can consider to make an informed decision about your round size.

Here are three factors to evaluate:

Your first milestone

Milestones are the specific benchmarks you want to hit on the way to reaching your broader, long-term company goals. Most milestones are quantifiable achievements that indicate where your company stands, growth-wise. For instance, you might want to focus on launching your MVP or securing your first 1000 customers within 12 months.

When contemplating your most important milestones for fundraising, there are two key questions to ask yourself: 

  1. Where do you want your company to be by the time you reach the next stage of funding? 

  2. What specific metrics will help you get there? 

For each milestone, consider the following elements: 

  • Resources: what will it take to reach the milestone? Whose specific talents and skills will you need? What kind of tools will you rely on? 

  • Time: how many months or years will it take to reach the milestone? 

  • Costs: how much money will you need to reach the milestone? 

Your runway

Cash runway is the amount of time you can realistically fund company operations before running out of money. If you have £500,000 in funds, for example, and it costs roughly £100,000 a month to run your company, this only gives you five months of runway. In general, you want to raise enough money for at least 24 to 30 months of runway, which is the typical amount of time it takes to move from one funding round to the next.

To figure out how much it costs to operate your business while working towards your next milestone, you need to consider:

  • Your team: how many engineers, marketers, salespeople and customer support reps do you need to reach the next milestone you’ve set? How much will you need to pay your team working full-time?

  • Your admin needs: how much will it cost to buy the right tech and equipment, rent ‌ office space and budget for travel?

  • Your marketing and advertising budget: how much do you expect to spend on building a website, creating a social media strategy, running ads and setting up different distribution channels?

Calculate your burn rate with Carta’s free cash burn rate calculator

Once you figure out your company’s cash burn rate (total monthly spend for people, admin and marketing), multiply that figure by the number of months you think it will take to achieve your next milestone. That will give you a clear idea of the minimum amount of cash flow required to reach the next phase in your growth journey.

Keep in mind that this number is often just a starting point. It’s sensible to cushion your budget to account for unexpected problems and delays. Having more cash to hand – even if you don’t end up using the money – is better than having to account for every penny and still come up short.

Your ideal valuation

Your company’s valuation is an assessment of its worth, but it’s also a direct byproduct of two factors: the amount of money you raise and the ownership stake you’ve given to investors. Carta data from Q1 2023 reveals that most founders part with around 20% of their equity at the seed stage and another 15.5% during the Series A round.

Let’s say that, after defining your milestones and estimating monthly operating costs, you decide you need to raise £1 million during your seed round. If you don’t want to give up more than a 20% stake in your company, you’ll need to aim for a negotiated post-money valuation of £5 million (since £1 million is 20% of £5 million). This figure represents the capital needed to achieve your next goal without diluting your equity too much.

Remember that valuations are fluid, so you may need to be flexible with your expectations. When negotiating your ideal valuation, the goal is to raise enough money to sustain growth, satisfy investors and maintain a reasonable ownership percentage.

What to do before you start fundraising

If you think you’re ready to start fundraising, follow these steps to set yourself up for success:

Chat with fellow founders

Consider reaching out to other founders and mentors who have successfully reached their milestones and secured capital. Find out what they learned from fundraising and what they would do differently next time. In particular, ask how they defined their milestones, how much cash they needed to reach their next round and whether their fundraising target was on point.

Ask your lawyer for advice

Your startup lawyer may be able to offer guidance on the logistics of preparing to fundraise. For instance, you might need to firm up your idea from a legal or regulatory standpoint, apply for patents or compare your product or service with competitors.

Gather data and crunch the numbers

Having the right metrics to back up your company’s growth and profit potential is crucial. You need to persuade investors that it’s worth betting on your company and that you’ll use their money wisely by explaining your expenditures, estimated runway and funding needs.

Prepare your pitch

Before you start fundraising, you need to build a compelling pitch deck that explains who you are, what problem your business is solving and why investors should care.

Target the right investors

Not all investors are created equal. To increase your chances of securing funds, it’s important to target investors with experience in your industry and an interest in founders with a similar background and mission to yours. But tread carefully: some investors might already back one of your competitors and could therefore face a conflict of interest – or possibly use your intel to aid their portfolio company.

Starting the fundraising process

When you choose to fundraise and how much you raise comes down to your specific needs and goals as a company. Carta can support your business all the way from seed to exit, with cap table management, valuations, share plans, fundraising and much more.

Behind every fundraise is a solution. Find out how Carta supports founders at every stage of their fundraising journey.


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