There are many skills we ask of entrepreneurs – sales, hiring, marketing, product management etc. Of them fund raising is probably the most detested among technology entrepreneurs and the most desired among investors. If there are 3 things most seasoned entrepreneurs will tell you that you need to focus on as the CEO is to set the vision and product direction, hire great people and make sure there’s enough money in the bank.
The fund raising landscape, though has dramatically changed over the last 7-10 years for technology startups.
Used to be that most startups went from bootstrapped (for 6 months or less) to friends and family round (for the next 6 months) to an angel round (lasting 12 months) and then, if successful to a institutional venture capitalist (lasting 18-24 months).
It is not unusual to hear of 7 or more funding rounds BEFORE the institutional venture funding round these days for the 80% of the startups that dont have “unicorn type” growth. This crushes previous investors and makes the entrepreneurs more vulnerable to the situation when there is an exit at the company and the entrepreneurs make literally no money at all.
What are the sources of capital now available to entrepreneurs and when should you chose them?
That’s largely a “it depends” type of question, but here are your options.
1. Most entrepreneurs start with a bootstrapped model. It used to be that you had to keep 6 months of capital for yourself to sustain before you started, and now that has remained 6 months or become closer to 12-18 months. If you show quick traction, expect external investment soon, else expect to be in for the long haul.
2. Friends and family are typically still a good option, but increasingly I am noticing ex colleagues who have worked at startups or large companies who trust you and have experience in the market or customer problem you are trying to solve are a good option.
3. Crowd funding sites like Kickstarter, Indegogo, Fundable and Funding Circle are a relatively recent option for hardware startups, but are increasingly becoming a good option for “validating” true customer need and initial funding for many startups as well.
4. Angel investors are still a viable option, but increasingly angel groups are becoming a better source of the next stage of capital. They provide not only the ability to get money quicker than venture investors but also provide valuable expertise, advice and connections to help rookie entrepreneurs along the process.
5. Accelerators are relatively new source of funding, advice, network and mentorship as well. From fewer than 10 that existed 7 years ago, there are over 500 of them across the world, with many focused on specific verticals and industries that have domain expertise to help you further than a generic seed fund.
6. Micro Venture Capitalists (Micro VC) or Super Angels or Seed Funds are a relatively new phenomenon as well. From fewer than 10 Micro VC’s 7 years ago, there are over 250 of these small check-size, quicker to move investment options.
7. Angel List Syndicates are the latest option available to entrepreneurs now in the US and India (via Lets Venture). These syndicates allow any investor who has expertise in an area to help syndicate their “deal” with other interested High net worth individuals. They are usually led by an experienced and very well regarded entrepreneur and the value to this individual (besides the carry, a small portion of the investment in ownership or future exit option) is the reputation it builds for that individual.
Most of these new options come with their own pros and cons, but they are relatively recent phenomenon. If you are an entrepreneur I’d highly recommend you spend time reading up on all these options before you embark on your funding path. The best sources are usually blogs written by experienced entrepreneurs who have recently gone through the process and have the knowledge and desire to share.