An Introduction to Early-Stage Fundraising
By Wing Lee
Fundraising is vital for startup growth. The landscape is saturated and competitive, so founders need to understand and nail every step of the process. We discuss four areas to guide you to success.
Understanding who you are talking to is essential because you want to explore avenues of investment that fit your startup’s profile. The three primary types of investors are:
- Government: Funding from the public sector typically comes in the form of grants, facilities, and subsidies. They will require the startup to fit eligibility criteria, which align with their agenda to promote innovation in the country.
- Incubation and acceleration programs: They provide early-stage startups with business support and mentorship. The programs are usually region-specific or sector-focused, where startups are incubated in cohorts.
- Angel investors, family funds, and venture capitalists (VCs): These investors can offer a wealth of collaboration and mentorship opportunities. They have different investment theses and usually operate in specific sectors.
When your startup is at an early stage, it’s not always clear when you should begin reaching out to investors and which investor-type is most suitable. Step one is determining your valuation. Here are some general rules of thumb:
- Viable business plan for a scalable idea in an attractive market: US$250,000 to $500,000
- The above plus a prototype and a strong committed team: $500,000 to $2.5 million
- The above plus strategic alliances, partnerships, and a customer base: $2.5 million to $5 million
- The above plus measurable user traction and a clear path to profitability: $5 million+
Step two is identifying the right type of investor:
- Government support schemes are usually appropriate for very early-stage startups with a viable business plan.
- Incubation programs target those with a prototype and a strong and committed team.
- Angel investors, family funds, and VCs look for a customer base, user transaction, and strategic partnerships.
Investors evaluate many factors when assessing a potential portfolio company. One common concern is the likelihood of an exit further down the line, whether it’s through a strategic buyer, later-stage VC, private equity acquisition, or initial public offering. An investor’s aim is financial return, so their primary considerations are:
- Market size: Is the addressable market large enough?
- Capital expenditure, operating expenditure, and cash-burn rate: Is the startup growing sustainably and earning revenue?
- Scalability: Is the speed and ease of growth healthy?
- Defensibility: Does the startup offer a unique product proposition? Does the management team possess sufficient market knowledge, and balanced skill sets and personalities?
Regardless of the type of investor you work with, you will have to go through due diligence. While the process varies, it generally follows this structure:
- Screening: When you first connect with investors, they will look at high-level information, such as whether your business fits the fund’s mandate, if they have chemistry with the founders, and where the deal was sourced (i.e., through a referral or an application).
- Business due diligence: This step forms the basis of decision-making for investors. They will look at factors mentioned in the previous section, such as the team, market size, business model, etc.
- Legal and financial due diligence: When the investor is comfortable with the previous steps, they will then look at verifying financial records, key employee and client contracts, regulatory and legal checks, and getting an expert’s opinion on the market and technology.
Fundraising is a continuous process. It’s crucial to align your presentation with the investor’s point-of-view and investment thesis. It should never be about the capital itself, but how you can use it to scale your startup into a business with value.
About the Author
Wing is an entrepreneur and investor who invest in startups across the education, esports, and technology sectors. He is a former investment banker with more than 10 years of experience in corporate finance and debt capital markets across London, Singapore and Hong Kong.