Maybe you're still bootstrapping or maybe you have started to dip your toes in the water of third party capital pools. Now, however, you are widening your search to some of the most common early stage sources of capital, such as your immediate circle of friends and family, and local angels, incubators, accelerators and micro-VCs. Explore how and which of these sources can help you extend your runway and get access to the capital you really need to grow and scale your venture?
The first thing to understand when thinking about who you want to raise money from is the idea of “First who, then what.” Who is the right match for what you are offering? Specifically, you need to think about what's in it for the investor. Why would they want to part with their capital to help you achieve your dream?
It’s also important to recognize that although money is theoretically a fungible commodity, it's not true that all money is equal. Actually, some money comes with value-add; some money comes with strings attached. But this is the next step. First, we want to think about what kind of investors exist and how you might choose between them to decide who is best: best for you and best for them.
Friends, Family, Fools
Everyone knows that when you're starting a business, the people who love you the most may think it is a crazy idea and may try and convince you not to do it initially. But once they get over it, they may say, “Okay, actually I do support you.” That’s why friends, family and ‘fools’ are typically the first outside capital source for many startups. ‘Fools’ would be people who, for whatever reason, want to throw money in at this early stage but aren't really professional investors.
And all of these possible investors have one thing in common: they're essentially supporting the entrepreneur because they like the entrepreneur. They're supporting the entrepreneur because maybe they even love the entrepreneur. In other words, they have a personal relationship with him or her. This source of venture finance money tends to be the least sophisticated in general.
Equity-based and debt-based crowdfunding are now legal in many countries, so you could seek to raise capital through crowdfunding in the form of equity (investors looking for upside in the form of capital gains and/or dividends) or debt (lenders looking for a return on investment in the form of interest and repayment of principal). There is also crowdfunding based on awards (pre-sales of products or prototypes) and philanthropy. Crowdfunding can be a great way to “test the waters” with your idea, but it’s not easy and it requires a serious investment of time and money to be successful.
Business accelerators have become popular sources of funding. An accelerator typically is part of a cohort, a fixed duration program – maybe 90 or 120 days – and it comes with a host of services such as mentorship, training, business support services, some pre-seed capital (say, $20,000-$150,000) culminating a type of “commencement ceremony” or “demo day” to an audience of prospective investors. The pre-seed capital is frequently in the form of convertible debt or something similar like a SAFE or a KISS. Well known examples include Y Combinator, 500 Startups and Tech Stars which hail from the USA, Startup Bootcamp which hails from Europe and Startup Chile in South America.
Whereas accelerators generally think of themselves as enablers of startup rocket ships during the “pre-seed” and “public launch” phase, incubators are more open-ended and are not generally designed to rapidly boost growth. You can generally join on a rolling basis and, although there is typically access to training, mentoring and shared business services, the approach is more ad hoc and laid back. Usually, incubators are typically “fee-based” and do not take an equity interest, but they are important players for early-stage companies in many startup ecosystems. Incubators tend to be known regionally, and are frequently supported by governments and universities. For a list of business incubators in the USA, click here: https://www.gaebler.com/small-business-incubators.htm For a list of top incubators globally, click here: https://www.startingbusiness.com/blog/best-incubators
These are individuals investing their own personal capital. It's not institutional money. Typically, they get involved in the pre-seed, seed, and earlier stage VC rounds. Professional angels are motivated by a number of factors, one of which is just pure economic return. They are also investing because they think it's fun, interesting and an opportunity to stay involved with entrepreneurship. In fact, most business angels are successful entrepreneurs themselves and they like to stay involved because they are curious and want to mentor and engage with other creative, ambitious and risk-loving investors and entrepreneurs.
A super angel is not a micro VC and not an institutional investor. It's somebody who can operate at a higher level. Usually, they are capable of writing bigger checks. They can lead deals and negotiate the terms and conditions, They frequently have a following of other angels because the super angels are perceived to be “smart money.” The ones that follow are the sheep angels, who say, "Hey, if so-and-so is in the deal, I know they are smart and savvy so I'll follow along." Some super angels have professionalized their operation by leading syndicates of other angels.
Micro-venture capital firms
Micro VCs have become quite common around the world. These firms are structured like a traditional VC, with limited partner investors and management fee and carried interest, but they are “micro” in the sense that they manage smaller pools of capital, generally less than $50 Million. Micro VC firms are frequently first time funds, founded and lead by persons who may have previous experience as an active angel investor who wants to step up a little. They're operating in the early-stage market and they're important players.
Within the local ecosystem, it's important that these micro VCs survive and thrive for many reasons. They can act as “lead investors” to bridge from pre-seed to seed stage, and also as the “boots on the ground” for larger VC firms that may be deploying capital from another city, region or country. They are the ones who can add additional capital on top of angel capital. As venture finance grows through cross-border deals, the larger global VC funds who want to venture into new markets may feel more comfortable if there's a micro VC involved and who can help them perform due diligence and manage the investment over time.