Everything you need to know about getting funds
This chapter is an introduction to fundraising. It answers the following questions:
Where to get money for a startup?
What are the different stages of fundraising?
What are the different forms of fundraising?
Who are the different types of investors?
Where to find investors? (investor lists for Switzerland & Europe)
What do investors look for?
What is the investment process and how long does it take?
Where to get money for a startup?
When thinking about getting money for a startup, we traditionally think about fundraising. However, before going into that, let's explore where else startups can get money.
Bootstrapping: building the company from the founders' savings as well as from the cash coming in from sales. Below is a small video with tips for bootstrapping done by EPFL Innovation Park and with Jean-Guilhem Chiariny, CEO of FeedBackNow. He talks about the advantages of bootstrapping, other sources of financing and optimizing Cash-Flow (something very important especially when bootstrapping).
Reward crowdfunding: this form of crowdfunding, or raising small amounts of money from a large poop of "investors", means that you are sending your product in exchange for money. It is almost like a marketplace where you can sell your products. Typical reward crowdfunding platforms include Kickstarter, Indiegogo, wemakeit and Crowdify.
Grants, prizes & competitions: governments and associations organize competitions to foster entrepreneurial activities. You can win small and large amounts of money without giving out any equity.
Loans & debt crowdfunding: loans can be from banks (usually inaccessible for startups) or from debt crowdfunding (usually for later stage startups) such as Swisspeers and Acredius
Revenue-based financing: is a form of debt financing, in which founders receive a debt that needs to be paid back by sharing future revenues. You can find out more about it here: Bigfoot Capital. For this type of financing, the company should be already generating revenues, although not necessarily be profitable.
Fundraising: financing through fundraising usually involves giving out equity to investors, at some point. Equity financing is a complex form of raising funds that goes through different stages (from pre-seed or seed to IPO or sale) and has a variety of different forms and types of investors. Let's explore it in more details below.
What are the different stages of fundraising?
As mentioned previously, a startup goes through different stages from Idea to Growth. During each of this stages, startups have access to different fundraising options. Keep in mind that this is not a static model, and the barriers between the stages are blurry.
At the ideation stage, founders usually use their own savings to finance their startups. The next stage, sometime between ideation and prototype involves asking Friends, Family and Fools (FFFs). Sometime around the prototype stage, founders have the possibility to raise funds from incubators and angel investors, who invest small amounts of money for a higher valuation, since the risk is extremely high at this point. Once startups develop a functioning product and get some traction (MVP stage), they can start raising more funds from angel investors, accelerators, do a small crowdfunding campaign or even go to early stage venture capital. Finally, when the goal of the startups is to get more customers and traction (Growth stage), startups can focus more on raising funds from Venture Capital Funds as well as Corporate Venture Capital Funds. The process with venture capital also goes stage by stage from series A to series C, D, and F. Finally, at the end, the startup performs an exit either through an IPO or by being acquired.
What are the different forms of fundraising?
The two most common forms of fundraising are equity fundraising and convertible loans (also called convertible note and convertible debt).
Equity fundraising means that investors receive equity in the company in exchange of their investment. In the context of an equity fundraising, the startup is issuing new shares that are bought by investors. The big question is "How much equity should they receive for the amount invested?" and this depends on the valuation of the company. As a result of an equity investment, each previous shareholder's equity stake gets diluted. You can find out more about dilution in the Block: Cap Tables.
A convertible loan is a debt that converts into equity when a certain even is triggered, such as a next investment, a take over, a liquidation or expiry date. The graph below from Equidam explain very well how Convertible Notes work. Moreover, you can find more information about Convertible Loans on the Swiss Startup Association's article "Everything you need to know about convertible loans".
You can also find out more about these two types of fundraising in Swiss Startup Association's article "How to get funding in Switzerland". The article talks about these two forms of financing, types of investors, funding phases, bootstrapping (pros & cons), FFFs (pros and cons), Seed (pros and cons) and mental readiness.
Who are the different types of investors?
As a small reminder, here are the different types of investors. Some of them were already mentioned previously.
Friends, family and fools (FFFs): anyone, usually your connections, who invests at a very early stage (Ideation)
Angel investors & Angel investors clubs: Angel investors are individuals with a particular interest in startups in which they invest up to 50'000 at very early stages (Prototype & MVP), some individuals may even invest much larger amounts. They can be working alone, in which case you find them at different events and programs, or they can be associated in an Investor Club. Some examples of such clubs in Switzerland include: SICTIC, Start Angels, Investiere, and Business Angels Switzerland.
Family offices: family offices are entities that manage the wealth of ultra high net worth individuals or families. Some of them invest in alternatives investments such as startups.
Venture Capital: Venture Capital funds are firms that invest the fund's money, that they get from other individuals and organizations. They invest in later stage startups (typically Growth), howerer some of them invest in seed-stage too (MVP). Here are some players: btov, Equity Pitcher, Ti Ventures, ZKB, RedAlpine, Wingman Ventures, Polytech Ventures, Index Ventures, Tomahawk VC, Swiss Startup Capital, Backbone Ventures, Alpana Ventures, and others.
Corporate Venture Capital: Some corporates have their own Venture Capital arms through which they invest in relevant to them startups. Working with a corporate has its own benefits such as access to the market. The following companies have their venture arms: Swisscom Ventures, Nestlé's Inventages, Rignier Digital Ventures and others.
Equity Crowdfunding platforms: are platforms where you can raise small amounts of money from a large pool of investors, giving them equity in return. Some examples include: Verve Ventures (previously Investiere), Seedrs, Companisto, C-Crowd and Republic.
Where to find investors (investor list for Switzerland & Europe)
To look for investors you will need to use a variety of strategies ranging from using your own network, to applying directly to investors or investing companies (VCs, Angel Clubs...), by gaining visibility through attending events such as pitching competitions, awards, etc., and getting referrals through investors you are in touch with or from your network. Below you will find multiple sources where you can find quite comprehensive lists of investors you can contact or apply to:
List from the Swiss Startup Association: here
List from the GlobalTechBox: here
List from the startup.ch: here
List from Startupticker: here
Below, you will find a video from the EPFL Innovation Park talking about when to start looking for investors, where to find them and how to chose them.
What do investors look at?
90% of startups fail, investing in startups is highly risky for investors. That's why they will assess different aspects of the startups before making a decision. These aspects can be categorized in 6 topics: the team, the market, the product, the business model, the financials and the achievements, see Framework: What investors look at. At the first stages, the team and the market will have the highest impact on the investors' decisions. As you advance in the journey, start getting traction and paying customers, financials metrics and achievements start having a predominant role in the decision-making process. Keep in mind that the time between a startup starts looking for funds and get funds takes a long time, up to 6 months or even more.
What is the investment process and how long does it take? The investment process usually takes between 3 and 12 months but averages at 6 months. In the graph below you will find the main stages of the investment process as well as the most important information you need to have ready. We will explore pitch deck, due diligence (data room), term sheets and shareholder agreements in more details in the next articles.
Supporting Tools & Additional Resources
Reward Crowdfunding: Kickstarter, Indiegogo, wemakeit and Crowdify
Debt Crowdfunding: Swisspeers and Acredius
More info on revenue-based financing: Bigfoot Capital
Valuation tool: Equidam
More info on Convertible Loans: Swiss Startup Association's article "Everything you need to know about convertible loans"
More info on fundraising in Switzerland: Swiss Startup Association's article "How to get funding in Switzerland"
Angel Investors Clubs: SICTIC, Start Angels, Investiere, and Business Angels Switzerland
Venture Capital firms: btov, Equity Pitcher, TiVentures, ZKB, RedAlpine, Wingman Ventures, Polytech Ventures, Index Ventures, Tomahawk VC, Swiss Startup Capital, Backbone Ventures, Alpana Ventures
Corporate Venture Capital firms: Swisscom Ventures, Nestlé's Inventages, Rignier Digital Ventures and others
Equity crowdfunding platforms: Verve Ventures (previously Investiere), Seedrs, Companisto, C-Crowd and Republic Investors lists:
List from the Swiss Startup Association: here
List from the GlobalTechBox: here
List from the startup.ch: here
List from Startupticker: here
Fundraising is not easy and takes a lot of time and preparation. As one founder said "You need to treat fundraising as a full-time job" (even if you need to focus on actually building your startup". In the next blocks we will explore how to create a convincing Pitch Deck and pitch, how to determine your company's valuation, how to create cap tables, what are Terms Sheets and Shareholder Agreements and what you need to prepare for the data room.