The art of startup fundraising: Your guide to raising capital in 2022 and beyond

There is an art to raising funds for a startup. 

Whether your business is in its early stages or you’re preparing for your Series E funding round, you need a tight strategy to raise the capital you need to realise your ambitions. 

In this guide, we’ll take you through the different types of funding available to startups and how to access them. We’ll also cover how to value your startup, how much to ask investors for, and the common mistakes to avoid. Plus, we’ll speak to industry experts to get their first-hand tips on how to prepare the perfect pitch. 

Types of funding available to startups

First things first. Before you start raising capital, you need to choose the funding avenues that are right for your business. Here are the funding types that may be available to you. 

Personal capital 

Founders often use their own savings or rely on money from family and friends to kick-start their business in the pre-seed stage. This is sometimes referred to as “bootstrapping.”

Be aware that there are risks involved. 60% of startups fail within their first three years, and you might not be able to recover your personal savings, or those of your family and friends, if your business unravels. 

But if you have confidence in your idea and are in a position where you can afford to take a risk, using personal capital can help take your business from an idea sketched on the back of a napkin to something more tangible that future investors will want to get on board with.  

Crowdfunding

Crowdfunding is the process of persuading a large amount of people to invest a small amount of capital in your business. 

Rather than convincing one individual to invest $500,000 into your startup, you can try persuading 5,000 people to invest $100. The idea is that no one is putting a large amount of capital at risk.  

Social media and crowdfunding websites provide founders with access to a diverse range of potential investors. These investors are usually ordinary people who might decide to support your business in return for rewards, equity, or simply because they like your idea and want to be a part of it.  

To protect vulnerable individuals, there are specific legal restrictions on who can contribute to crowdfunding efforts and the maximum amount that can be contributed.  

[Related: Venture capital vs crowdfunding: What’s the best call for your business?]

Incubators and Accelerators 

Incubators and Accelerators provide a range of support services to young businesses, including office space, workshops, access to professional services at a reduced rate, and seed funding. In return, they'll typically ask for equity in your company.  

Incubators can be academic organizations (such as universities), non-profit organizations, commercial companies, or venture capital firms. 

Accelerators typically operate as part of a scheme backed by the government or a corporation. 

Angel investors

An angel investor is an individual who invests a large amount of their own capital into a startup or small business in return for ownership equity. 

Angel investors tend to be wealthy individuals with business experience who, in addition to offering funding, also provide mentorship to entrepreneurs and access to a network of valuable contacts.  

Angel investors differ from venture capitalists in that they invest in the earliest stages of a business, even though this puts their capital at considerable risk. Angels may take those risks because they want a business to succeed for personal reasons, not just for profit. An angel investor might be a friend or someone who strongly believes in what your business is trying to achieve. 

Angel investors will typically ask for a 20 – 25% stake in your business, which is why this form of investment is usually confined to seed-stage businesses that cannot access funding from other sources, such as investment banks.  

Venture capital

Venture capital is a type of private equity given to startups with long-term growth potential. 

Unlike angel investors, who invest their personal wealth in startups, venture capitalists typically work for financial institutions, such as investment banks and venture capital firms. 

Venture capitalists raise capital from accredited investors and invest it in promising early-stage enterprises in exchange for equity. The overall objective of any venture capitalist is to generate profit for their investors. 

The upside of venture capital is that you can secure funding for your business even if you do not have assets or cash flow. The downside is that venture capitalists may demand a significant stake in your company and even require you to relinquish some control over the business's direction.   

Debt: business loans, credit cards, and more

There are several funding options available to businesses seeking to take on debt, each with its own specific eligibility criteria. 

Some avenues to consider are business loans, invoice finance, government loan schemes, credit cards and asset finance. 

This type of finance comes from banks, peer-to-peer lending corporations, and commercial lenders. Interest rates vary depending on the type of finance and the provider, so it’s essential to thoroughly research the options before committing to a product. 

Often, lenders will require security, such as a personal guarantee, before agreeing to lend you money. This means you may need to secure the debt against your home or business assets. 

Only businesses with a positive cash flow, and therefore able to repay the interest accrued on their debt, should consider taking on this type of finance. 

Private equity

As the name suggests, private equity is a type of financing reserved for businesses that are not yet publicly traded on the stock exchange.

Unlike venture capitalists, private equity firms do not invest in early-stage startups. This is a form of investment that you should consider later down the line, for example, in your Series B funding round. 

Startup fundraising stages 

Pre-seed 

Pre-seed funding is the initial round of capital that founders raise to launch their business. The amount raised in a pre-seed funding round typically ranges from $50,000 to $250,000. You should use this initial investment for:

• Market research: to validate your business model and product idea.

• Prototypes: a version of your product that you can show to potential investors and stakeholders. 

• Patents and licensing: to protect your intellectual property rights and ensure you’re legally allowed to distribute your product.   

• Hiring: you may need employees to get your business idea off the ground. 

Pre-seed funding typically comes from founders’ personal savings, as well as from family and friends. 

Seed

Seed funding refers to the initial round of capital that an early-stage business raises from investors. 

Seed funding amounts range from $10,000 to $2 million. The amount you raise will depend on what you are trying to achieve at this stage in your business’s development.  

You should use the money raised to continue the work you’ve begun in the pre-seed stage and develop a minimum viable product that is ready to take to market. 

Some companies will never need further investment beyond the seed funding stage. Others will need to continue raising money to achieve long-term growth and profitability. 

Series A

To successfully raise Series A funding, you must demonstrate to investors that you have a clear strategy for achieving long-term profitability. 

Seed A funding typically comes from venture capitalists that'll be looking for proof that your business is going to generate returns. Although it’s worth noting that venture capital is not the only route to Series A financing, crowdfunding is another option for businesses that fail to gain interest from venture capital firms. 

Less than 10% of seed-stage companies will go on to raise Series A funding. So, how do you give your business the best chance of success?

1. Approach investors because you’re ready for your next stage of growth, not because you’ve run out of money. Remember, raising capital takes time, so ideally you want to have a runway of 6 – 12 months before you start the process.    

2. Ensure you connect with the right people. Build a list of venture capital firms that have invested in companies similar to yours. These firms are more likely to be interested in your proposition.

3. Build relationships by attending events. Make connections with peers who can introduce you to their investor network. Cold emails are likely to be ignored by venture capitalists, but a recommendation from a trusted contact will get you far.      

4. When it comes to pitching, you must provide evidence that you have reached product market fit, are on top of your unit economics, and have a plan for scaling your business towards profitability. At this stage, having a great idea is not enough; you need to show that your company is on track for long-term growth.  

Eran Galperin is the founder of Gymdesk, his advice to businesses seeking funding is to find a network of investors that suit your enterprise. “Find a network that shares similar philosophies to yours. It's no use pitching or moulding your company to fit the money. It has to be a hand-in-glove arrangement to maximize your chances of success and sustained growth.”

If your pitch impresses a venture capitalist, they will conduct due diligence to verify that your financial projections are accurate and perform a valuation of your company to determine its worth within a given timeframe.

Successful Series A funding rounds will raise between $2 million and $15 million. In the US, the average amount raised in a Series A funding round in 2021 was $13 million, although the high valuation of companies in the tech industry inflated this number. 

In return for Series A funding, you can expect to give up between 20% and 25% of your company in the form of common or preferred stock. The investor will also expect to be involved in company proceedings going forward and will likely request a seat on your board. 

You should use the money raised in your Series A funding round to progress towards your long-term growth goals. 

Series B

At this stage in your fundraising journey, your business should be well established with a proven business model. 

Part of your Series B funding may come from the same investors who provided capital during your Series A round. You can also pursue new avenues, such as later-stage venture capitalist firms, which are more likely to be interested in your business now that it has matured. 

Series C funding and beyond

If you’re looking into Series C funding, your business must be enjoying some success. At this stage, you may be looking for funding to support global expansion, develop new products, or acquire a competitor.

As you progress in your funding lifecycle, the balance of risk versus opportunity begins to tip in your favour, making it easier to get investors on board. At this stage private equity firms, hedge funds, and investment banks are likely to become interested in your company.

[Related: From Seed to Series E: Understanding funding rounds]

How to pitch to an investor

Once you’ve secured a meeting with an investor, it all comes down to your pitch. We spoke with industry experts to determine how founders can best impress potential investors.

Jason Porter is a Senior Investment Manager at Scottish Heritage SG. His advice is to play to your strengths and keep your proposed solution clear and concise. 

“Investors will believe in your potential to thrive if you have a strong track record as a founder,” says Jason. “If not, you'll have to demonstrate your worth in other ways. Be honest and true to yourself. Investors are interested in your journey, how you reached your current position, and what motivated you to achieve your goals.”

Jason stresses the importance of showing your startup’s ability to address a market need or problem.  “If your brand is well-known and has a strong personality, but you are unclear about the solutions you are providing to the market, it is unlikely that you will be able to attract investors or secure enough cash,” he says. 

Sophia Jones works as an Investment Analyst at PiggyBank. Her advice is to ensure you have a clear understanding of what you're trying to accomplish and how you plan to do it. 

“It's important to be able to explain your goals in a way that makes sense to investors who may not be familiar with your industry or technology,” says Sophia. “Create a realistic budget for what you want to accomplish with your funds. Investors want to know that you can use their money wisely and effectively. Finally, if possible, find early adopters for your product or service. This will help demonstrate that there is demand for what you're doing and provide some proof of concept for future investors.”

Diego Kafie is the CEO and co-founder of Playbite, a mobile games platform backed by prominent venture capitalists like M25. His advice is to prepare.  

“Prepare your pitch, prepare your answers. Prepare to be rejected countless times, and sometimes even get strung along for a while to no fruition,” says Diego. “Prepare to course correct: you'll learn from every meeting, and should apply those learnings to your pitch. Prepare to have to make tough calls as you inevitably have to pass on investors.”

[Related: 10 key business metrics every startup founder needs to know]

Valuing your startup

Valuation is an essential part of a startup's fundraising strategy. There are several ways to do it. Here are some options: 

Comparable analysis

This valuation method, sometimes called peer group analysis or “comps”, involves finding companies that are similar to yours and looking at how they are valued by the market. 

The multiples that analysts use when performing similar analysis vary by industry, but typically include: 

• Enterprise value/sales (EV/S)

• Price/earnings (P/E)

• Enterprise value/earnings before interest, taxes, depreciation, and amortization (EV/EBITDA)

• Price/book (P/B)

The primary drawback of this valuation method is that it can be challenging for early-stage startups to find comparable companies.    

Discounted cash flow (DCF)

This valuation method assesses a company's future earning potential to determine the value of an investment.

The DCF method takes a company’s forecasted cash flow over a specified period. Then it uses a discount rate – typically the weighted average cost of capital (WACC) – to determine the present value of that cash flow. 

Investors can then assess whether the value of their investment over time will exceed the initial cost of the investment. 

Cost to duplicate

To determine your cost to duplicate, you need to calculate how much it would cost to rebuild your business from scratch. To do this, you need to look at how much you have spent to date on costs like equipment, product development and research.

Cost to duplicate gives a fair valuation of your business’s current assets, but it doesn’t take into account your company’s future earning potential. For this reason, it is not the most effective valuation method for companies seeking to persuade investors of their growth potential. 

How much funding should you ask for?

There are several factors to consider before determining the amount of capital to request in each funding round.

1. Your company valuation

Understanding your company’s valuation is crucial to understanding how much capital you should ask investors for. Investors are looking to make returns between 10–40 times their investment amount, so by analysing your company’s future worth, you can work backwards to see how much you should ask for in exchange for the equity you’re offering.

2. How much equity you're prepared to give away 

The more money you ask for, the more equity an investor will require to earn returns. Be cautious not to reveal too much about your company in the early stages.

3. The amount each investor is looking to offer 

Angel investors typically invest between $25,000 and $500,000 (although some invest more). Venture capitalists won’t get out of bed for anything under $2 million. Asking for either too much or too little will deter investors, so ensure you conduct thorough research. 

4. The stage your company is at and how much capital you need to achieve your next phase of growth 

When you pitch to investors, they will expect you to share how you plan to use their funds. The amount you ask for should match the cost of what you’re looking to achieve (with a reasonable buffer built in).      

5. How long will it take you to raise the capital you need

Fundraising takes time. The more you’re looking to raise, the more time it’s going to take. If you don’t have a huge runway, it might be best to opt for a smaller fundraising target in the knowledge that you can raise more capital in your next round.

6. The number of investors that have shown an interest in your company

Like many things in life, being in high demand is going to make your company look more attractive. Your ideal scenario is for investors to enter a bidding war.

Common startup fundraising mistakes and how to avoid them

If you’re new to fundraising, here are a few common mistakes that you need to be wary of.  

1. Don’t give away too much equity in the early stages of your business

 The moment an investor shows an interest in your business is exciting, but it’s important not to get carried away and give away too much of your company in exchange for what may, in the long run, be a small financial investment. If you give away too much of your business in the pre-seed and seed stages, you won’t have as much leverage when it comes to later funding rounds. An accurate valuation of your business will help you understand the true value of a stake in your company. 

2. Don’t approach the wrong investors

Not every investor will be a good fit for your enterprise, and approaching the wrong individuals is a waste of both your time and theirs. Likewise, successfully securing investment from someone you don’t want to work with for the next three to six years can be disastrous for your business. Ensure you conduct thorough research and identify investors who align with your vision.

3. Be confident, but don’t oversell yourself

Telling everyone that your business is the new Microsoft isn’t going to make it true, and is likely to elicit an eye roll from jaded investors. Ensure your claims are based on verifiable facts and sound financial projections.  

4. Don’t ask for too little

You might think it’ll be easier to raise a small amount of capital, but this isn’t always the case. Investors are looking to make a decent return on their investment, and if you’re only asking for a few thousand dollars, investing is hardly going to be worth their time. Be bold with your growth ambitions and ask for the amount you need to achieve them. If investors think it’s too much, they can always negotiate with you. 

5. Don’t ask for too much

On the flip side, be wary of asking for unreasonable amounts of capital. Look at how much the investor usually puts into businesses at your stage of development. Explain clearly what you will use their money for and how their investment will lead to solid returns. 

6. Sell your idea

Before you get into the weeds with your financial projections and unit economics, don’t forget to sell yourself and your business. Investors need to believe in both you and your idea before they part with their money. A truly compelling pitch will clearly communicate the ‘why’ of your company, enabling investors to walk away with a clear understanding of how your business will appeal to your target market. 

7. Don’t go in unprepared

It should go without saying, but make sure you have your facts straight before you pitch. You should be prepared to answer questions on how you plan to scale your business over the next 12 months, the size of your target market, what your monthly burn rate is, your financial projections for the next two years, your unit economics, marketing strategies, and more.

8. Don’t underestimate how long it takes

According to Alejandro Cremades, author of The Art of Startup Fundraising, securing a Series A investment can take months, even just for the due diligence process alone. And even if you do secure investment it can take 90 days from your initial pitch to the money hitting your bank account. The moral of the story is that you should make sure you have a cash runway of 6–12 months before you start fundraising.  

Manage your global finances with Airwallex

If you’re on your way to securing the investment you need to accelerate your startup, you may also be searching for the best way to manage your global finances. 

Here’s where Airwallex can help. 

Airwallex is a financial suite designed for fast-growing startups. Our Global Business Account enables you to open foreign currency accounts with just a click. Collect, hold, and send multiple currencies – including USD, GBP, EUR, AUD, and HKD – from your account and convert currencies at our bank-beating exchange rate.

You can also spend in multiple currencies with our Corporate Cards, collect payments from your global customers with our Online Payments software, and integrate our technology with your existing tech stack. 

Airwallex is your one-stop shop for global money management, helping you expand into new markets while keeping FX fees low and profit margins high.   

To learn more, sign up for an account today.