Guidebook To Raise Early-stage Funding For Startups


Author of the article is Sipika Nigam, Principal, Artha Venture Fund

Congratulations! You have an idea. It is either a service or a product, and now you want to start building upon it.

You start working on the service offering or building the product. You will either not need cash for this stage, in which case you continue to build the service offering/product until you find a PMF, or you need cash for this stage to hire resources or pay for tech integrations to enable your service/product.

This is when you begin fundraising. This would typically be the Pre-seed or Seed stage.

The following pointers will act as a guide for the various avenues there are to raise funds from and how to do it successfully.

Friends and family:
Your friends and family may or may not understand your idea well. They will primarily invest in you based on their belief in you and your abilities. Their investment amount and the expectation of return will usually be low. Nonetheless, they are your first set of believers and backers.

Make sure to treat them the same as you would an external investor by taking the time and patience to explain your idea, the risks of investing in the business, the period they may need to stay invested for, and the possible returns. A little earnestness will go a long way.

Angel investors:
These are typically high net-worth individuals, either first-generation entrepreneurs running family businesses over multiple generations or working professionals employed at the highest corporate echelons.

They stay ahead in their field and have good predictability and foresight about future trends. Their ability to understand your idea and its viability is much higher. Do research about the angels, their background, belief, and interest. Make sure your pitch is to-the-point. Avoid jargon and far-fetched ideas. While they may or may not have a prior interest in your idea, they will definitely need a strong reference from someone they know and trust. Investment is made in the founder than the idea at this stage since the service/product has not seen a market fit yet.

Make sure you have created strong ambassadors who will vouch for you and be supportive. Appointing board advisors and mentors is the best way to go about it.

Keep them updated regularly and ask them for help making new connections or any other business advice. Many synergies get identified by them for your business along with their other portfolio companies.

Family Offices:
It is a wealth management structure comprising second-generation (and beyond) businesses that have accumulated generational wealth and are looking to invest strategically or financially. They can be similar to the angel investor in terms of their knowledge background and need for a strong reference.

An important distinction from angel investors is that family office investing is not just more organized than angel investing but also needs periodic updates and meeting of compliance.

Institutional investors:
Institutional investors typically have a mandate from their Limited Partners (‘LPs’) (ranging from a specific sector focus to sector agnostic) and will evaluate your idea as per their mandate. Make sure to read about their mandate and check out their previous investments to understand their company selection criteria and investment style. It will save a lot of time and effort and prevent agony from applying to many investors and receiving a poor response from them.

Presenting a good pitch to them is of utmost importance, preferably showing some traction. A tool that can be used to give an overarching theme and execution plan about your business is a Business Model Canvas (‘BMC’ – a template would be readily available online). A unit economics analysis is necessary, with a quick projection of best-case and worst-case scenarios. Also, a good reference will make everything easier.

Compliance, reporting, and organizational structure for an institutional investor are more sophisticated, with multiple team members, including deal sourcing, presenting the deal to the IC, documentation, and execution.

Finally, Incubators and Accelerators:
These are generally set up by universities or large corporates that want to promote startups in a particular sector and provide a launchpad for them. They onboard startups in cohorts after a careful filtration process and offer strategic advice, sometimes small starter capital (in the form of equity or grants), making the right connections, and prepping to pitch to institutional investors on a ‘demo day’ against a small advisory fee or advisory stake in the company on the success of a funding round.

Such platforms serve as a good playing ground to try out different approaches for the business, getting direct advice from the incubator/accelerator’s managers and peer startup founders from the cohort. Rarely are 2 startups from the same field or having the same business idea selected in a single cohort. Such programs polish and hone the fundraising skills of founders and often offer much-needed mental and emotional support to early-stage founders. Although, it is crucial to not apply to too many of them, thereby wasting precious time that could have been spent building the idea.

While it may seem comforting to many to go through a curated program for launching their startup through these set-ups, do bear in mind that these programs require your time to attend meetings as a whole cohort as well as at an individual level, do the prep work as is prescribed by the managers and present at different times, making the process time-consuming and demanding.

All the best! Now that you have this information, it’s time to go and get your first investment!

Disclaimer: The views expressed in the article above are those of the authors’ and do not necessarily represent or reflect the views of this publishing house

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