Raising a funding round is no easy task. Especially if it’s your first-time raising money. Ask any founder regardless of the size of their startup and they will tell you – heartbreaking – stories about how they got their first funding round.
Naturally, first-time founders and entrepreneurs have tons of questions they’d like to get answers to.
Some founders begin asking questions the moment an idea forms in their head, while others start wondering about funding when money is tight and they need outside investment to help them grow.
So what are the top startup funding questions founders ask when it’s their first time raising a funding round?
In this article, we’ll answer 15+ of the most commonly-asked questions about funding rounds, investments, and investors. We’ll also offer some tips and food for thought if you’re still early in your startup journey.
Startup funding questions: When should founders think about funding?
Many founders often begin thinking about funding and how they’ll get it quite later than they should. However, more founders today are learning to consider their funding options quite soon. Some even do so before they start their business.
The best time to think about funding is early on. Why? Because:
1) Market conditions are changing everywhere.
2) As you grow, you’ll need to expand your team, which means you need more money.
3) Despite financial forecasts, sometimes it’s harder to get a clear estimate of how long your current finances will support your growth.
Investors are more likely to invest if they see that your idea isn’t just an idea but rather an idea that’s coming to life. An idea that’s proving every day that it’s worth the investment.
So, when should you think about funding? As early as possible is our answer.
While you shouldn’t let the idea consume you, it’s best to be aware of the different types of investors and investment options early on.
And when it’s time to find an investor, you’ll already be familiar with your business needs and growth methods.
When should I join an accelerator or an incubator?
“The stage of your startup is what determines whether you should join an accelerator or an incubator,” explains Flat6Labs investment associate Maya Oda Pacha. She explains that the incubator comes first because founders are still at the ideation stage.
Incubators help founders in the ideation stage by showing them how to validate their ideas, how to launch their product, and so on.
In other words, incubators help founders move from the ideation stage to creating an actual startup.
“It’s all conceptual work but puts things into perspective,” adds Pacha.
Accelerators are the second step. At this point, founders have an actual product and startup, and they want to grow, bring their product to the market, or both.
“When startup founders want to take their product to the next step, whether to learn how to generate revenues, build a solid customer, and the like, they join an accelerator program,” explains Flat6Labs’ Maya Oda Pacha.
She further adds that accelerator programs differ from one another, indicating that some programs offer mentorship only, while others offer both mentorship, including 1-on-1 help and workshops, and funding.
It’s worth mentioning that the average accelerator program is about 6 months long. Generally, founders have to attend all the workshops included. However, they may have one or more team members attend with them if the workshop is relevant to them.
What is the process for applying for funding?
This is one of founders’ most frequently-asked startup funding questions in early-stage and pre-seed startups.
Ask any founder who has raised funding and they’ll tell you and it’s neither an easy nor a short process. But it’s worth it.
In its simplest form, the process for getting or applying for funding looks like this:
- Creating a pitch deck to show them why they should invest in your startup
- Networking and connecting to reach investors
- Pitching multiple investors
- Repeat step 1 several times
- Don’t give up 😊
How do startup founders know how much they need to raise?
Another question we see and hear often from founders is ‘How much do I need to raise?’ And it’s really important because it’s a question investors will ask you.
The first step in knowing how much you need to raise is to determine your needs and create your vision. You should then translate this vision into figures and a short-term and medium-term plan.
Let’s say you’re a startup that operates in the manufacturing sector. If your vision is to increase production by a certain percentage, then your plan should show how you’re going to achieve this target.
This means your plan can include hiring more full-time team members, adding more vendors and suppliers, buying machinery,…etc.
In addition, we recommend creating and referring to your cash flow plan. Doing so will prepare you for this question since cash flow planning helps businesses detail their current and future expenses.
Your cash flow plan shows investors what you’re currently spending money on and what your future expenses may include.
It also includes:
– How much you’re currently investing in your team
– How much you’ll need to invest once you grow your team
– How much you spend on renting/leasing services
– The cost of all your software subscriptions and supporting systems
– Your current marketing budget and how much you’re planning to invest in marketing in the coming months
– What assets you need to buy, when, and how much they cost
In addition to knowing how much you want to raise, you’ll want to answer the question of ‘Why are you asking for this specific amount?’
Your answer needs to be specific. Is it to drive marketing? Is it for research and development? Product development? Expanding your hiring? All of the above?
How will you spend the capital raised?
Investors aren’t just interested in how much you want to raise but also in how you plan to use their money.
The best way to respond to money-related questions is to have a money-focused plan. This can be your cash flow plan or your budget. Having a budget means you can monitor your finances periodically and see if you’re moving according to schedule (your cash flow plan) or if you’re overspending in other areas.
If you need help creating a cash flow plan, budget, or both, then Stride has your back 🙂
What are the different types of funding?
As a startup founder, it’s not only about how much you’ll raise in funding, but where you’ll get it from.
Here are the most common types of funding and investment sources for your startup:.
- Bootstrapping
- Incubators
- Accelerators
- Crowdfunding
- Angel investors
- Venture capital firms and funds (VCs)
- Loans and debt financing
- Investment funds
- Hackathons
What type of funding does my startup need?
Now this is an interesting question that many founders are often confronted with. We’ve listed 9 types of funding in this article. But which of them would be best for your startup?
Contrary to common belief, not all startups need venture capital (VC) funding. VC investors are but one of the several types of investors out there. In fact, VC funding only begins at Series A.
“The type of funding usually depends on the stage in which the startup is in,” says Flat6Labs investment associate Maya Oda Pacha.
If the startup is just starting out or in the pre-seed stage, they’re more likely to get funding from people in their personal network, family members, or angel investors, she explains.
“Early-stage startups may often participate in competitions, grants, and hackathons,” she adds, noting that starting the Seed stage, startups can consider an accelerator that provides funding.
“Startups raising funding for Series A through Series C usually seek VCs. After Series C, most startups – now established companies – consider approaching private equities, applying for venture debt, or launching an initial public offering (IPO) on a stock exchange,” reveals Pacha.
As a startup founder, you’ll need to consider which investor type is best for you and what each of them brings to the table.
How is the funding disbursed?
Every founder and non-founder has probably asked themselves this question. We see announcements every day about startups raising funding. But how does the funding get disbursed?
Usually when startup founders reach their pre-determined required funding, they sign their contracts with their investor or investors, who in turn transfer the money into their startup bank accounts.
If the financing comes from multiple investors, each investor transfers the money separately into the startup’s bank account.
One of the rare cases Flat6Labs’ Pacha mentions is when an investor distributes the funds in the form of tranches based on achieved milestones. “This is a very rare case and it’s not the standard for disbursing funding,” stresses Pacha.
How much equity do I need to give up at an early stage or seed round?
This is a tricky question. However, there is no right or wrong answer. Like many things in life, the answer is ‘it depends.’
However, we can tell you what it depends on. How much equity you can give to angel investor or VC depends on:
- How much money you need at this stage
- If the investor will only provide cash assistance or if they will provide additional services such as mentoring or access to other investors
- The stage your startup is in
“Early-stage startups or those pre-Series A can give up less than 30% of the business,” comments Convertedin co-founder and CEO Mohamed Fergany.
“Usually we advise startups to not give up more than 20% in equity until they reach Series A,” advises Maya Oda Pacha, investment associate at Flat6Labs. She adds: “After Series A, the startup will be looking for a larger figure and should have enough to offer its investors.”
Further reading: What Is Financial Mentorship? When & Why Do You Need It?
What should I look for in an investor?
Investors aren’t there just available to provide you with capital for your startup.
When looking for an investor, especially an angel investor, you’ll need to consider whether this investor can provide mentorship and guidance among other benefits other than just their money.
Here are several elements to consider when you’re in talks with a potential investor:
1) Experience: Does this investor have experience in your industry? Have they helped other startups grow? Did they build startups of their own?
2) Risk-taker: It’s important that your investors are aware that startups are generally risky businesses. Even with a brilliant idea and suitable market conditions, there’s room for risk or failure.
3) Trustworthiness: You should be able to trust your investor not to disclose confidential information.
4) Guidance and support: Choosing an investor is a two-sided endeavor. Investors may provide you with funding to grow your business or may offer guidance from their expertise as a former entrepreneur or founder. Or they may offer both.
5) Clear on expectations: Make sure the investors you’re talking with can manage their expectations. You don’t want investors who’ll push you beyond the limits of their startup till the result is an embarrassing flop!
6) Patience: Like realistic expectations, investors should also be patient. They should be aware that it takes time to generate revenues and more time to generate profits.
If you’re beginning your Series A investment, here are a few more tips from Y Combinator:
– Look for investors who can be like board members for your business.
– “Look for ‘do no harm’ investors,” advises Y Combinator.
– The “best investors are experienced enough to know how to keep [a] distance [and] share their relevant experience in specific areas,” adds Y Combinator.
Further reading: Need Funding? Learn How to Answer These 15+ Questions Investors Ask Startups
What is a startup valuation?
Startup valuation is the process of giving value to a startup for reasons such as raising funding, entering into a merger or acquisition, listing on a bourse, among other reasons.
There are several startup valuation methods used which mainly depend on whether the startup is generating revenues or pre-revenue.
What is the burn rate?
The startup burn rate is a metric that indicates how much your startup is spending each month. It also indicates how much time (or how many months) you have left before you run out of money and require new funding.
The burn rate is one of the most important metrics for investors. It’s often referred to as negative cash flow or cash burn rate.
What are the documents needed to raise funding?
When you’re considering a funding round, there are a few documents you need to prepare before getting started.
While the geographical location of where you incorporated your business may require additional documents, these are the main documents founders should prepare before raising funding:
- Term sheet
- Shareholders’ agreement
- Share subscription agreement/equity distribution agreements
- Financial model and forecasts
- Investor pitch deck
- Financial statements (if one year has passed and if applicable)
What is an investor pitch deck?
The most important document you’ll be presenting to your potential investors is your pitch deck – formerly known as a business plan.
An investor pitch deck is a presentation that offers a brief but detailed overview of your business, including:
- Your products and services
- Your business achievements
- Your plans to grow
Also known as your startup deck, investor slide deck, and investor presentation, this document includes why you’re looking to raise funding and how much. It also includes your company’s financial forecasts.
What should an investor pitch deck include?
- Your pitch deck should:
- Your vision, mission, and value proposition
- The problem (why you created this startup)
- Your product or service (and how it’s the solution to the problem)
- Your target market and your total addressable market (TAM)
- Your business model and financial forecasts
- Revenues generated (if applicable)
- Your marketing and sales strategy
- Your founding team
As you can see, there’s lots to include in your investor pitch deck. And you need to ensure your numbers are accurate and your pitch deck isn’t boring.
If you need help creating your pitch deck or including information such as financial forecasts, get in touch with Stride.
What is due diligence?
A company’s due diligence is an audit, review, or type of investigation that’s used to determine whether certain details or elements are true or not.
Companies perform due diligence to analyze and mitigate potential risks such as a potential investment, merger, …etc.
“In the financial world, due diligence requires an examination of financial records before entering into a proposed transaction with another party.” (Investopedia)
Conclusion
When it comes to building a startup and raising funding, there are many elements and requirements that come into play.
We have tried to include as many of the top startup funding questions asked by founders in the different stages of their business. If there’s a question we missed, please let us know in the comments section of this blog post so we can add it.
If you found this post helpful, please let us know. Our aim is to create a resource that would serve startup founders and entrepreneurs like you.
At Stride, we provide various financial services for startups including:
- Cash flow planning and budgeting
- Financial models and forecasts
- Startup valuation services
- Investor pitch decks
- Business plans
We also provide:
Need help with one or more of the above services? Get in touch with Stride
