We’ve been answering a ton of questions about startup fundraising recently, so we thought we’d share some answers.
Q: Are there any pitfalls of getting money from people you know, like friends and family?
It’s sometimes easier to convince people you know to invest, especially at the beginning when you still don’t have a real company. For friends and family, it’s more about you, your idea, and your potential to execute. On the flip side, there are people who prefer to keep business and friendship separate. Be sure to consider what happens if you don’t succeed before you take friends and family money. It’s a totally personal decision (if you’re lucky enough to have the option).
Q: If I can self-fund is that better than getting investors involved at all?
Pros of self-funding:
- You can get started right away, and you don’t waste time and money looking for investors, pitching, dealing with lawyers, etc.
- It’s 100% your risk, so you don’t add the pressure of other people’s agendas.
Pros of getting investors:
- You reduce your financial risk (it’s not smart to invest 100% of what you have in a single thing: a company, a single stock, etc.).
- Great investors can help you with more than just money: introductions, guidance, etc.
- Accountability to other people can help you achieve your goals.
Q: Do investors like to stay in industries they know, or are they looking to diversify their portfolio?
It totally depends on the individual. Many investors like to stick with industries they know as a way to reduce risk, because they can better evaluate ideas and proactively help with suggestions and introductions.
There are other investors who focus on specific technologies, not industries. For example, blockchain can be applied to finances, notary, cybersecurity, etc. Artificial intelligence also crosses many different industries. Other investors—like our own Rokk3r Fuel fund—aren’t focused on a specific region, industry, or technology.
Another way to classify investors is by which stage of startup they invest in. Angel investors tend to invest earlier because they deploy less cash. Institutional investors—VCs and family offices—usually get involved at Series A or later, and tend not to invest in early stage companies.
Q: is it better to have multiple investors?
Many times you need multiple investors because investors feel most comfortable participating in groups. A fund who invests in one round may require you to find a different lead investor for your next round, for example. This helps them sanity-check that the investment is attractive to other professionals. Or you may be asking for more money than any single investor has available, so you’ll need to assemble a group.
One advantage of having multiple investors is that you theoretically have more people helping, as long as they are all “smart money.”
Focus on finding a lead investor first, and then everyone else will feel more comfortable putting money in. Social proof and scarcity help you raise money—think about how you can politely add some FOMO to the equation.
Having only a few investors makes everything easier (paperwork, reporting, etc.) so we recommend it at the early stages.
FYI – Big investment funds have minimum thresholds for new investors ($250k minimums, for example) because they don’t want to deal with a bunch of paperwork and management for lots of tiny investors.
Q: How many rounds of fundraising do most companies typically go through?
It depends. 99% of investors invest because they are looking to get at least 10 times their money back in 5-7 years. This means that they are expecting you to either sell your company or IPO so they can get their money out. Of course that’s just a reference, it might take longer or less than 5 years.
This article lays out the how many rounds of fundraising startups usually go through.
Most startups do a few rounds of funding in that time. Unicorns do more rounds. WeWork just raised a Series G, for example. Founders and some investors are typically taking some money off the table in these big rounds at successful companies.
Q. What else can you tell me?
Crunchbase is a great source of information for this type of stuff. You can also browse companies and see how much money they’ve raised, from whom, how many rounds they’ve done, etc. It’s not 100% complete, but it gives you a good idea of what’s going on out there.