Fundraising guide for startups

For most startups, fundraising is a crucial milestone. It provides the capital necessary to develop a product, scale operations, and, in many cases, survive. While some founders opt to bootstrap, the reality is that most high-growth startups will require outside investment to grow at a competitive pace.

That’s why understanding the fundraising process is key to ensuring you make the most out of this critical phase. Successful fundraising requires preparation, strategy, and effective execution.

Table of content

Intro
1. Defining your fundraising goals
2. Finding and approaching investors
3. Preparing fundraising materials
4. Building relationships
5. Mastering the art of the ask
6. Closing the round
7. Delivering results
Mistakes to avoid
Final tips
Closing thoughts

A common question for founders is: When should I start fundraising? The answer is largely dependent on how much progress you’ve made and the amount of cash you need to hit your next major milestone. According to Geoff Ralston of Y combinator, the best time to raise is when you have a compelling story to tell. Investors are drawn to traction – if you can show them that your product is gaining momentum and you have a path to rapid growth, they’ll be more inclined to invest.

Rule of thumb: If your product has found some level of market fit (measured often by user engagement or revenue) and you are growing 10% week-over-week, you may be ready.

Financing options

One of the key decisions for founders is choosing an investment structure. Here’s a brief breakdown:

Safe (Simple Agreement for Future Equity): A popular option in the startup community, particularly among Y Combinator alumni. A safe is a straightforward agreement that converts to equity during the next funding round, without interest or a maturity date, making it founder-friendly.
Convertible notes: These are debt instruments that accrue interest and have a maturity date. At conversion (usually during the next financing round), they turn into equity at a discounted rate or with a valuation cap.
Equity rounds: In this approach, investors directly purchase shares, requiring a set valuation. This method is more formal and costly due to legal fees and negotiations.

Most early-stage startups prefer safe or convertible notes for their simplicity and lower costs.

Before reaching out to investors, clarify the following:

Why do you need funding? Be specific— whether it’s for product development, customer acquisition, market penetration, etc.
How much do you need? Determining how much to raise is a balancing act. You want to raise enough money to comfortably achieve your next big milestone, but not so much that you suffer from unnecessary dilution.
Calculate your burn rate (monthly expenses) to determine the right amount to raise. For example, if your burn rate is $50,000 per month and you want 18 months of runway, aim for at least $900,000 plus a buffer.
For how long? Raise enough to secure 18-24 months of runway, as fundraising can be time-consuming and unpredictable. You don’t want to seek capital too soon.
What’s your valuation? Research competitors and industry norms. Seed-stage valuations typically range from $2 million to $10 million, depending on various factors.
Remember: Dilution is part of the game. Most seed rounds will result in the founders giving away between 10-25% equity, depending on the amount raised and the negotiated.
How will you use the funds? Be clear about allocations—product development, hiring, marketing, etc.

Example: You need $500,000 to develop the next version of your app and scale your marketing efforts to gain 50,000 users over 12 months.

Action step: Create clear milestones and a detailed budget outlining how funds will be spent and how long they will sustain you (runway). Investors need to know your burn rate and your break-even timeline.

Useful resources:
1. Runway calculator: Tools like Runway and Burn Rate Calculator can help estimate how long your capital will last.
2. Lean plan template: Free lean plan templates are available at Bplans.com

Necessary documents:
1. Detailed budget breakdown: Include all costs—salaries, product development, marketing, etc.
2. Use of proceeds slide: A visual slide showing how each dollar will be allocated.
3. Financial projections: Cash flow projections for 12–24 months.

Finding the right investors for your seed round is as important as raising the money itself. You want investors who believe in your mission, can offer strategic advice, and are in it for the long haul.

Venture Capitalists (VCs): Venture capitalists are ideal for scalable, high-growth companies. They may offer more capital but come with higher expectations and due diligence. VCs often look for big returns, so be prepared to show them how your company can scale rapidly.
Angels: Wealthy individuals who invest their personal money, typically offering smaller checks for early rounds. They may be more emotionally driven and often act based on personal interest in the product or the founders. Building relationships with angel investors can be incredibly valuable early on, as they often provide mentorship in addition to capital.
Strategic investors: Corporations that could be future partners or acquirers.
Crowdfunding: Platforms like Republic and StartEngine can allow you to raise from the public.

Regardless of the type of investor, make sure you do your homework before approaching them. Understand their investment focus, portfolio, and typical check size. If possible, get a warm introduction through a mutual connection—cold emails tend to have lower success rates.

Building a target list

You can find investors through:

Networking: Reach out to founders, advisors and advisor in your network.
VC websites: Tools like Crunchbase, AngelList, PitchBook, etc., offer data on who’s investing.
Incubators/accelerators: Programs like Y Combinator, Techstars can connect you with investors.
Cold outreach: If you have no connection, craft a personalized email. Be direct, keep it short, and hook them with something impressive (traction, revenue, product market fit).

You need to know who will fund you and why they’d care. Don’t waste time on people who aren’t the right fit. Narrow your list to those who:

Invest in your industry (e.g., AI, hardware, biotech).
Are at the right stage (seed, Series A, etc.).
Have a track record of funding companies at your growth level.

Investors have preferences (early-stage, tech, etc.). Research their previous investments, portfolio, and values. This tells you what type of companies or causes they back.

Action step: Create a spreadsheet of potential investors/donors with their contact information, investment focus, and any mutual connections. Make sure to personalize your outreach to each investor based on their interest areas.

Useful resources:
1. Crunchbase: For startups, Crunchbase is excellent for researching investors and understanding their portfolio.
2. PitchBook: While at it, check out Pitchbook too.
3. AngelList: Use AngelList to find angel investors or small VCs who invest in early-stage companies.

Necessary documents:
1. Investor research list: Spreadsheet with key details (investor name, focus area, email, past investments).
2. Pitch tracker: Document for tracking who you’ve pitched, their response, and next steps.

Financial model

You don’t need a crazy complicated model. Show:

Revenue projections
Expenses (including salaries, marketing, development)
Key assumptions (like growth rates, customer acquisition costs)

Investors want to know if you understand your business. Be able to explain how you get from $0 to $1 million, and then to $10 million.

Pitch deck

Investors need to believe not only in your product but in you as a founder. Fundraising is about selling a vision, and the best pitches convey ambition, urgency, and capability. Keep your presentation concise, focusing on key metrics and future potential. Visuals like user growth charts or product demos can be much more persuasive than lengthy explanations.

Your pitch should clearly explain:

Problem & solution: What major problem are you solving? How your solution solves it better than any alternatives.
Market opportunity: How big is the market? Is it growing? Show traction or proof of demand (users, revenue).
Business model: How do you make money? Explain your revenue streams and gross margins.
Team: Why are you and your team are uniquely qualified to succeed. Highlight key experience and expertise.
Financials & projections: Your traction to date and massive opportunity ahead.
The ask: Be clear. “We’re raising $500K for 20% equity,” or “We need $1M to extend our runway for 18 months.”

Example: “We’re solving the inefficiency of small business marketing with an AI-driven solution that helps owners automate their campaigns. In 6 months, we’ve grown to 5,000 users, and we’re seeking $500K to hit 50,000 users and expand our market.”

Action step: Create a slick, easy to follow pitch deck using design templates and practice your pitch using a timer to ensure it fits within 10 minutes.

Useful resources:
1. Pitch deck step-by-step guide: Follow our guide for creating an impactful and catchy pitch deck.
2. Pitch deck templates: Use platforms like Slidebean or Canva for free, customizable pitch deck templates.
3. Pitch practice: Check out the Y Combinator Pitch Guide for actionable pitching advice.

Necessary documents:
1. Financial model
2. Pitch deck
3. *Executive summary: A handy one-pager summarizing your business or project for busy investors.

The biggest mistake is jumping into an ask before you’ve built any relationship. Fundraising is about trust and credibility.

Connect first, ask second: Reach out to introduce yourself and your mission, product, or vision. Share insights on the industry, or offer something of value before asking for anything in return.
Stay in touch: Keep investors updated with progress. An occasional short email showing growth, product updates, or milestones helps build rapport.
Ask for advice: Many investors respond well to this. Instead of directly asking for money, seek their expertise and feedback on your pitch or plan.

Action step: Start relationship-building well before you need to raise. Send periodic updates even to those who haven’t invested yet.

Leveraging warm introductions

Warm intros are critical. Investors are much more likely to engage if they’re referred by someone they trust. To get these:

Leverage your network: Connect with people who can introduce you to investors.
Use your advisors: If you have advisory board members or mentors, ask for intros.
Founders in your space: Reach out to other founders who’ve raised from your target investors.

Action Step: Be strategic with intros. Prioritize high-quality intros over cold emailing, and ask your network for help.
Attend startup events or local investor meetups and get to know investors without the pressure of an immediate ask.

Cold outreach

Keep it short and sharp: 3-5 sentence emails.
Be direct: If you don’t get a response after two follow-ups, move on.
Example:
“Hi [Investor],
I’m [Your Name], founder of [Company + link]. We’re building [Product] to solve [Problem]. We’ve seen [Traction], and are raising [X money] to [Goal]. I’d love to tell you more.
Best,
[Your Name]”

Useful resources:
1. Networking platforms: Use LinkedIn or Meetup to find investor events or local pitch competitions.
2. Investor databases: CB Insights offers a research tool to track investors by industry, geography, and deal size.
3. Cold email templates: Hunter.io offers great cold email templates and outreach ideas.

Necessary documents:
1. Investor updates template: A simple email template updating prospects on your progress, e.g., new hires, product updates, or revenue milestones.
2. Networking tracker: Keep a record of contacts made during networking events (who, where, notes, follow-up actions).

Managing investor meetings efficiently

Once you’ve secured a meeting, here’s how to make the most of it:

Be concise: Get to the point. Investors don’t want to hear a rambling 40-minute pitch.
Don’t be wishy-washy: Don’t drag out the ask. After explaining your project, get specific: “We’re raising $250K for X, Y, and Z. Would you be open to participating?”
Know your numbers: Investors will drill you on everything from customer acquisition costs (CAC) to lifetime value (LTV) to churn rates.
Address risks head-on: Don’t avoid tough questions about competition, growth rates, or cash flow. Be upfront and show you’ve thought about the risks.
Focus on the big picture: Avoid getting bogged down in minutiae unless asked.
Listen as much as you talk: Pay attention to investor feedback. It will help you refine your pitch.
Show excitement: Investors want to see your passion for the business and belief in its success.
Follow up relentlessly (but not annoyingly): If you don’t hear back, follow up within a week. Always provide value in your follow-ups, like sharing relevant updates or new traction.

Action step: Time your ask based on when you’ve reached a key milestone. For example, pitch investors right after a significant product update or revenue spike.

Key tip: Pitching is a numbers game. You’ll need to meet with dozens of investors. Don’t get discouraged by “no’s.” Keep refining your pitch and moving forward.

Building momentum with a tight process

You want to create a sense of urgency. Fundraising can drag on if not managed correctly, so run it like a sales process:

Schedule investor meetings close together: Not to build FOMO per se, but let’s just say that when investors know others are interested, they’re more likely to jump in.
Have deadlines: Set soft deadlines for closing the round.
Track progress: Use a CRM or simple spreadsheet to track which investors you’ve contacted, who’s interested, and what stage you’re at.

Action step: Aim for multiple investor meetings within the same week. Keep them informed about other interest to build competitive tension.

Useful resources:
1. Fundraising tips: Check out the Fundraising Playbook for more strategies on closing deals.

Necessary documents:
1. Email templates for investors: Have pre-written templates ready for outreach and follow-up.
2. Due diligence checklist: This should include all documents investors may request (financials, IP, contracts, cap table, etc.).

Once you have investor interest, the next challenge is closing the deal. While negotiation is inevitable, using standardized documents can simplify the process. Be clear about your terms, such as valuation cap and discount rates for convertible instruments, and don’t hesitate to push back if the terms aren’t favorable.

You should be decisive during this phase—once an investor is interested, don’t drag your feet. Deals can fall apart if you delay or second-guess terms. The goal is to build momentum and close the round as soon as possible.

Due diligence

If investors are interested, they’ll dive into due diligence. They will want to check everything so expect questions about financials, intellectual property, legal risks, team, and market. Make sure all your documentation is in order.

Legal docs: Make sure all company documents (incorporation, cap table, contracts) are in order. Clear up any legal issues before raising.
Financials: Be ready to show profit/loss statements, balance sheets, projections, and other key financials. Make sure they’re up to date.
Team background: Investors might check references for key team members.

Negotiating the term sheet

Investors will negotiate terms (equity, valuation, etc.). Be flexible but protect your key interests.

Valuation: Valuing an early-stage startup can be subjective, often driven by market dynamics and investor interest. Seed valuations typically range from $2 million to $10 million, though they vary widely based on traction, team, and potential.
Don’t focus on maximizing valuation; instead, find a balance that attracts investment while minimizing dilution.
Be realistic: Overvaluing can make future fundraising rounds tough. Undervaluing could give away too much equity.
Equity & dilution: Understand how much equity you’re giving up. A typical seed round could result in giving away 10-25%.
Keep control: Make sure you retain enough equity to stay incentivized.

Negotiation tips:

Know your bottom line: Know how much equity you’re willing to give up and how much control you’re comfortable with.
Stay flexible: Terms like liquidation preferences, board seats, and voting rights matter. Be ready to negotiate.
Don’t rush: Take time to understand the offer – if necessary, get legal advice.

Action step: Be prepared for the back-and-forth. Clarify any deal breakers early (like control issues or valuation mismatches).

Signing the deal
Once everything is in place, closing is about locking in the final terms and executing.

Get the term sheet: This document outlines the terms and is non-binding. Make sure your lawyer reviews it thoroughly.
Final due diligence: Complete any remaining legal or financial checks.
Sign the docs: The final step is signing all investment agreements (e.g., stock purchase agreements, investors’ rights agreements).

Action step: Ensure you’re clear on all terms and the timeline for closing. Keep open communication with your lead investor to avoid last-minute surprises.

Getting the money

After signing the term sheet, there’s typically a closing process where the money is wired to your account. This could take weeks depending on the investor’s process.

Useful resources:
1. Legal Templates: Use services like Docracy or LawDepot for customizable term sheets, NDAs, and contracts.
2. Fundraising closing techniques: 500 Startups offers a practical blog on closing fundraising rounds effectively.

Necessary documents:
1. Term sheet: This outlines the agreed-upon terms between you and the investor, including valuation, equity percentage, and investor rights.
2. Investment agreement or convertible note: The legal document securing the investor’s funds.

Key terms to watch for

Liquidation preference: Investors often get their money back before anyone else in the event of a sale. A 1x preference is normal; anything higher, push back.
Board seats: Be careful of giving up too many. Ideally, the founders maintain control.
Anti-dilution: Watch for clauses that overly protect investors from future dilution.
Key tip: Don’t skimp on legal fees here. A good lawyer will help you avoid giving away too much equity or agreeing to unfair terms.

Raising money is just the beginning. What happens after it also matters a lot so keep a good relationship with your investors:

Execute: Spend the money exactly as planned. Don’t burn cash unnecessarily. Deviations should be communicated early.
Report back: Send monthly updates with key metrics, wins, and challenges.
Stay focused: Fundraising is important, but it’s a distraction from the actual business. Once you’ve closed your round, refocus on building, scaling, and hitting the targets you promised investors.
Ask for help: Investors often have networks and expertise – use them to your advantage when the need arises.
Stay transparent: If things go off track, inform your investors early. They may be able to help.
Keep momentum: Fundraising is an ongoing process. Even after closing a round, keep building relationships for future rounds.

Example: “We’ve deployed 30% of the funds toward product development, doubling our user base in the first 6 months. Here’s a detailed update.”

Action step: Stay disciplined with reporting and updates to investors. This ensures goodwill for future asks.

Useful resources:
1. Monthly update templates: Use Baremetrics for tips on creating concise and effective investor updates.

Necessary documents:
1. Monthly investor update: A simple report detailing key metrics, progress, and challenges.
2. KPI dashboard: A visual dashboard to track and report key performance indicators like user growth, revenue, or milestones reached.

1. Starting too late: Begin building relationships way before you need the money.

2. Asking for vague amounts: Always be specific with your ask.

3. Failing to follow up: Investors are busy. Following up shows persistence and professionalism.

4. Not having data ready: Be prepared for tough questions on your financials, traction, and competitive landscape.

5. Giving away too much equity: Protect your equity early on by negotiating fair terms and avoiding desperation deals.

1. Always be fundraising: Even when you’re not raising, build relationships with investors.

2. Focus on traction: Show growth, users, or revenue. Numbers speak louder than projections.

3. Don’t waste time: If an investor shows little interest after two meetings, move on. Time is your most valuable asset.

4. Be relentless: It’s a grind, but persistence is key.

Fundraising is one of the most challenging yet vital tasks for any startup founder. It requires preparation, storytelling, and relationship-building. With the right tools and approach, you can efficiently secure the capital you need to move forward. Be prepared, stay persistent, and always push for the best terms you can get while maintaining control of your vision.