Fundraising is undoubtedly one of the most important stages of the startup life cycle. And yet, especially for early-career entrepreneurs, fundraising remains a major stumbling block.
With this in mind, we asked 2022 Future Founders Fellow Chris Cherian, founder and CEO of Gatherly.io and self-proclaimed fundraising nerd, to help us create a comprehensive guide designed to demystify the startup fundraising process for founders who are just beginning.
Chris Cherian, 2022 Future Founders Fellow, Founder & CEO of Gatherly.io.
Each month, we will publish a piece of Chris’s wisdom that breaks down a different aspect of the startup fundraising journey, step by step, from start to finish:
Part 1: Fundraising 101
Part 2: What is Venture Capital (and is it for me)?
Part 3: Alternatives to Venture Capital
Part 4: How do I start raising?
Part 5: What will my raise look like?
Part 6: So I’ve raised. Now what?
If you aren’t already a millionaire, launching a business can seem daunting. Without capital (money to invest in building up your business), your business can’t get off the ground. If you don’t have the capital you need to start selling your product or service and setting your company up to grow, you need to find it elsewhere.
That’s where fundraising comes in.
If you need to raise funds to start your business and help it grow, chances are you’re working on a scalable startup.
The good news is that, as an entrepreneur, you have options when it comes to raising:
We’ll cover these fundraising methods in more detail in subsequent articles. For now, let’s take a look at some other concepts and lingo you’ll need to consider as you plan your raise:
A presentation you’ll give to investors demonstrating why they should invest in your business, in which you share all the data and progress you’ve made (including many of the data points described in this list) and illustrate your future growth potential.
The demonstrated success and momentum of your business; evidence of traction can take many forms, but some common indicators are revenue, letters of intent (notes signed by larger customers agreeing to purchase a certain quantity of your product), and media following, to name a few.
The rate at which your business spends money before becoming profitable; also known as negative cash flow, your burn rate is calculated as the average amount of capital your business spends per month before running out of funds (at which point you’ll need to start turning a profit). This length of time (how long before your business runs out of capital) is known as your runway.
The length of time before your business runs out of capital. Most startups aim for around an 18-month runway to ensure enough time to set and hit initial targets (~12-15 months) and raise more funds (~3-6 months).
The rate at which customers stop doing business with your company; also known as rate of customer attrition, your business’s churn rate must be lower than its growth rate (the rate at which you acquire new customers) in order to grow.
CAC: Customer Acquisition Cost
How much the company needs to spend to get one customer to buy their product or service.
LTV: Lifetime Value
How much estimated revenue a company can expect a single customer to generate over their lifespan as a customer; in other words, how much a single customer is worth to a business. LTV is calculated differently depending on your business model. In this example, we calculate LTV for a subscription-based/SaaS (Software as a Service) business.
Market Size (TAM, SAM, SOM):
When talking about your company’s market, or the total amount of potential buyers (and potential revenue) it could attract, it’s helpful to break things down:
Graphic shows visual comparison of TAM, SAM, and SOM for a travel startup targeting Gen Z and Millennial travelers in the U.S. Note: CAGR = compound annual growth rate; in other words, the yearly rate at which this market value is expected to grow.
MMR: Monthly Recurring Revenue
How much a business can reliably expect to earn each month.
ARR: Annual Recurring Revenue
How much a business can reliably expect to earn each year. ARR (and MRR) are valuable metrics to share with investors because they demonstrate steady, reliable income for your business (which makes it a safer investment).
SAFE: Simple Agreement for Future Equity
When raising a SAFE Note, your business is really raising a type of “convertible debt,” or debt that will eventually convert into equity. In other words, you are agreeing to give an investor equity in your company proportional to the amount of their investment at some point in the future. This conversion happens upon a “qualifying event”, which typically is a priced round/equity round (which is the direct sale of stock to an investor–more on that in subsequent articles) or an acquisition.
SAFEs are quick and low-cost ways of quickly financing a business. They typically require less due diligence and less time to execute, as the form is relatively standard (the Y-Combinator (YC) safe note is the most common template). There are a few terms to negotiate, however:
Cap Table, or Capitalization Table
A spreadsheet or table that shows the equity capitalization of your business. In other words, your cap table shows a breakdown of your company’s equity ownership: who owns what percentage, and at what market value per share. The cap table is an essential tool for calculating and making decisions based on your company’s market value.
Sample Cap Table (Future Founders)
This may seem like a lot (and it is!), but don’t worry. At Future Founders, we believe that entrepreneurship is for everyone. We’re dedicated to creating a world in which our businesses reflect our people, and in which opportunity, choice, and economic freedom are available to all.
To that end, over the next few months, we’ll be digging more deeply into each step of the fundraising process with the goal of making it a bit less daunting and a bit more accessible. Good luck!
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