When to Raise Money for a Startup

January 27, 2023

It doesn’t take much to get the ball rolling on a startup. A great idea helps, as does a solid business plan and perhaps a trusted co-founder you’ve convinced to come along for the ride. From there, things get a bit trickier. Startups eventually need to buy or rent certain things in order to survive and grow—things like computers, employees, and office space. A shrewd entrepreneur can (and should be able to) grow their startup from nothing into something without raising capital from outside investors. But there comes a point where bootstrapping hits its limit as a viable startup funding strategy.  

Why? Well, it’s in the name. A “startup” differs from other small businesses in the sense that it isn’t content to stay small. Startups want to set themselves up for consistent (and preferentially exponential) growth, and that kind of growth usually demands money from outside investors. 

In this guide, we’ll discuss when to raise money for a startup. We’ll also review the fundraising process from seed to Series C and beyond. Fundraising can be a challenging topic for a lot of first-time founders, and it’s not always fun or easy. But fundraising rounds can also mark important milestones in the growth of your business, and getting money is generally (we think) something worth being excited about.

  • When should I raise money for my startup?
  • Who can I raise startup money from?
  • How much capital should I raise for my startup?
  • The stages of startup fundraising
  • Model complex fundraising rounds with Pulley

When should I raise money for my startup?

We hear this question from founders of early-stage startups all the time, and our first instinct is to take a beat. There’s a series of questions to ask and answer before you even think about raising outside money for your startup—questions like:

  • “Does my startup have a solid product-market fit?” Chances are, nobody will want to invest in your startup until you’ve developed a rock-solid business plan, analyzed the competition, and determined that there’s actual demand for what you’re selling. This can take time! The early days of a startup are often spent figuring this stuff out, which means you likely won’t be ready with a pitch deck that will wow investors from the jump.
  • “Have I incorporated my business yet?” Many investors are only interested in working with startups that have incorporated. The most common legal structure is a Delaware C-corporation, thanks to a number of tax and corporate advantages that state provides. Online services such as Clerky can simplify the process of forming a Delaware C-corp—and Pulley happens to have a partnership with Clerky that allows for easy integration between our platforms.To learn more about incorporation, read our guide on LLCs vs. C-corps
  • “Is my founding team fully formed and capable?” Early investors, such as venture capitalists and angel investors, aren’t just investing in companies. (In some cases, the companies they invest in barely exist!) Many venture capital firms think first about investing in a young founder or team, and second about whether the business has a proven model. So, if your founding team isn’t squared away yet, you likely aren’t ready to raise outside money.
  • “Does my startup have traction yet?” Despite what you may read about in tech industry news, few investors are ready to throw away millions of dollars on a business idea with no traction behind it. By traction, we mean something that says your startup is growing at a steady pace. This is usually expressed as double-digit revenue growth month-over-month, but traction can also come in the form of a fast-growing subscriber or customer base. 

If you’re able to answer “yes” to all of these questions, then you might be ready to raise money for your startup.

What about bootstrapping?

True entrepreneurship means finding a way to make things work, and in this sense a startup is just like any other small business. You may need to put up your own hard-earned money to keep the lights on in the early going. The old story of co-founders sharing a cramped office in a garage that doubles as their living quarters is a bit cliched, but the cliche exists for a reason! 

This early period of “roughing it” is colloquially known as bootstrapping, and for many startups it’s a necessary right of passage. It’s also a good time to learn more about yourself and your founding team, and develop some of the discipline that can come in handy when wooing investors later. 

But unless you’re made of money, bootstrapping will only get you so far. At some point, you’ll need to start identifying potential investors who may be interested in giving your company money to grow in exchange for a stake of ownership, i.e. equity.

Who can I raise startup money from?

The prospect of finding investors can seem daunting at first. It doesn’t have to be. Let’s look at some general groups of potential investors, starting with one that may be right under your nose.

Family members and friends

If you’re in need of some crucial funds to kick things off but don’t yet have a solid track record or business history, you may need to start your fundraising efforts closer to home. Family members and friends are often the first investors in a startup, and their investments can take a variety of different forms.

If your friends or family really believe in you and your idea, they may want to invest money for an equity stake in your business. (In this sense, they are basically acting as proto-angel investors—a group we’ll get to next.) But you may also be able to raise capital from family and friends in the form of debt financing, i.e. money you borrow from them at a favorable rate with the intention of paying it back. 

Angel investors

Angel investors are high-net-worth individuals who invest their own seed capital into early-stage companies. Excluding friends and family, angel investors are usually the first outside investors to enter the picture. 

These angel investors may be industry experts with a penchant for sniffing out the next big thing, or they may be interested in providing mentorship along with their funds. This mentorship can be crucial for a first-time founder, especially one with little experience putting together a business model or pitch deck that will impress investors further down the line.

Angel investors may put up their money for a stake in equity if you can agree on a particular valuation. Or, they may finance your company in the form of convertible notes that entitle them to a certain amount of equity later down the line.

Venture capital firms

Venture capital is a type of private equity, which basically means that it’s a way to invest private money into private companies. But venture capital is a bit different from other forms of private equity. 

For one, venture capital firms typically specialize in funding startups with a ton of growth potential and a ton of associated risk. Because the risk-reward proposition can be so high here, many venture capital funds focus on one particular industry or sector that their managers know well.

It’s also not uncommon for venture capitalists to leave the largest equity stake for founders, as a sort of incentive to stick around and grow the business. Remember: A VC investment is oftentimes as much an investment in a founder as it is in a particular startup. 

Crowdfunding or community-based funding

Crowdfunding is another strategy you might want to consider in the early going—especially if you’ve managed to build up a dedicated user base. As its name implies, crowdfunding involves raising money from a “crowd” of investors online. For their money, these investors receive a share of equity in the company. 

Note that, in some cases, only accredited investors may be allowed to participate in crowdfunding efforts. This is more likely when the amounts invested and risks involved are higher. 

Startup incubators and accelerators

Believe it or not, some programs exist specifically to solve the problem of supporting early-stage startups with the necessary funds to get off the ground. These programs are fittingly called incubators or accelerators, and you may have heard of some popular ones such as Y Combinator, Techstars, and 500 Startups. 

These programs might be a good fit if you’re seeking some level of mentorship or educational support beyond simply funding. Just understand that they can be pretty competitive, and they may come with certain requirements in terms of equity, location, or involvement in the local community.

Bank loans and business lines of credit

These aren’t “investors” at all, but we figured we’d include them here because many young startups do rely on good, old-fashioned bank loans to get started. You may want to look into a small-business microloan backed by the U.S. Small Business Administration (SBA). These SBA-backed loans often provide better rates than you’d find with other lenders, though they only go up to $50,000.

How much capital should I raise for my startup?

You might be thinking the answer is, “As much as you can squeeze from investors,” but there are other considerations at play here. 

Investors don’t simply give startups money because they’re generous people; they do so in exchange for an ownership stake in the company. So, if you care about your own shares being diluted (spoiler alert: you should!), aim to raise only as much outside money as you need to become profitable. 

This may not happen right away, and you may need to go through multiple funding rounds in order to raise the amount of outside money your company ultimately needs to grow. In any case, take care not to give up too much of a stake in your company in the earlier rounds. Y Combinator recommends aiming for 10% dilution in a seed round, and avoiding more than 25% in subsequent rounds.

The stages of startup fundraising

Now that we’ve reviewed the different investor types and talked a bit about how to go about fundraising, let’s tie it all together with a quick overview of the funding stages:

  • Pre-seed round: This is where bootstrapping comes into play. Before you’re ready to raise funds in a seed round, you’ll likely need to put your own money on the table to keep the lights on. Friends and family may also lend or invest their money at this stage.
  • Seed round: Angel investors and venture capitalists typically enter the mix in the seed round, which means this is the first round with a significant influx of outside cash from investors. Startup accelerators and incubators also specialize in seed funding.
  • Series A round: Angel investors and venture capitalists also take part in the Series A round, which is typically weighted a bit more toward the latter. The size of a Series A round depends on a number of business-specific and macroeconomic factors; a Crunchbase report from 2021 clocks the average global Series A round at $18 million.
  • Series B, Series C, and beyond: Companies that need the funding can subsequently go through a number of additional rounds, though this isn’t any kind of requirement. In a Series B round, you might see a mixture of venture capital and other private equity firms taking part—especially those that specialize in funding pre-IPO companies.

Model complex fundraising rounds with Pulley

If you’re still in the early stages of startup fundraising, you may not have a great idea about what your cap table will ultimately look like. But it pays to start thinking about this early, as it can help you prevent unnecessary dilution in the early funding rounds and avoid complexities in the later ones. 

Pulley specializes in scaling with startups from the earliest stages through IPO, so it’s never too early to get in touch with our team and see how we can help. Our fundraising modeling tools can help you save thousands on legal fees and avoid costly cap table mistakes. And our pro-forma is perfectly transparent and shareable with investors, which means you won’t be caught off-guard at your next fundraising meeting.