In A Brief Introduction to Raising Capital, we used the example of a meal-kit delivery startup to give an overview of the fundraising process. As we dig into defining the different stages of a startup, we’ll stick with that example.
For the purpose of raising capital, there are really only three defined “startup stages” you need to know about.
This is the stage where you see a problem in the world, an unfulfilled need, and brainstorm a solution. You might even take it a step further and figure out how to make money by creating that solution.
If you are in the concept stage, you don’t have any proof that your idea is going to work. You don’t know if anyone will use it, much less pay money for it.
You problem-solution statement is theoretical.
Everything exists in your head.
This is not a bad thing, but it does limit how much money you will be able to raise. Investors will categorize you as “high-risk.” This is why most startups in the concept stage go after something called seed money, a relatively small amount of money, usually from friends and family, that allows you to test out your business ideas.
Often, seed money gives you the ability to move to the Traction stage.
Traction is where you will seek proof that consumers will purchase your proposed solution.
What does that mean? It’s simple, really.
If you use that $5,000 from your uncle to build a small meal-kit delivery company out of your garage, you are testing for traction. If you get twenty orders immediately, that is evidence of traction. Investors love traction. Finding evidence of traction is like finding gold buried in the ground. Maybe you don’t know just how to get it out profitably – but you know it’s there.
You don’t need to have a large, profitable business to demonstrate traction.
Traction is where you research the market, build and rebuild your solution, test out demand, etc… Demonstrating real traction will enable to raise a much larger amount of capital than you would be able to in the concept stage.
People have different names for this next level of fundraising, but we’ll call it Series A.
Series A brings you into Growth.
Growth is when you know there is a demand for your solution, you know how to deliver on that solution, and now you need to invest in your company infrastructure in order to increase your production capacity.
Let’s say you can deliver 50 meal-kits out of you garage per week, using your uncle’s seed money, and the proceeds from the orders. Suddenly, more orders start coming in. In fact, now you need to ship 500 meal-kits. Any investor would jump at an opportunity to invest with you at this point, provided they deem the sources of growth to be sustainable. So you raise your Series A money, let’s say $1,500,000, and invest in a warehouse, labor force, and marketing strategy.
Now you have the capability to fulfill 500 orders per week and expand your service geographically (for instance, two-day UPS shipping vs. city wide deliveries).
Series A funds are the fuel behind a companies early growth. Companies often repeat the fundraising process once, twice, or even three times more when they want to accelerate their growth. These rounds are called Series B, Series C, Series D, etc…
No matter what stage your startup is in, chances are you will be in position to benefit from raising money at some point in the near future. Connecting with the right investors can be extremely difficult, especially when you have a million other things to deal with. Often, startups are so busy with operations that they will take cash from whoever will give it to them.
By using Syntiq, you can avoid this trap and meet only the investors who are pre-qualified to meet your fundraising needs. You can learn more about our service here.
Once you’ve figured out what stage you’re in and what type of investor you want to deal with, you need to figure out what you will give away in exchange for investment. To learn more about different forms of financing, check out our guide, Debt vs. Equity Financing