It’s an understatement to say founding a business is challenging. Herbert Hellemann, CEO and co-founder of BuddyGuard, explains why it’s important to manage the way you fund.
From the get go, everything from designing the product to creating a marketing strategy, hiring staff, and of course raising investment falls on the founders’ shoulders. The complex world of investment makes this challenge even more difficult, with start-ups needing to decide early on whether they want to raise capital through seed rounds or jump straight to Series A with VCs and angel investors.
Many first-time entrepreneurs have fallen into the trap of thinking that getting as much investment as possible in the shortest amount of time is the best way to get their start-up of the ground. However, in reality, staggering rounds and ensuring the company is ready for seed investment is more effective in the long-run for creating a successful business.
Historically, many companies in their early stages chose to go for one big seed round, raising between $2million and $5million in one hit. However, seeding is no longer a one-hit stop, rather it is a process – the mantra for smart founders today is “always be fundraising”. In today’s investment environment, it’s less about when and more about how you raise your capital.
The majority of companies announcing they’ve raised from a seed round will have secured the total amount during multiple rounds of funding. We raised a total of €3.4million over the course of two years following this principle for our second seed round, with a pre-seed round raising €1.1m, a seed round raising €1m and a post-seed round of €1.3m.
Raising seed funding in this way ensures that you reach important milestones in the lifecycle of the company before moving on to the next stage. It keeps you on track and focused on the tasks that need to be done instead of running before you can walk and rushing key strategy decisions.
Another important reason for staggering funding and not aiming for one big cash injection from a VC i.e. not jumping ahead to Series A, is that you’re able to attract multiple investors who can offer much more than just their money. No entrepreneur is expected to know everything, and one of the most powerful things you can do is to ask for advice from investors even before you ask for funding.
Often, they are well-seasoned and have a wealth of experience in taking ideas to market successfully and will be happy to share their experience with you. Keeping these business angels in loop and enthusing them about your idea can produce invaluable advice for first-time entrepreneurs.
Money can only take you so far, so having access to multiple investors who can offer advice can help steer the company in the most successful way.
Choosing to stagger funding also means that you’re under less pressure to scale aggressively and have more time to finesse the factors that can make or break a company such as customer acquisition rates, product to market fit and market research into customers’ values. We also paused fundraising each time we knew we needed to reach an important milestone, such as ensuring the artificial intelligence software was fully developed before raising funding to develop the hardware.
Deciding how to raise capital for your business, and then going out and securing it, is one of the most challenging aspects of starting a new business. However, while it will always be tempting to aim for one large lump sum, the reality is this isn’t always the best course of action for a young start-up.
Small injections of capital enable you to perfect elements of the business and product without the pressure of having to scale rapidly. It also enables entrepreneurs to tap into the valuable experience of angel investors and backers. Ultimately, founders need to do what’s best for their company, but there’s definitely something to be said for slow and steady wins the race.
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