Growing a startup is a tough job, and many fail for one reason: they lack capital and a healthy cash flow to keep running. Even with a solid business idea that has a market need, the long-term success often comes down to a simple matter of capital.
Raising capital is top of mind for entrepreneurs and it requires having a well-thought out plan early on to execute against. It’s a balancing act that involves knowing when and how much capital is needed to not only stay afloat but also drive growth – all while maintaining healthy levels of ownership between financing rounds.
Below we’ve laid out what venture capital (VC) fundraising was like in 2021 and some tips for navigating fundraising in our continued digital (or at least hybrid) world in 2022.
Looking Back: Record-Setting Year for VC Fundraising in 2021
The venture capital industry saw record-breaking fundraising numbers in 2021: According to CB Insights, global venture capital funding surpassed $600 billion in 2021 (nearly doubling over 2020 numbers) invested across ~34,500 deals (up from 26,500 in 2020), with existing “unicorn” companies surpassing 1,000 for the first time ever (+100 unicorns per quarter for 3 quarters straight). Of the $600 billion+ in global VC funding, a majority (58%) of the capital was deployed in mega-rounds ($100 million+ rounds) accounting for $360 billion across 1500+ deals. However, the gains weren’t limited to large deals, as early stage startups raised $100 billion more in 2021 than in 2020. The global fintech sector was the most active, attracting $1 in $5 in capital raised. Similarly, venture funding in the US reached over $300 billion in 2021, also doubling the $151 billion figure for 2020*.
Despite expectations that the funding environment will stay elevated or remain consistent with 2021 this year, raising capital remains a complicated, time-consuming process – especially while much of the VC world continues to operate in a digital, work-from-home environment due to the pandemic. To successfully get your startup funded, you need to know how the different funding rounds work at the early stages, what offering type to consider, and how to prepare for and execute a capital raise in an increasingly competitive, and remote-first environment.
Funding Round Trends and Considerations
Startup funding works in a series of rounds depending on the progress of the company. As the startup expands and proves its success, it progresses to the next round of funding. If you’re doing things right, with each round of funding, the slice of the pie shrinks (dilution), but the size of the whole pie grows, making your slice valued more than the prior rounds.
- Pre-Seed Funding
When a new company gets its operation off the ground, it is often during this stage, when the company is usually funded solely by the founders or early supporters (i.e., “friends and family”). At this stage, investment in the company is usually in the form of a simple convertible note or other very basic contract. At this stage, companies are largely using spreadsheets to manually track their equity ownership (their “capitalization table” or, most commonly called the “cap table”).
- Seed Funding
As you kick off your Seed round as your first formal financing stage, you are likely considering a priced equity round or a convertible instrument like a SAFE (Simple Agreement for Future Equity) or KISS (Keep it Simple Security) financing or convertible note. Priced rounds require more time, and a higher cost to administer and involve a set of offering documents that are more complex than a SAFE or a convertible note. One reason that priced rounds often take longer to execute than SAFEs or other offerings is because they involve two key elements: valuation of the company and an investor to “lead” the round (i.e., usually a VC firm or other experienced investor who negotiates the offering’s terms that apply to all investors). “In a SAFE, the company and investor basically postpone the valuation of the company until there is a later, priced equity round (and usually more information about the company’s prospects of success to base the valuation on)”, says Kelly Chapman, product counsel at Figure. In addition, SAFEs largely have standard, simplified terms (e.g., KISS and SAFE templates) and generally only include two major terms to be negotiated: the valuation cap and discount rate. For those reasons, SAFE financings are becoming the go-to for pre-seed and seed-stage companies given the simplicity of the terms and the ease of kicking off a financing event.
Conclusion: Consider SAFE or KISS financings for early-stage funding rounds given their relative ease, flexibility, and cost-effectiveness as compared to priced equity rounds.
- Series A Funding
At this stage, a business has become more established, with a growing customer base, revenues, and other performance metrics. Series A funding helps to further optimize the business to start scaling. If you have done a prior SAFE financing, it will convert into this priced equity round, which should be accounted for when modeling your dilution impact. Learn how to use a next-round modeling tool to understand the dilution impacts to your cap table.
While both global venture funding ($600B) and deal volume were up (~34,500 deals) in 2021, early stage deals dominated 62% of the global deal share. The median deal size was up across all stages, with the early stage at $3M in 2021 (up from $2M in 2020)*.
Conclusion: It’s a competitive funding environment, and gaining access to capital requires work. Hard to beat a warm introduction, but if you are sending in your deck, the volume of decks reaching an inbox has multiplied substantially in the last 12 months.
Preparing for Your Raise
- Get your pitch and pitch materials lined up
The key to succeeding in any type of funding round is a great pitch and a solid pitch deck. There are plenty of good templates available in a search but do the work to create a cohesive narrative and make sure you’ve researched and know what sets you apart from them. Get feedback from mentors, practice and iterate. Get your offering documents ready from your counsel.
Now you’re ready to get yourself in the door and get a meeting.
- Find the right investors
Part of your research should extend to your investors as well. Not every investor is going to be interested, not every investor leads or takes a board seat, so it helps to narrow things down and find your target investors.
Build your investor pipeline. Consider subscribing to a low cost investor database to build your investor pipeline and segment by region, stage, and sector investments. Find your comparables and see which investors invested in a similar space. Start with some lower probability prospects, and work your way to the more important prospects after some practice.
Keep your investor audience in groups that include venture capitalists, angel investors, or family offices. Review their website to understand which investors can add strategic value and bring domain expertise, connections, to help propel your business even further.
Go in fully prepared
Investors are busy people and will appreciate someone who goes in armed with all the facts and figures they need. Before you speak with VCs, get a very clear picture of how much capital you need to take your business to the next level.
When investors ask you questions, make sure you have the facts and figures that demonstrate what you’ve done and a narrative of where you are headed. After several meetings, you will begin to see a pattern of similar questions and your conversations will be more fluid with a better understanding of what investors want to see. Be sure to follow up shortly after your meeting and have everything ready to hand over.
Keep your presentation short
While you may have a lot to talk about, especially if your business is moving in the right direction, keep your initial pitch presentations no longer than 20 minutes. Leave plenty of time in the end to have a discussion with investors, when they can ask about what they really care about.
One of the most common mistakes people make during a pitch is they feel the need to go the distance with the presentation deck and make it to the end. This can make the discussion feel very mechanical (read: boring). Have a story arc to your deck that paints a cohesive narrative that leads the investor. Keep in mind that investors will likely jump in with questions mid-presentation, but don’t let that detract from your flow, and instead try to weave your response back into the presentation and into your next key slides.
- Pitch Meetings & Networking in a Digital / “Work from Home” Environment
Pre-pandemic, face-to-face pitch meetings, demo days, conferences, networking events, and social events were all common ways founders met and pitched investors, both formally and informally. Of course, these sources of introductions and pitch settings largely vanished or changed shape over the last two years, and yet venture capital funding has continued to grow, as noted above. And, while the world is slowly improving, economists expect that we may not ever go back to “business as usual,” with more people working from home than ever before.
So, how have founders been successful in raising capital in a digital environment, and what can founders do to better adapt to fundraising in a digital, or at least hybrid, world?
-> Lean into the “new normal.” Even though it may be tempting, founders shouldn’t wait until the pandemic is “over” to start making connections and laying the groundwork for their raise — you should expect that the VC world will continue largely in a digital environment for the foreseeable future, and plan accordingly to take advantage.
-> Focus on the basics. It’s easier to exude charisma and keep investors’ attention in in-person settings without having your pitch and personal presentation perfect. In a digital environment, though, it’s more critical to focus on the basics to ensure your audience is engaged not just with your content but with you as a presenter. So, focus on the steps we mentioned above – be fully prepared for meetings, anticipate questions investors will ask in order to minimize pauses and downtime, and keep your presentation short and succinct.
-> Optimize your video presence. Optimize the physical setting you’re in while pitching or otherwise engaging investors, with a goal of making the video setting as close to being face-to-face with someone as possible. For example, look into/at the camera as much as possible, and avoid looking away from the camera while on camera (e.g., at other computer screens while presenting); have decent lighting so that participants can actually see your face well (e.g., avoid being backlit by sitting in front of a window, or sitting under low lighting); and make sure you’re talking directly into the microphone and not trailing off as you fidget or move around. These may sound obvious, but you’d be surprised at how often founders overlook the importance of this aspect of digital fundraising!
-> Open up your potential investor base. It’s harder to meet and network with investors online, especially because most startups still rely on securities law exemption that limits what they can say or market publicly, which limits the ways they can reach new investors over the internet and social media (Rule 506(b) of the Securities Act). By relying on a different exemption instead (Rule 506(c)), you may be able to publicly market to U.S. accredited investors via additional avenues – cold emails, DMs, podcasts, etc – and also use social media and industry articles (e.g., TechCrunch) to drum up buzz about your company. Digital capital raise platforms like Figure Equity Solutions can help you easily and seamlessly comply with the requirements of Rule 506(c) so you can reach as many investors in as many ways as possible.
-> Refine and have different versions of your “elevator pitch.” Speaking of the basics, in the digital world, it’s just as critical, or even more so, to have a refined, succinct, and clear “elevator pitch” that quickly conveys why an investor should invest in your startup (or, at least why they should want to know more about your startup!). It’s also important to have multiple versions of your pitch for various settings and introductions – for example, you might have one general elevator pitch for a broad audience, but a different pitch for settings with people with more industry expertise in your sector.
-> Use your networks. In this new digital environment, people are increasingly reaching out to old friends and colleagues, and even to people they don’t know yet, over LinkedIn, social media, and email in ways that might’ve seemed a little awkward in the “before” times. It may still feel awkward, but this is the new digital world, and others competing with you for capital resources aren’t being shy to use their networks and pound the virtual pavement to make new introductions – and neither should you.
-> Make it easy on your investors. Try to minimize the steps and different programs an investor must use to access your pitch materials and your offering by streamlining service providers as much as possible (e.g., digital capital raise platforms can combine dataroom, accreditation, and online offering document signing all in one place). Consider using programs like Calendly to take the hassle out of scheduling meetings. [We discuss this more below.]
-> Get creative. Explore new venues for connecting with investors, like being a guest on online panels or podcasts, a guest content creator for blogs or websites, or by using digital capital raise platforms, which we discuss below. (But, remember to talk to your lawyer first before talking about/marketing your offering publicly!)
- Consider a digital capital raise
If you haven’t noticed, the traditional venture capital model for raising funds is changing. Entrepreneurs are now seeking alternatives to traditional fundraising to streamline capital raises leveraging technology solutions.
In-person pitches in a conference room are replaced largely by video calls and virtual events. If you are still using a dozen different point solutions (i.e. dataroom, e-signature, E-mail to send Investor Suitability questions and the exchange of private documents with personal information) – let’s pause. Imagine the multiple touch points from the investor journey: from accessing your dataroom, back-and-forth e-mail threads requiring action, Investor Suitability, execution of offering documents, wire instructions, etc.
Modern tools are now offering a digital way to streamline a capital raise and consolidate these multiple applications into a single built-for-purpose platform. Private companies and startups can now manage their capital raise and equity through platforms like Figure Equity Solutions to improve the investor journey and shorten these unnecessary time gaps that slow down your capital raise.
- Get help with fundraising and managing equity
Consider an integrated end-to-end equity management solution that makes it easier to launch a dataroom and seamlessly conduct a capital raise. Platforms such as Figure Equity Solutions offer:
- Reg D offerings under 506b or 506c
- Priced equity rounds, SAFEs, Convertible Notes, and other instruments
- Virtual dataroom
- Investor accreditation services under 506c, and AML/KYC review
- E-signature Offering Document execution
- Integrated Cap Table + 409A valuation services
Traditionally, this process is done manually, using multiple service providers (including dataroom providers, e-signature providers, accreditation services, and lawyers charging by the hour) to complete the investment process, which can be a frustrating process for investors and founders alike.
To learn more about Figure Equity Solutions, request a demo today. 500 Global founders get an exclusive discount.
This blog post is not legal advice, and all startups are encouraged to consult with their attorneys about their fundraising activities, including raising capital online. Figure Equity Solutions is not a registered broker-dealer and does not provide legal or investment advice.
*Source: All venture capital funding statistics in this post obtained from CBInsights