Fundraising is hard.
Misunderstanding which funders are right for your business makes it even harder. I’ve done this myself and 0/10 do not recommend.
Funders have different goals. You must understand them and de-risk your company. Here’s what that looks like at various stages. Show funders a future that meets their goals.
Idea Stage
At this stage you have an idea for a company. You’ve done research but you don’t have a sellable product yet.
This is the riskiest stage of your company.
Government or Non-profit programs are your most likely sources of outside capital at this point. These are usually grants or loans.
These funders are mission-driven so you can de-risk your company’s alignment with that mission. You can also use your research to create an economic model based on reasonable assumptions. This shows that the numbers might work.
The Iowa Proof of Commercial Relevance or SBIR/STTR programs are examples that make sense here.
You are too early for Angel or Venture Capital (VC) funding at this point.
Post-Product, Pre-Revenue
You now have an early product. For University Tech spinouts, this might be a bench-scale prototype etc.
Get this product in the hands of early adopters, confirm that you’re meeting a real need.
Grants and loans are still primary but you may start attracting Angel Investors. Angels are investing their own money. You are still a high risk company and so they need to see a path to a huge reward. When pitching Angels de-risk by articulating a clear vision for a massive outcome.
Many Angels have built businesses and will offer mentorship as well as capital.
Naval Ravikant is an example of a prominent individual Angel.
You are still too early for most VCs
Post-Revenue
People are now paying for your product. This indicates you are providing real value and is a massive risk reduction. Each new customer is a little more proof.
Grants or loans may continue to apply. Angels are a better fit now. You may attract early-stage VCs.
VCs need to generate large returns for their investors. They must believe your company can grow to support that outcome. Because they are playing with other people’s money, they need to have more proof than Angels. De-risk by showing them a model for massive growth based on the data of your current early traction.
Ensure that any VC invests at your stage and in your area of focus before approaching them.
Plains Angels and Hyde Park Angels are examples of Midwest Angel groups. IDEA Fund and Groove Capital are examples of Midwest early-stage VCs.
Scaling (Seed Stage and Beyond)
Now you need to prove that you can sell over and over again. Repeatability is the name of the game at this stage.
You now need to prove that each dollar invested in the business will produce many dollars in revenue. You need to prove this with greater degrees of certainty as you progress through the stages of funding.
VCs and Private Equity Firms are the primary funders of high-growth startups at this stage and beyond. Approaching these funders before you have de-risked will be a waste of your time.
Conclusion
Governments and Non-Profits de-risk public goals. Angels de-risk early vision. VCs de-risk exponential returns.
