What is Fundraising?

Fundraising, or financing, is the process of raising capital to fund your startup's operations, growth, and expansion. For most startups, the cash generated from initial sales is not enough to cover expenses and fund the rapid growth necessary to capture a market. This is where external capital becomes necessary.

When Should You Fundraise?

Raising money is a major distraction from building your product and talking to customers. You should only do it when you have a clear purpose for the capital.

• You have achieved some validation: You have evidence (from an MVP, user interviews, etc.) that you are solving a real problem for a specific market.
• You have a clear plan for the money: You know exactly how you will use the funds to reach your next major milestone (e.g., achieve Product-Market Fit, scale user acquisition).
• You are ready to grow, fast: External capital comes with the expectation of rapid growth and a large return on investment.

Don't raise money just because you can. Raise it because you have a plan to turn that capital into enterprise value.

Key Fundraising Terminology

• Valuation: What your company is worth. In early stages, this is more of an art than a science, determined by negotiation.
  • Pre-Money Valuation: The value of your company before an investment.
  • Post-Money Valuation: The Pre-Money Valuation plus the amount of investment raised.
• Equity: Ownership in your company, represented by shares. When you raise capital, you are selling equity to investors.
• Dilution: The decrease in ownership percentage for existing shareholders (including the founders) when new shares are issued to investors.
• Runway: How many months your company can survive with its current cash balance and burn rate.
• Burn Rate: The rate at which your company is losing money, typically measured per month.

The Main Stages of Fundraising

Fundraising typically happens in distinct rounds or stages:

1. Bootstrapping: Using your own personal savings to fund the business. You maintain 100% ownership.
2. Pre-Seed / Seed Round: The earliest stage of funding. The goal is to get from an idea to some form of Product-Market Fit.
   • Source of Capital: Friends & Family, Angel Investors, early-stage Venture Capital (VC) funds.
   • Amount: Typically $50k - $2M.
3. Series A: The first significant round of VC funding. This is for startups that have demonstrated Product-Market Fit and are ready to scale.
   • Source of Capital: Venture Capital funds.
   • Amount: Typically $2M - $15M.
4. Series B, C, and beyond: These later-stage rounds are for scaling the business to a massive level, expanding into new markets, or acquiring other companies.
   • Source of Capital: Venture Capital funds, Private Equity.
   • Amount: Tens to hundreds of millions.

Each stage of fundraising requires you to have achieved new milestones and demonstrated significant progress. The journey is long, and not all companies need to or should raise venture capital.