Planning your first fundraise

So, you’ve decided to found a startup company, great!

You’ve got some savings, maybe you’d borrowed some money from family or friends. That only goes so far, however, and if you want to scaleup your startup the time has come to seriously consider raising some capital investment.

Many founders are experts in their fields and perhaps not natural accountants or sales leaders. So, understanding how much money you may need to raise and how to go about it can seem like alchemy to some. Across Alberta, there is a growing investment community that is eager to see more success stories. Alberta Innovates works closely with many partners to attract venture capital to Alberta and grow the number of investable companies in the province.

When starting out, it’s important to realize Alberta is a unique ecosystem, different from other markets, according to Bryan Slauko, Co-Founder of Metiquity Ventures, an investment fund that specializes in pre-seed funding levels.

“Alberta's a very different market and it's a challenge because yes, there's lots of wealth here, but all that wealth comes from oil and gas, and it comes from real estate and it, for the most part, doesn't feel like it understands investing in technology start-ups. It's very unfamiliar and so that makes it really hard to raise money,” says Slauko.

For Kristina Milke, General Partner with the Sprout Fund a seed-stage venture fund, it can be obvious which founders have done their advance homework and sometimes, which ones haven’t.

“These founders that you know are trying to solve a real-life problem and they spend a lot of time on building their product and haven't spent as much time educating themselves on the financial aspects of running a business,” she says. “So, then they build this product and then they think, ‘OK, well that hard work is done. Now I just need to raise some money, it should be easy.’ It's not, there's a lot of education that's required.”

It’s important to start with a strategy and identify key steps. These can include:

• Mapping key milestones
• Determining the target amount to raise
• Determining the type of capital being raised
• The type of fundraising instrument you will use
• Identifying potential funding sources

The type of fundraising instrument or combination you may land on is important as each has advantages or considerations to think about, says Milke.

“Because you have no assets in the business at an early stage no banks are really going to help you out because they want security unless you put your house up or something as collateral, which to me that's a big risk on your shoulders. I can't tell you whether to take it or not, but to me it's a huge risk, especially if you're, you know, a first-time founder who doesn't have a lot of experience. It's not a recommended path.”

Common fundraising instruments for startups can include:

“I think there's any range of instruments that there's a time and a place for all of them,” says Slauko with Metiquity. “We have our own thesis and our own belief in what we like and we don't love to do SAFE notes and convertible notes on an initial investment. But you know not to say that there's not a time and a place for those if someone's raising a little bit of money and needs it quickly because they need to hire someone to execute something quick on their product and they need $50,000-$100,000. It makes total sense to use a quick convertible note or a SAFE note or something like that.”

Once you have determined some of your initial plans, let’s get more familiar with some common terms to understand.

Cash burn rate

It might seem obvious, but this is how much money you are spending each month, your total expenses no different than a household budget.

Cash runway

This is how much time you have before you’re out of money essentially, based on your burn rate.

Capitalization Table

This is typically one of the first documents created. It organizes and details the ownership structure of the company, documents securities and warrants.

Term sheet

A non-binding document outlining the key terms and conditions under which an investor is willing to invest in a startup company. It lays the groundwork for negotiations before a formal agreement.

To make educated financial projections, startups and entrepreneurs can use a combination of tools, resources, and strategies. If you are looking to do a priced fundraising round, you can use a suitable valuation method such as Cost-to-Duplicate, Market Multiple, Discounted Cash Flow (DCF) Analysis, or a combination of these to determine what your company is worth to guide conversations with investors.

Creating a capitalization table records important details such as ownership information, the prices paid by investors for shares and the percentage of ownership each investor holds in the company. Additionally, it tracks the value of these securities and how ownership may be diluted over time. Ensure your table remains well-organized by diligently monitoring and recording all relevant information, including terms, dates, funding amounts, and dilution.

As you begin planning your fundraising, Milke reminds entrepreneurs not to forget some important considerations.

“Make sure you understand who your investors are because not all money is created equally. You really want to make sure that when you're working through that ideal investor profile, you're thinking about what are the best investors that you think could be useful for your business and helpful on your CAP table,” she says.

Managing your expectations and have reasonable valuations and fund-raising targets is also critical, says Slauko.

“Raise enough to hit some milestones and prove some traction. You might have to go back and, you know, raise another $500,000 just to because you didn't quite get as far as you wanted, but you got some proof. It's just easier to execute that on a smaller number than going super big. If there's too much money on the table, I said this is a red flag for us.”

Both the Sprout Fund and Metiquity Ventures are members of the Venture Capital Association of Alberta and the Sprout Fund has received funding investment from the Alberta Enterprise Corporation to help spur investment in Alberta technology companies. To learn more about the Alberta Enterprise Corporation visit its website.

For more detailed information check out Alberta Innovates full Fundraising Journey Map.