Raising capital for an early-stage startup can be a daunting task, especially when an entrepreneur is unsure of what to include or leave out of a pitch. The process of startup fundraising involves proper business planning with thoughtful growth targets, deciding business valuation as per the current market standards, planning potential exit options for investors and much more. In the case of tech startups, this means having a minimum lovable product (MLP), a clear go-to-market strategy, as well as a path to product-market fit (PMF).
There is a broad range of funding sources entrepreneurs can explore to raise capital for a startup: angels, venture capital, private equity funds, accelerators, incubators or startup studios. Usually, the decision regarding which funding source to use is simple and depends on the stage of a startup itself. For a startup in its early stages, incubators, accelerators or startup studios are the obvious choices. For a startup in its preliminary stages, or if product details or the business model are not well-defined, startup studios may also be appropriate.
In simple terms, a startup studio deploys its expertise, resources and infrastructure under a platform approach to generate and validate startup ideas, then builds and launches them into the market. This model offers two kinds of direct benefits. First, it limits entrepreneurial risks for the startup as team formation, ideation, execution and capital risks are taken on by the studio rather than the founders. Second, startup studios increase speed and lower costs by offering an economy of scale. Thus, they increase the probability and size of success. Startup studios remedy a startup’s lack of ecosystem, making them even more relevant outside of Silicon Valley.
Typically, VCs manage around a 10 percent success rate in a market where more than 90 percent of startups fail. Conversely, startup studios strive for a 33 percent success rate. Of all the startups funded by Andreessen Horowitz, only eight percent end up being successful. The success rate remains similar for other top VCs as well. Startup studios literally take care of everything A to Z, while significantly increasing startups’ chances of success. In a highly competitive fundraising market, where only five percent of startups6 are able to raise funds from top VCs, entrepreneurs must seek as much external expertise as possible.
For startups at a relatively advanced early-stage, seed VCs and angel investors will most likely provide funding. Upon demonstration of growth and maturity, startups become eligible to raise funds from VC and PE investors.
In this White paper, we will focus on early-stage startups looking to raise seed capital from VCs and angel investors. In addition to being innovative with their business model, founders must think, evaluate and present their venture from an investor’s perspective to raise capital. We’ve put together an evaluation checklist that founders and entrepreneurs should explore and consider in fundraising strategies at all levels when selling a business opportunity or case. This guide combines multiple views from experts in the startup and investing space and aggregates them into a generalised approach technical PE, VC Funds and seasoned investors take when evaluating whether to invest in a startup.
At CeedCap, we use this same evaluation checklist when deciding which entrepreneurs or startups we choose to invest and build with. The checklist explores five essential areas every entrepreneur raising capital must clearly address if they wish to convince investors to invest. The areas covered include market evaluation, competitive analysis, management, valuation and structure.