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Startup Financing from Seed Round to Institutions

Finding capital for startups is no easy feat.

Global Influencer

Global Influencer
Global Influencer

Finding capital for startups is no easy feat. Our team works with them on a daily basis to help them find, and support, the right funding options.

We like to support these companies in finding financing for their immediate needs so most of the financing will be smaller numbers with a larger objective of $10MM as the final amount.

We only work with private companies and find that raising capital of $500-700k at a time works for them and is relatively easy to accomplish. The process is pretty typical. We utilize the family and friends network for initial rounds then accredited investors and Offering Memorandums (OM) to fill the need.

Angel investors are in good supply in Vancouver but they are looking for the unicorn in the group they manage while most of their investments may perform ok or simply fail while they attend to the star company. Our goal with the companies that we work with is to make sure after all the early rounds of financing they still retain control of the business until liquidity.From my experience Angels and Venture Capital guys want a board seat and a big chunk of shares for their investment. We rarely use that model and go instead for the accredited investor route.

We choose the companies we work with very carefully so they usually follow our thoughts on where to go for funding being family and friends, accredited investors and OM’s. It’s a matter of preference for us as well as our persistence that our clients retain majority ownership. We also don’t like debt financing at any point in the process.

Our thoughts are that people and equity are the two most important things to our clients. Taking care of the client so the founder retains ownership is paramount.

Sure there are advantages for taking money from Angels and VC’s. Financing a needed expansion quickly is very appealing to the first time founder who is going for the dream. However, if he’s been down that rabbit hole before he knows the disadvantages too. He’s tried the banks but without a track record and a big sales number they are not interested and family and friends resources are limited. The VC’s money seems like a great deal.

The downside to VC investment is not so much a bad thing as it is meant to protect the VC’s interests in the deal. You’re definitely going to face some management changes in both people and how decisions are made. The VC will want to bring in his own people for some positions and may have some of his own thoughts on decisions the founder would take for granted.

You probably remember those days when you could pivot on a dime. Those are now gone if you take money from the VC. Don’t forget your equity position is definitely diminished.

We were talking to a founder the other day and the subject of institutional funding came up. Yikes, if you thought VC’s were troublesome getting money from these guys too early in the startup can mess you up completely. Think dilution!

Institutions are the big boys in the schoolyard, the standout in any crowd. They have tons of money and they are heavily into private financing. Institutional funders include pension funds, money managers, mutual funds, insurance companies, hedge fund – you get the point. They are essentially investment pools for others. The 5 largest investors in Apple are institutional money managers.

It’s a widespread view in the VC literature that institutional investors generally choose to invest in private equity through funds. As an example, Lerner et al. (2007) argue that the bulk of institutional investment in private equity is done through funds, since institutions lack the intensive relationship and due diligence skills needed to directly select the appropriate private equity investments.

The prudent way is to raise the capital you need from other channels and those top Tier 1 (the most in demand) institutions like J.P. Morgan, Citigroup, Bank of America, Goldman Sachs, Morgan Stanley (in that order) will line up to offer you more money. With $10MM raised the very least you would find Tier 2 funders like Deutsche, Barclays, Credit Suisse, HSBC jumping on board.

It certainly is a long and road less traveled to go from a fresh upstart startup to a position of seeking the big bucks. If you are facing a huge expansion and feel it’s time to go big or go home then working with these guys is the answer. For now I’ll stick to my seed round choices and leave dealing with the big boys to others.

The saying that there is no such thing as a free lunch is very much true for Robinhood.