Class 8: Raising Capital

Welcome back to Thinkk's startup scaling course. Today, we're diving deep into a topic that's both exhilarating and often daunting for founders: raising capital. At Thinkk, we've guided numerous startups through this crucial phase, and we're excited to share our insights with you.

The Capital Conundrum

Let's start with a truth that might ruffle some feathers: not all money is good money. I know, I know – when you're burning through cash and eyeing that next stage of growth, any injection of capital can seem like a godsend. But trust me, choosing the right source of funding is as crucial as the funding itself.

Think of it this way: if you're building a rocket to the moon, you don't just need fuel – you need the right kind of fuel. The wrong type might get you off the ground, but it won't get you where you want to go. The same principle applies to your startup's growth capital.

At Thinkk, we believe in arming founders with knowledge. So, let's break down the main sources of capital you might consider:

1. Venture Capital (VC)

Ah, the allure of VC funding. It's like the siren call for many startups. But let me tell you, it's not always what it's cracked up to be. 

VCs are the most common place startups go for funding, and for good reason. They're reputable and can connect you with more than just financing. This includes helping you establish a network of partners, co-founders, technical support, marketing and branding help, and more. They'll also help you refine your business model and, because of their work with multiple companies, they'll probably have some decent advice to give you.

Here's the thing about VCs – they're not just writing you a check. They're buying a ticket to your show, and they want front row seats. This means they'll likely want a significant chunk of equity and a say in how you run things. Now, don't get me wrong – the right VC can be a game-changer. But the wrong one? It's like inviting a backseat driver on your road trip to success.

At Thinkk, we always advise our clients to do their homework. Look for VCs that specialize in your industry. And please, for the love of all that is holy, read the fine print on those term sheets. I've seen too many founders get burned by agreements they didn't fully understand.

Some common issues founders have with VCs:

• They often take too much equity, sometimes beating down your initial valuation.

• They can breathe down founders' necks and sometimes replace founders with their own people.

• Not all VCs have founder experience, which can lead to unrealistic expectations.

• VCs are known for complicated term sheets that can put founders under undue stress.

Remember, there are different types of VCs. Some invest in ideas and founders (pre-seed), some invest in new products and services (seed), and some invest further out. When you're an established company with good cash flows, you don't go to a venture capital organization, you go to a private equity fund.

2. Angel Investors

Now, angels – they're a different breed. Often, they're successful entrepreneurs themselves, which means they've been in your shoes. This can be invaluable.

We love angels at Think because they often bring more than just money to the table. They bring experience, connections, and sometimes, a mentorship that can be priceless.

The right angel will serve you as more than just a funding partner. Because of their wealth (as seen by their willingness to invest in one of the riskiest asset classes known to mankind), they often have a history of experience and success which can and will benefit you as a founder. Their insights and knowledge are huge, and their wealth has typically come from personal success. This is in stark contrast to venture capitalists, who often invest other peoples' money at the discretion of a young analyst.

But remember, angels are individuals, not institutions. Their involvement can be more personal, which can be both a blessing and a curse. Choose wisely.

3. Friends and Family

Ah, the classic "friends and family" round. It's tempting, isn't it? After all, who believes in you more than your loved ones?

This is one of the most common cases for raising money to grow your new venture or expand an existing one. As Felix Dennis argues in his book "How to Get Rich," if you're willing to take money from sharks (VCs, Private equity funds, banks, etc.), you should be willing to take it from fish (friends, family, and unsophisticated investors).

Family and friends are, from an owner's point of view, the easiest place to get money from. It especially helps if they're wealthy and believe in your talents. These people are often unsophisticated, letting you get better terms in exchange for the capital that you took.

But let me tell you a story. We had a client who raised $120,000 from friends and family. Sounds great, right? Well, fast forward a year, and Thanksgiving dinner became a board meeting. Not exactly the family time he'd envisioned.

If you go this route, set clear expectations. Treat it like a business transaction, because that's what it is. And for the love of your family relationships, only take money from those who can afford to lose it. Make sure that the people who give you this money won't have their lives changed if they don't get it back.

4. Bootstrapping

Now, this is my personal favorite. There's something beautifully pure about building a business with your own blood, sweat, and tears (and savings).

At Thinkk, we've seen companies go from zero to million-dollar valuations without a cent of outside funding. It's not easy, but it's possible. And the best part? You keep full control.

Not everyone has the capital to fund their own venture. It may require weeks and months of saving, re-allocating capital, or picking up extra work. And if you plan to use your own capital to fund your startup, remember that, depending on your bankroll, your capital will only go so far.

It's important to have some of your own money tied up in your venture to signal to outsiders your commitment to getting it done. Indeed, those without their own capital tied up will be looked at as 'not having skin in the game' and may be frowned upon.

5. Bank Loans

I'm going to be blunt here: for early-stage startups, bank loans are usually a terrible idea. Banks want predictable cash flows, not the rollercoaster ride of a startup.

Bank loans are a great way for existing businesses with sustainable growth to further fund their expansion. They're meant for businesses with steady, predictable cash flows.

Bank loans (debt) come with advantages to established businesses. Firstly, interest paid on loans is tax deductible, meaning it decreases a company's taxable income. Some companies even pick up debt to show investors and the marketplace how strong they are financially, a concept called the signaling theory of debt.

If you're an established business looking to expand, sure, explore this option. But for you scrappy startups out there, steer clear unless you want to be paying off that loan long after your startup has become a "stop-up".

6. Credit Cards

I'm including this here only because of how bad an idea it is. You should never finance a company venture (or even most purchases) with a credit card unless you absolutely have to.

Some founders talk about a process called credit stacking, where they take out multiple credit cards that have favorable terms like zero interest for 18 months. While I've spoken to founders who have done this successfully, I've talked to far more who are now speaking to credit specialists about how to fix their credit and get out of debt.

Credit cards have the highest, most predatory interest rates on planet earth. You might be paying upwards of 30% interest on any money you borrow over the course of the year. That's absurd, and an easy way to bankrupt both your new business and current self.

7. Crowdfunding

Crowdfunding platforms like Kickstarter, Indiegogo, and GoFundMe can be useful ways to get ideas off the ground that appeal to the masses, but aren't usually beneficial for more established firms. In fact, established firms that use this method of fundraising are often shunned and looked down upon for their poor financial management.

You'll need a good marketing campaign, solid videos that show the product's use, and a good promise to the people who are willing to exchange their money today for your product in the future. This might be in the form of priority access, custom versions of the product, a massive discount on their purchase, and more.

Not every company is meant for crowdfunding. In particular, only 'cool' companies that have mass appeal are right for this approach. B2B software, for example, won't do as well as a fork that twirls your spaghetti for you.

8. Credit Lines

Credit lines are a form of capital reserved for established businesses. The credit lines work with the idea that your company is creditworthy, and thus able to take on a regular amount of monthly financing at your discretion.

To apply for a credit line, visit your local bank. This can be a good option for businesses with steady cash flow looking for flexibility in their financing.

9. Grants

While not as common, grants can be a great source of funding, especially for businesses in specific industries or with social impact goals. Unlike loans or investments, grants don't need to be repaid and don't require you to give up equity.

I’ve heard numerous entrepreneurs say that hiring a grant-writer was the best thing they ever did for their business. Indeed, once a grant is written, it just needs to be approved. Grants come in different forms and sizes, and are often segmented by niche or industry. Some are only available for non-profits. Still, you can use resources like ‘grants.gov’ to find grants that apply to your business.

Some grants are also reserved for specific communities. For example, because minorities tend to be under-represented in entrepreneurship, governments set aside budgets specifically to fund their ventures. A great friend of mine named Chad used a combination of grants and forgivable loans to start his company called Wearpack. Today, it’s worth nearly $2 million dollars, holds partnerships with dozens of Division-1 universities, and employs 15 wonderful people.

10. Other Creative Options

While the above forms are the most common for raising capital, there are a million other ways to do it. Don't be afraid to get creative, as long as you have the proper guidance to do it. Here are a couple other ways that you might raise growth capital for your business:

• Businesses: If a company you're running or looking to start will directly help another company, or is designed to provide value to that entity specifically, then they may be willing to fund your venture.

• Your employees: If you have employees with deep pockets, they may be willing and interested in financing the company's growth themselves. This is a huge hack for founders that minimizes the reporting costs that come with raising outside funds.

The Thinkk Approach to Raising Capital

Here's how we advise our clients at Thinkk:

1. Delay raising capital as long as you can. Every month of growth increases your valuation and decreases the equity you'll need to give away.

2. When you do raise, raise more than you think you need. Running out of runway is not a good look.

3. Choose partners, not just money. The right investors can open doors you didn't even know existed.

4. Always, always have a clear plan for how you'll use the funds. Investors want to see a roadmap, not a wish list.

5. Don't underestimate the power of revenue. Traction is the best leverage in negotiations.

Preparing for the Raise

When you're ready to raise, you'll need to get your ducks in a row. At minimum, you'll need:

• A killer pitch deck (keep it under 15 slides, please)

• A solid business plan

• Financial projections (be realistic, not optimistic)

• A clear use of funds breakdown

If you're a startup looking for VC financing, you'll need a pitch deck, business plan, and use of funds sheet at the very least. If you're an established business looking to take on bank loans, you'll need cash flow statements, profit and loss statements, and a balance sheet.

And please, know your numbers & practice your pitch until you can do it in your sleep. I've seen too many great ideas sink because of poor presentation.

The Final Word

Raising capital is not just about getting a check. It's about finding the right partners to help you build your vision. Choose wisely, negotiate hard, and always, always keep your eyes on the prize – building a great company.

Remember, at Thinkk, we believe that the best companies are built, not bought. Use outside capital as fuel for your rocket, not as the engine itself.

In our next class, we'll be diving into how to effectively use that capital to find market validation and scale your operations. Until then, start thinking about what kind of fuel your rocket needs. Your journey to the stars is just beginning!