Raising Money, Costs Money

The hidden costs of securing capital

Startups who need capital and are ramping up to raise money from investors often do not understand the hyperbole of fundraising-- its costs money to get money!

Once a startup has formally raised more than $1MM and are doing their Series A or Series B they know this. Seed founders who have not raised money or significant money (and actually need capital the most!) are the founders who don't under that raising capital requires: hundreds of human hours (meetings and prep), costs thousands of dollars (designers, software, onboarding costs), needs an actual process / project schedule

I was thinking recently why is it that early stage founders who need money are the MOST surprised that raising money costs money?!

I think it boils down to two reasons...

The bar for raising money as a startup has significantly been raised

Having an idea on a napkin is no longer enough. Angel and VC investors are looking for traction, customers, working products out the gates. Ideas are limitless but the true winners in the ecosystem can execute and get it done for tangible results

If you have never raised money you do not know, what you do not know

Like anything in life, if you have not lived through the process of something you have no idea how things go. And with more startups than ever competing for the same group of capital and investors, founders really need to "have it together."

Anyone professionally investing into startups, whether its $10k or $100k can nearly smell when a founder is organized enough for capital. It shows in how the founder responds to questions, what their scheduling is like, how fast they can reply to an email...

So for all those founders out there looking to raise say $100,000- $1,000,000 allow me to let you in on a secret: it costs money.

Here are five costs early stage founders should be prepared to figure out how to cover while fundraising:

1. Materials and Design - $10,000<

Your website, pitchdeck, one pagers and anything else needed to support the fundraising and investor process will need to be proofed with some proper design elements. How you fundraise is also how you run a business. Sure there are many "templates" out there for $100 or $500 and you know what? Investors can tell. Your main pitchdeck should be 10 slides no more, look great, and be polished. A typical pitchdeck that I see for startups that complete their rounds will cost several thousand dollars between edits and designs. Every startup who raises money will ultimately end up at the same point of presentation quality. The startups who try to "save money" on decks and running a proper investor process either take twice as long to raise money or end up not raising at all. Communicating with investors is a sport in itself and part of the process

2. Software and Technology - $5,000<

There's more technology costs to fundraising that founders realize: you often need a data room setup, somehow, with documents in one spot for investors. To host these documents somewhere or to use an actual program like Carta or SS&C Intralinks will cost money. This can range from thousands to dozens of thousands of dollars depending on the round, not to mention the setting up the online account and folders

3. Legal Fees - $20,000<

Having a perfect pitchdeck, business model, traction and passing the diligence process are huge steps to take and after all that? Legal. Depending on the law firm or lawyer startups are charged for their termsheets or terms review, any investor contract documents (even if a SAFE note template) and importantly KYC or "Know Your Customer" this is the process of verifying each investor and that they are applicable to invest capital into your startup. I have seen KYC fees range from $200-$2,000 to KYC

4. Platform Fees - $20,000<

More startups are in parallel using crowdfunding platforms to raise their rounds. This is smart because it's been shown the more investors you have the more people there are to share or refer your startup. The online platforms doing this work for you however have their own fees: setup fees, often a % of money raised and their own KYC fees. On average I have seen most platform charge 3-5% of capital, 2-3% for online or credit card fees, then additional fees. On a $1,000,000 online platform raise, a startup likely to pay the platform (when everything is added up) to almost 10% which = $100,000 on $1MM

5. Meetings and time - $50,000<

If a founder is taking hundreds of investor meetings (which is standard) startups need to account for the founders time away from building the business and any people who would need to assist the founder or founders. There's document updates. Legal edits. KYC. Logging into the data room and making updates... all of these tasks of human hours end up costing the company realized or not. Even if the founder is not taking a salary each startup knows their margins so if you factor in say 500 meetings at 1-3 hours of meeting time and prep that is = 1,500 founder hours. A startup founder is worth more than $20 an hour to the organization but even at that at that very low wage 1,500 X $20 = $30,000

When you are early stage, scrappy, and watching bills its not impossible to raise money you simply have to balance the above tasks and costs in a way that works for the startup. Maybe a cousin is good at graphic design, maybe you can find someone on Upwork across the world who is 1/4 the cost of a local designer. Perhaps a lawyer is willing to do work without pre-payment or for equity. One thing I warn to founders is that if someone is guaranteeing they can help raise a round, and they can seriously do it, they will want to be paid before and not AFTER the round closes.

---

"Can you help us raise money and we can afford you or pay after?"

I hear this a lot in my job, the answer is NO.

First of all there's no guarantee after getting the startup perfect and assuming their round closes, to get paid. If you are good at fundraising the last thing you wanna do after spending weeks getting a startup completed with their round is chase them down for payment.

Second, there's no way to guarantee loyalty. You can get a startups documents perfect, maybe even do some introductions, and then be ghosted. You will not know until reading TechCrunch that who you helped closed a round (been there myself).

And third, at round close a startup is going to have WAY less money than they realize from the costs explained above. An example would be raising $1,000,000 and then paying $100,000 to the lawyers, designers, software costs etc. The startup will also be behind on growth from the founder being pre-occupied the last several weeks and months with investor meetings. So at a round close, after paying all these costs having to pay a person or consultant who helped make it happen is painful. It's another cost and it feels horrible to pay once a startup realizes where all the money goes into fundraising, it's not feasible and I rarely see this combination work.

That is why I always recommend startups not go cheap on fundraising consultants and try to stay away placement agents who charge usually 5% themselves and will place mid to low tier investors into your round. Imagine the costs above + an additional 5%.

Congrats, you now lost 15% of your capital raised to raising your capital raised while customers are backing up.

For founders the best way to cut costs while fundraising is to save time.

Have a fundraising start and stop date. Have all pitch materials prepared before your start investor meetings. Keep initial investor pitches and meetings SHORT even if you "have chemistry" with the investor and avoid traditional placement agents which will be another 5% layer atop all other costs. Try to use proven templates that already exist online like SAFE notes and know what a reasonably priced round should look like.

Raising money in any industry is a sport in itself and investors can tell right away if you have been practicing. Instead of cutting corners and stretching out a startup capital raise over 6 months, if you prepare and do things right this could be closer to 1-3 months.

Find a consultant or advisor who has done the process before. Get an affordable designer on Upwork. Prep your data room before an investor asks. Know your terms.

And if you are still confused or need help, I am here. There are many startup operators who know this world well... it's the founders job to find them.