Watch: How to secure startup funding and scale

There was a time when options were limited for entrepreneurs who needed cash to give their business a running start. 

To make a go of it, founders had to use their own savings, work multiple jobs, take out a loan from a bank, secure a grant, or borrow money from friends and family, just to name a few. 

Today, there are more efficient ways to raise capital, especially for early-stage startups. 

Apart from the traditional loans offered by banks, burgeoning startups can tap into newer and more accessible financing options, from startup incubators and venture capital firms to angel investors and revenue-based financing platforms.

But here’s the elephant in the room: Do you know which funding options work best for your startup and how do you know when you’re ready to make the leap?

To that end, Pilot CEO and co-founder Waseem Daher sat down with Pipe’s VP of Finance, Lukas Wagner, for an hour-long webinar on how to successfully build and fund companies, as well as scale in a new financing landscape.

Key Takeaways:

  • While the allure of VC funding is tempting, understand that you’re also expected to deliver a meaningful return on investment and produce solid results.  
  • When thinking about pursuing VC funding, take a look at your TAM, or total addressable market, and determine whether the timing and potential for growth is there. 
  • Consider whether trading away some ownership in the company is needed to grow quickly and achieve the scale of value that you want.
  • Once you’ve developed a solid business model that no longer requires a significant amount of investment in ambitious or experimental initiatives, it may be worth considering other financing options that don’t cut into your ownership stake. 
  • Not all angel investors are the same, but there are those who can become trusted advisers, mentors, and supporters.

On what makes a company ready for VC funding

While the prospect of securing money through traditional VC firms may sound enticing and alluring, it also comes with the understanding that you’re given money to produce results and deliver a substantial return on investment. 

“Folks really need to understand the power law of VC money, where in the end, they're looking for those two or three home runs — they're looking for those portfolio makers, such as Coinbase and Uber, that end up letting them raise another fund,” Wagner said. 

When startups start thinking about raising a traditional, institutional round of financing, Wagner says they should consider four important questions:

  • If you play your cards and execute with the right team and the right timing, is there a really big company to be built here? 
  • Are you serving a potentially very profitable, but very niche market, where, even if you get 60, 70, or 80 percent market share, the outcome ends up not being what a larger and well-known company could attain?
  • How do you run your business leading up to the fundraise? 
  • Have you found the right level of product-market fit — a rinse-and-repeat type business — that will be easy to see when people review your metrics without any bias? 

“We, quite frankly, run into a lot of companies that want to raise institutional capital but just aren’t quite there yet, and that's okay,” Wagner said. “What you want to do is run your business in a sustainable way so you're not relying on outside funding at a specific point in time.”

Apart from determining whether your metrics support institutional funding, Daher says startups should consider whether they can or even should go after it. 

“You sort of have to believe that the market is super large and that you have the appetite to really pour on the gas,” Daher said. “In particular, at the expense of trading away some ownership in the company, you're going to use that because you want to grow super fast, because you believe that growing super fast is needed to ultimately create the scale of value you want to create.”

As an example, Daher pointed to the creation of Pilot, which seeks to provide the tax preparation services, online bookkeeping, and back office services that startups need at practically every stage of growth.

“It's an enormous opportunity, and we would rather pursue it more rapidly than more slowly,” Daher said of Pilot. “We know it has the potential to be really huge, so we're willing to do the work, give up some ownership, and take in some additional capital to allow us to realize that vision faster. I think, in some ways, the question I would ask is: does the business require venture capital to succeed? If it does, great; you should do it. If it doesn't, I view it as a good thing.”

Once founders develop a solid business model that doesn’t require a significant amount of investment in initiatives that may not pan out over time, such as geo expansion into new markets or ambitious research and development projects, it may be high time to consider other financing options that won’t reduce their ownership stake in the company. 

Pipe, for instance, turns a company’s recurring revenue, such as subscriptions, into upfront capital for growth without the specter of risk or dilution. This recurring revenue is then sold on Pipe’s online marketplace to investors who pay a reduced rate for the ACV, or annual contract value.

“When it's time to strike, go and raise outside capital, but there's also a stop button where you've now hit escape velocity and are just raising for the sake of raising,” Wagner said. “I don't think that serves anybody particularly well.”

On angel investors

Not all angel investors are the same, and some may end up being more helpful to you than others. 

Pilot’s CEO and co-founder, Waseem Daher, said there are generally three types of angel investors: 

  • Malicious angels: While they may not necessarily do something that’s intentionally bad, these angel investors can be slow, have a million questions for you, or delay the close of your next finance. “Your angels ideally are helping to make you successful,” Daher explained. “I think if you get the wrong folks on the cap table, they can apply a lot of stop energy in a way that can be frustrating.”
  • Neutral angels: These are the vast majority of angel investors who will send you money and then disappear. “I don’t think that’s a bad thing in the sense that they’re helping you fund your business, they’re low hassle, and they don’t take up your time,” Daher said. “Hopefully, if you reach out because you need something very tactical from them, you have a good shot of getting them to do it.”
  • Transformational angels: These are the extremely rare angel investors who will have a significant impact on the way you run your company. In many cases, they will serve as trusted thought partners, help you navigate sticky situations, become sounding boards for tricky dilemmas, and advocates who introduce you to top-tier investors.   

The challenge, however, is that you really won’t know what type of angel investor you have until you actually work with them.

“I like to get as many angels on the cap table as possible because that increases the probability that we're going to get someone really great, assuming we feel like we can filter out the folks who are actually going to be harmful,” Daher said.

It can also be helpful to stay close to longtime supporters, who understand your business and the journey you’ve been on as a founder. In some cases, these supporters can eventually become instrumental investors and trusted advisers.

“It's helpful to have one of your customers as a sounding board,” Wagner said. “A few of our biggest supporters early on are now investors in Pipe, and it has been tremendously helpful to have them be aligned with us strategically, but still go through the full experience early on, be very truthful about it, and give really candid feedback that you might not get from an outsider's perspective.”

Want to hear the rest of their conversation? Access their recorded talk here, and sign up for notifications whenever Pilot holds a webinar with a wide-range of thought leaders in venture capital, finance, and more.

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