I follow some business/entrepreneur publications and I’m ALWAYS reading about some new startup or business that just gained millions of dollars in funding through various investing rounds or similar. It makes entrepreneurship seem like a cakewalk but in reality I have no idea how you would even start this process as an entrepreneur or business owner. Would love to learn how this works!
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Often the earliest rounds are from personal savings and friends/family investing enough to get off the ground with the initial viability studies, concepts, prototypes and such. Once there is some semblance of a product, along with pitch decks that address potential market, customer demographics, potential revenue sources, etc. are pitched to venture capital firms. It can mean pitching to dozens of firms trying to get one to invest, and maybe one will or maybe none will and it means trying to keep moving forward trying to find an investor or finding a way to pivot in a way to draw investment.
ELI5 answer: They ask someone for money, and someone says “yes”.
Startups ask for money from whomever might be interested to invest, and if the investor says yes, they receive the money in return for “something”. That “something” is usually equity in the startup. Sometimes there are other conditions like a seat on the board or covenants. But it’s really as simple as “Here’s what we do. Here’s what we’re planning to do. We need money. Can we have some, please?” “Yes, if you…” “Deal.”
There’s no established process to this. There are some routes that are more conventional than others — very often you might hire investment bankers to organize all this because they know lots of investors and can provide underwriting and credit services, and very often you might talk to venture capitalists because they are more likely to say yes and also provide you with help — but there is no single required process. Startups hunt for money by hook or by crook. You do whatever is needed to keep the lights on.
I think the real question you’re asking is how startups find idiots dumb enough to give millions of dollars to them when they might have nothing to show but losses and a spiffy pitch. The answer is that it’s not that simple. The less a startup has to show, the more “something” they have to give up in exchange for money. The founders need to give up more equity, or agree to more conditions. In practice, startups can’t raise millions until they have much more than a pitch — you need at least an MVP (minimum viable product) and revenue from actual customers, plus evidence of good execution and growth, plus good plans with what you’re going to do with the money. Yes, you sometimes do get millions raised on nothing but a slide deck, but usually you don’t hear what the conditions are. The millions might be the headline number, but it may be only given out conditional on milestones being met, or only in kind not in cash, or there may be various other “catches”.
Idiot investors do exist, yes, so sometimes there are outrageous Series A or B rounds. Softbank is probably the most infamously idiotic. But most of them are pretty smart.
Venture capitalists like your idea, to see it to fruition you might need $100,00,000, but they don’t want to risk $100,000,000. They give you $1,000,00 at first then agree to give you the rest in installments as long as you reach certain benchmarks. e.g. by the first quarter, you must have 50,000 subscriptions and wi’ll give you $9,000,000 more, and at the end of the year you must expand to 3 states, by the second quarter of next year you must have 1,000,000 active users and so on.
Investors don’t want to risk all their money so you get paid in installments after you reach certain benchmarks that are pre-negotiated when they agree to fund your idea.
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