3 Trends in raising money for your startup in 2022

3.9.22
Startups

We all know that raising money for a technology startup is difficult. According to Fundera, only 0.05% of all startups raise venture capital.  Fortunately, there have been a continued rising trend in new vehicles for fundraising and new pools of capital ready to be put to work for you and your startup business.  These three new vehicles come in the shape of: Angel Led Rolling Funds, University Led Angel Funds, and Venture Studios. 


Background - Definition of Risk: Entrepreneur versus Venture Capital: 

Traditional Venture Capital is meant to invest while there is still a significant amount of risk in the new and growing business, hence the word “venture” in the name.  However, especially in markets outside of Silicon Valley, the industry’s definition of risk might look a lot different than what we consider risk as entrepreneurs. The VC industry likes to see revenue, revenue growth, a solid core team, demonstrable IP or technology, successful customer acquisition metrics, product market fit, and more. Or, you might be earlier than this BUT you have already had a 7+ figure exit under your belt. 


From the entrepreneur's perspective, having some combination of the above equates to having a full proper business. At that point, is it still a venture risk or is it a growth equity risk level? As entrepreneurs, we have to solve for the much risker stages of a new business which are at the very beginning. Having the aha moment, turning that into a problem statement, validating that with a potential audience, scraping together enough resources to show a demo, then a prototype, get some customer LOI’s, convince others to join your team for sweat equity, etc… These are the times, in the minds of entrepreneurs, where there is real risk. Once we are selling a product to a customer and have staff, we’re basically a mature business, or at least we think we are :) 


So the question is - how do startups make it to the stage at which they are ready to raise Venture Capital? 


Currently, that comes in the form of a few models: 

  1. DIY or DOWF
  2. Bootstrap
  3. Self Fund 
  4. Friends and Family 
  5. Crowd Funding
  6. Angel Investor
  7. Accelerator


The "traditional" options don't always work for us entrepreneurs, which is why we are happy to see three growing trends in 2022 for fundraising: 


Venture Studio 

Venture Studios have been popping up for the last few years, as a way to de risk early stage startups by surrounding the entrepreneur and/or the idea with proven resources, ranging from built in developer and engineering staff, to sales and marketing experts, to assistance with formation and fundraising. This is a LARGE component of both the risk as well as the cost in the very early stage. This is an option worth considering if the studio is accepting outside entrepreneurs into their program.

Pros

  • Proven teams and proven track records help minimize the risk that a good idea simply fails b/c you could not build it. 
  • Experience and guidance - most venture studios launched have been from successful entrepreneurs, who know that good ideas are everywhere (not just their own head), and that many a good idea gets snagged unnecessarily by something easily fixed. 


Cons-

  • First off, not all venture studios work with outside entrepreneurs. Many incubate their own internal product ideas. 
  • Control & Equity - venture studios exist to provide a turnkey process. This process is not cheap, nor is it something that can be replicated en masse. Therefore the studio is going to take an outsized equity position to cover a) their costs and b) the fact that they can only work on a select few companies at a time. 


Read here for Venture Studios, what they are, and where they can be found in the Southeast (United States). 


Don’t forget about our own venture studio


Angel Led Rolling Fund 

Rolling Funds were introduced by (or at least made popular by) Angel List in 2020 and are really beginning to pick up steam. Typically with more capital than an individual angel, along with more flexibility than a VC, and with the added bonus of many active LP’s, rolling funds represent a great opportunity for entrepreneurs to raise capital in 2022. 


How Are Rolling Funds Different than Syndicates? 


Pros:

  • Active LP’s - this means more people championing your startup! 
  • High flexibility- 
  • Active - rolling funds do not operate off of a concept of reserves. Each new fund is a clean slate, so winners will surely get reinvestment, but there is never a sunk cost fallacy- or a situation where prior investments of a VC get priority over new investments- so plenty of opportunities to pitch! 
  • Formed by/ Led by - typically run by someone who is not a ‘traditional’ fund manager or allocator. This means that the decision maker(s) are going to potentially be more empathetic to where you are in your process, b/c they’ve been there as well. 


Cons: 

  • Follow on funding unclear - while this is in part a “pro”, the flip side is that with a rolling fund, you might get your initial funding secured, but they don’t *necessarily* have the ability to be follow on partners. This means that you potentially have to go back to the drawing board for your next funder. 
  • LP Churn- not all managers of rolling funds will be around for the long haul, potentially leaving some zombies on your cap table or on your board. Due to the dynamic rolling nature of the structure, rolling fund managers can more easily get into the business, but equally as easily get out. 


Read here for more on Rolling Funds, and why I like the Tweener Fund. 


University Led Angel Funds


Now, you can be an angel investor as well as help your alma mater in one fell swoop! WIth the rise in the tech and entrepreneurship space, and the wealth that has been generated from it, there is no surprise that universities have caught on and are making their own moves. Enter the University led Angel Fund. 


Pros

  • Professionally managed, yet often have a ‘greater impact’ focus. Unlike traditional VC’s, there is additional motivation here to help the university and its network to standout. 
  • Warm intro’s - do you have an affiliation with a university? If you are or were struggling with how to get an “in” with an investment group, then start here! 
  • LARGE network of members- each investment typically is via an SPV, so while each investment has a cap of LP’s per investment, there is NO cap to how many members this angel club can have. 


Cons 

  • Still has bottlenecks
  • Not all Universities are Equal. Some are more organized than others, which goes without saying.


Read here for our blog post on university led angel funds


That about sums it up. Raising money in your startup is difficult. Fortunately, there are more options than ever before.


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Smashing Boxes is a creative technology lab that partners with clients, taking an integrated approach to solving complex business problems. We fuse strategy, design, and engineering with a steady dose of entrepreneurial acumen and just the right amount of disruptive zeal. Simply put, no matter what we do, we strive to do it boldly. Let's talk today!

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