Harvest Guide to Funding on the Prairies

Part Two: Finding your flavour of funding

Investors are focused on helping founders get their business off the ground.

Harvest Builders Staff

Chances are you’ve heard terms like seed funding or Series A, B, and C. What do all of these terms mean, how do they relate to each other, and how do you know which round of funding you should seek?

Once you’ve established you’re a venture-backable business, what kind of venture funding should you seek?

Chances are you’ve heard terms like seed funding or Series A, B, and C. What do all of these terms mean, how do they relate to each other, and how do you know which round of funding you should seek?

Overview of funding rounds

Friends & Family and Angel Round 

An angel round includes personal funds, not institutional funds. This money comes from friends, family, and high-net-worth individuals who want to invest in promising ideas. These investors are focused on helping founders get their business off the ground, and while they hope for an eventual return on investment, they aren’t hyper-focused on profits.

Pre-Seed Round

Pre-seed investors tend to be focused on specific niche markets, and scrutinize companies to understand whether they have a comprehensive understanding of the market, the opportunity, the competitors, product-market fit, and other early-stage indicators of a high-growth company. 

Seed Round

This is the first round where large, institutional investors typically get involved. These rounds can take a long time to close and come with ample scrutiny, but investing in this process is worthwhile. Seed-stage investors tend to focus on developing a long-term relationship with startups, providing strategic and operational guidance, and often provide follow-on funding.

Series A & B Rounds

These rounds are for early-stage companies that need to turn a large user base into a profitable customer base. Startups tend to focus on customer acquisition in the early days of their business at the expense of profitability. By the time they reach Series A and B, they need to be focused on turning revenue into profit and exploring opportunities to enter new markets.

Series C Round

At the series C stage, companies are more mature, established and profitable. At this point, they’re seeking funding in order to develop new product and service lines. They’re focused on rapidly scaling and expanding their success. Series C round funding may also be used to acquire other companies in the startup’s value chain. These acquisitions either round out the company’s offering or absorb potential competition.

Sidebar

Are you an early stage company?

“A company that has less than a million in revenue, with a team of fifteen members or fewer, and working towards product-market fit is how we qualitatively benchmark an early-stage or seed stage company,” says Jonathan Lipoth, Lead Analyst at Broad Street Bulls. 

Where should you focus your energy?

If you’re starting out, your focus should be on angel and F&F funding or pre-seed and seed stage funding. When you’re pursuing angel funding, focus on demonstrating that you are:

When an angel investor invests into a pre-seed startup, their money is illiquid. Until that investment is converted into a minimum viable product and a meaningful number of customers, it’s hard to either sell the company or attract new investment. As a result, an angel investor’s money is stuck. 

While angel investors don’t expect immediate profits, they do want a clear roadmap for how founders will use their money to reach key milestones and get to the next funding round. This roadmap requires vision and a compelling story, since it can take anywhere from seven to ten years to reach liquidity. 

“The liquidity period for a startup is generally between seven to ten years. Airbnb is a great example of a company that took close to 13 years to get to lPO. While different types of investors are often aware of this, many first time founders aren’t. Smart founders should be aware of investor liquidity timelines.” – Alex Gold, Managing Partner, Harvest Ventures

Identifying the “right time” to secure funding

How do you know when it’s the right time to secure funding? Should you wait until you have a team? A prototype? A few paying customers? 

Generally speaking, if you’re a venture-backable business, it’s best to seek funding sooner rather than later. 

“We’ve always said, ‘If you have a plan or idea for what you could use money for, but you just don’t have enough, it’s probably time to start fundraising.’” – Trevor Phenix, Managing Partner, Broad Street Bulls

“Founders think they can slow drip things and get their business to a happier spot before finding funding,” says Trevor Phenix, Managing Partner at Broad Street Bulls, a Regina-based venture capital firm. “We often see people seeking funding too late or later than they should because they missed out on a pretty material time in their business where they could excel, grow, and leverage some of these very beneficial relationships. We’ve always said, ‘If you have a plan or idea for what you could use money for, but you just don’t have enough, it’s probably time to start fundraising.’”

Demonstrating ability to earn your next round

That said, it’s not enough to be eager – founders must also be clear about what they want to do with the money. Marshall Ring, CEO of Manitoba Technology Accelerator, says his organization prefers a “tension-on-the-line”, tranche-based approach to funding that ensures each infusion of funding has a clear purpose and objective. 

“When companies are ready for money they’re able to give very tight deliverables for what they want to accomplish,” explains Ring. “We don’t want to finance someone to get all the way into the end zone. Figure it out a little bit and then figure out what the next steps are. People are ready for money when they can articulate the use of funds and the success metrics.”

“When companies are ready for money they’re able to give very tight deliverables for what they want to accomplish.” – Marshall Ring, CEO, Manitoba Technology Accelerator


Breakout Box

How companies can earn their next round

“We had a company that said, ‘We need $250,000.’ I said, ‘What do you need $250,000 for?’ They didn’t know, but they figured a startup needs $250,000. I asked, ‘What do you plan to do with that money?’ Again, they said, ‘Don’t know.’ 

I listened to them and asked, ‘What do you think your next steps look like?’ They identified where their break even point would be for the company, what that would look like from a customer acquisition perspective, and the usability rate they would have to reach. So together we figured they’d need 14 more customers and a usability rate of 22 percent. 

I said, ‘What do you need to get to those metrics? You don’t need money. So go hustle, find 14 customers, let’s wait 30 days, and see what the usability issue is.’ When we had that data, we identified that the usability problem could be solved with a $25,000 API to integrate platforms. So I said, ‘Why don’t we put $25,000 into your company and see if that solves the usability rate, because we already see that you can do customer acquisition.’ We did that and the usability rate went up. 

So now we’re starting to get a better sense of the fact that they can do customer acquisition, and they know how to solve their usability problem. Now we can do some bottoms-up projections on scale and put in $150,000 to help scale. That’s that stepwise progression with tension on the line with key milestones delineated, so people earn their next round.”

– Marshall Ring, CEO, Manitoba Tech Accelerator










Harvest Builders Staff
Part Three: Preparing and delivering your pitch
© 2021 Harvest Builders | All rights reserved.