If you want your company to become a player on the world stage, it’s going to take a lot of work – and a lot of money.
But exactly how much capital do you need and when should you start seeking it? What does “pre-seed”, “seed ” and “Series A” funding even mean? Is there a way to get around this stuff? Unless you’re already incredibly wealthy, probably not.
In fact, if you want your company to become a global leader in its sector, you better make sure it’s ready to step to the global competition, even if you’re seeking money at home.
“When you’re competing for capital, you’re competing on a global scale. Just because you’re performing well in New Brunswick in your sector, you still need to hit the $180,000 monthly revenue threshold to raise that Series A round,” says Ray Fitzpatrick, director of investments at the New Brunswick Innovation Foundation (NBIF).
“These metrics we’ve seen hold throughout, and it’s a global competition for capital. Nobody is going to fund you just because you’re one of the better companies in New Brunswick. You need to be one of the best companies globally.”
Fitzpatrick gave us the rundown on what each type of startup funding means, and what your business needs to get there:
What qualifies as “pre-seed” funding changes year-over-year depending on where the market is , but right now, it usually means that you’re looking to raise less than $1 million.
“At this stage, you’re really trying to build something. You have an idea for a product, and you might have proof-of-concept. You might have a demo, but it might not be fully functioning,” says Fitzpatrick. “You could have some customers in some rare circumstances. You could have letters of intent, things of that nature, but you’re not very far along. You have a really cool idea and you’re trying to see if it has legs.”
NBIF participates in pre-seed funding through its Startup Investment Fund, which is investments anywhere from $100,000 to $200,000. A lot of the time, the pre-seed companies NBIF invests in are ones the team comes across on their own.
“We don’t get a lot of cold applications on the venture capital side,” says Fitzpatrick. “It’s usually from our team being out in the community and listening to ideas from students and professors at the universities. Or we go to Venn and Planet Hatch to see what other entrepreneurs are thinking of.”
If an organization like NBIF participates in a pre-seed round, they will continue to work with the company as it grows.
“Whenever we meet with someone, generally they’re in the pre-seed category where we’re trying to get to know them. I like to say that it’s cheap due diligence for NBIF. You never know how someone is going to act until you start really working with them. We put $100,000 to $200,000 in and see what the relationship is like,” says Fitzpatrick.
“Do they take advice well? Do they report regularly? Or do they ghost us and we don’t hear from them for nine months until they run out of cash and want more?”
After pre-seed funding, the next fundraising milestone will be your seed round, where you’ll look to raise $1-million – $3-million.
Companies at this stage are starting to build a customer base and making around $30,000 in recurring monthly revenue and are looking to take it to the next level.
“You’re out of the ‘let’s building something’ stage. You usually have some customers. You’re hopefully seeing some repeatable patterns with those customers,” says Fitzpatrick. “At this point, you’re trying to take the $1-million to $3-million and really push it to a lot of marketing and sales efforts and some product development. You’re trying to build your customer base.
NBIF also contributes to seed rounds for New Brunswick startups. Oftentimes with companies they’ve worked with in the pre-seed round.
“Our model at NBIF is whenever we do pre-seed financing, we always want them to keep moving up the chain of raising more money. Building globally relevant, billion-dollar companies, it takes more than $200,000, it takes more than $1 million,” says Fitzpatrick.
Series A Funding
Series A funding is when you’re looking to raise $3-million – $10-million and have roughly $180,000 monthly recurring revenue. You likely have around 50 employees and have established repeating sales patterns. At this point, you have a lot figured out, and the focus is on growth.
“It’s more, ‘let’s put more money into repeating what we know works’ as opposed to ‘let’s put money into figuring out what might work,’ ” says Fitzpatrick. “It’s about repeatability and putting fuel on the fire in order to explode and have rapid growth.”
Laid out like this, it seems like raising capital is as easy as 1,2,3. But it’s not. In fact, Fitzpatrick says it not unusual for startups to take a while to get to that level. That’s normal.
“It’s a lot more volatility than just ticking up the latter, unfortunately, but that’s the way it goes,” says Fitzpatrick. “When I look at our portfolio right now, we have 60 companies. I’d say about a third of them are in that seed-stage range , they’re trying to graduate to the next level, and the other 2/3 would be in the seed and Series A stage.”
It’s Never Too Early to Reach Out
All this may seem confusing an intimidating. That’s where organizations like NBIF come in. Besides investing in New Brunswick’s most promising startups, they’re also a resource for both established and aspiring entrepreneurs alike to help guide along the right path.
“It might be a misconception that’s out there, that when people want to discuss their business, they need to have a full pitch deck and come in looking for capital,” says Fitzpatrick.
“We actually prefer to meet people when they’re not looking for capital. It takes a long time to get to know somebody, to build trust and to learn about the business. We’re looking right from the early stages to get to know entrepreneurs.”