The Art & Science of Tech Startup Fundraising

Introduction

So you want to run a tech startup, but where do you start? For one, you’re going to need capital. From designing a business logo and website to creating marketing materials to hiring contractors or employees for sales and customer service, there are many things to pay for when starting a new business.

Many may seek venture capital, but take note: According to Crunchbase, VC funding in 2023 reached its lowest level in five years; but that doesn’t mean you won’t be able to score a deal.

From figuring out how to wow investors to finding other ways to raise the capital you need to grow your business, here’s everything you need to know about the art of fundraising for tech startups.

Is it hard to raise money for a tech startup?

If raising money for a tech startup, or any startup, was easy, just about everyone would be an entrepreneur. Raising money to fund a new business venture is one of the most challenging parts of not just getting a startup up and running but keeping it afloat for months and years down the line. 

According to Fundera, 77% of small businesses use their own personal savings at the start of founding the company, and only about 0.05% of startups go on to raise venture capital.

Developing an idea for a product or service, studying the target market, finding ways to stand out from the competition, and preparing a business plan before you have enough data and projections to pitch to investors or lenders require a lot of research and time.

While the fundraising process for tech startups is difficult, there is a sort of art that can go into preparing for this journey.

The art and science of tech startup fundraising strategy and planning 

In 2023, global startup investments declined by 38% year-over-year, reaching $285B, according to Crunchbase. But while overall funding for startups may be seeing a decline, tech startups, particularly those focused on artificial intelligence, may have a better shot at success.

Funding for AI startups is up 9% for 2023 compared to the previous year, Crunchbase reported.

But just because a startup is in another market doesn’t mean it cannot secure funding. Startups may have to be more diligent about knowing what investors are looking for or consider other alternatives to fundraising.

How do people raise money for startups?

There are multiple approaches to raising money for startups, and founders can consider using one or multiple approaches as they seek capital to start and grow their businesses. 

Self-funding or bootstrapping is one option, and many founders contribute their own money in the very early stages of creating a new company. Angel investors are another option; these are individual investors that will offer you an investment in the business, usually in exchange for equity, or ownership in the company. On average, an angel investor offers $52,000 to $1M to a startup.

Venture capital is another popular option. Similar to angel investing, VC funding offers an investment in exchange for equity. The VC investment process starts with a pre-seed and seed round, which raise an average of $100K to $1M and $3.1M, respectively. From there, startups will go through a series of funding rounds depending on the company’s growth. About one-third of startups will go on to raise funding in Series A or later rounds.

Startups don’t have to seek out investors, though, especially if they want to retain full control over the company. Crowdfunding is a way for startups to build an audience while raising money; typically, individual customers will offer smaller sums of money in exchange for early access or other perks. However, some startups may consider offering equity crowdfunding, which offers smaller amounts of equity to a wider pool of investors.

Startups may consider business loans through a bank or other financial institution, but these typically include interest that will need to be paid back later. If the startup fails, it will still be on the hook to pay back the loan plus interest.

How much money do you need to raise for your startup? 

The amount of money a startup needs to raise will vary from company to company. Generally, a startup needs enough money to reach its next stage of growth while continuing operations, and it doesn’t hurt to have enough money to continue running the business for at least an additional six months to a year in case sales are slow or there is a long period of rejections from potential investors.

Faster Capital recommends raising between $500,000 and $1.5M for a startup in its earlier stages, while Shopify data found that the first year of starting a business costs about $40,000.

source: Shopify

Ultimately, the amount of money depends on your operating costs and profits. 

What makes a startup attractive to investors?

For startups that want to pursue funding via VC firms or angel investors, it’s important to show not only that you have a great idea, but that you are well-versed in your industry and fully understand your target audience and its needs. Of course, attracting investors goes even further than that, and startups need to consider the founding team and the long-term business plan if they want to earn investments.

Jason Druker, portfolio manager at SFC Capital, noted that a startup’s founding team is one of the first things investors look at when considering investing in a startup. Startup founders need to be resilient and communicative not just with each other but with all stakeholders in the company. 

Typically, investors prefer to see two to four founders in the startup. Having multiple founders ensures a wider variety of skills to manage the different facets of the business, but too many quickly become an issue of competing ideas.

Additionally, investors want founders to be fully focused on the business rather than approaching it as a side project.

“We need to see founders that are fully committed to the venture — an old saying goes that you cannot be ‘half-pregnant’ and we admire founders that are full-time focused on one purpose,” Druker said.

Startup founders will also need to be able to provide a solid, forward-thinking business plan that shows the long-term scalability of the company if they want to attract investors.

Stories from tech startup founders on raising capital & making your startup investable

As you can see, there are many methods to raising money for a startup, from bootstrapping to seeking out VC funding. No matter what strategy a startup uses, it can be a long and difficult path. In fact, money problems are some of the top reasons startups fail, from improper cash flow management to poor pricing strategies.

But savvy startups can learn from others who have been in their shoes. By building up a solid business plan and making your company as attractive to investors or lenders as possible, you may have an easier time securing funding.

HubSpot for Startup’s Spiraling Up: The Journey to Become a Unicorn series follows startup founders who have been through the process of fundraising and succeeded. These founders know a thing or two about building a successful startup, from making your company more attractive to investors to closing deals and increasing company valuation.

Here’s what startup founders who have gone on to build unicorn companies, or those valued at $1B, have to say about raising capital for startups.

Godard Abel of G2

Godard Abel, CEO and co-founder of G2, a software marketplace, comes from an entrepreneurial-minded family, but the path to G2 was long and challenging. Yelp inspired him to build a place where other businesses could find and review software and apps. 

The founding team had a plan to launch the idea at a conference, and they focused more on data first before thinking about how to make money on the idea. But they weren’t getting any interest from potential users. 

The G2 team worked toward improving their search rankings to drive traffic, and it took nine months before the company made any revenue. 

“I do remember after we started, 2012–2013, a couple of friends chipped in a little bit, but at some point, that money was going to run out,” Abel said. “This gnawing feeling we may never get the results, we may never 1) get the web traffic and then 2) we’ll never figure out how to make any money at this.”

The founders bootstrapped further with help from co-founder Tim Handorf, whose family farm helped supply investment to push the company forward. But asking friends and family for investments brought a lot of pressure, Abel said. 

Abel joined a group of entrepreneurs in Boulder, Colorado, who offered some support and advice. This was life-changing for Abel and the business, inspiring him to drive growth from passion rather than fear.

As of 2021, G2 is valued at $1.1B and raised $157M in its last funding round, and it boasts 80M users per year.

Kishore Kothandaraman of Goldcast

Kishore Kothandaraman, COO and co-founder of digital event marketing platform Goldcast, grew up in a middle-class family, where he was taught to work hard and earn what you want while also giving back whatever you earn. Watching his father experience a series of health struggles during his teenage years made Kothandaraman want to take care of his family and taught him he could overcome anything if his dad could overcome these life-threatening obstacles.

He sought to get an MBA in the U.S., where he met his eventual co-founder, Palash Soni. They found they had similar interests in starting a company, so they collaborated to create Goldcast. 

“We didn’t know anyone to raise capital from,” Kothandaraman told HubSpot. “Since we are new to the country, you know, investors usually like to take calls with people that they know and that they get warm introductions from.”

On top of that, they had little in savings and had each racked up student loan debt from Harvard Business School.

They continued marketing to potential customers, eventually securing their first 10 to 15 clients. The efforts paid off in $2M from investors, although this amount was little compared to the hundreds of millions they noticed their competitors getting in series funding.

The company had to keep working hard to pitch and market what it offered in order to attract employees and investors. The co-founders had to get used to hearing no without giving up on what they knew was a disruptive idea, and the perseverance worked.

The company’s latest funding round raised $28M in Series A, and it’s valued at over $100M.

Dawn Dickson of PopCom

For Dawn Dickson, founder and CEO of PopCom, a company offering AI-powered software for retail kiosks and vending machines, the path to raising money for a startup is all about trusting in yourself and never giving up.

From the start, it was hard. Dickson noticed at conferences, parties, and other events that people wearing heeled shoes would end up taking them off because of the pain. She thought about ways to reach these customers, and realized the fastest method would be through vending machines. 

Dickson went to conferences for three years just studying the industry and learning more about her target market.

She set up a vending machine with comfortable, flat shoes in an Atlanta airport, and she quickly had people calling her to buy her vending machines. While she had been testing different businesses in the past that had some success, she knew this was a different kind of idea that was scalable — a characteristic that investors are looking for in startups.

“One of the most devastating but motivating times in PopCom was after I raised my first million dollars, and that was a big deal, because at the time, less than 20 Black women had ever raised a million dollars from VC institutional capital,” Dickson recalled. But she felt like she had become a token investment, especially because she wasn’t receiving the additional support and resources investors were providing to the other founders they had invested in.

Not only that, but when her prototype was stolen, and she needed a smaller amount of funding to rebuild, investors weren’t interested in helping further. Some investors encouraged her to change her business model, and she obliged, but it didn’t always work out. She decided to go with her gut instead, but this meant seeking out other ways of finding the funds she needed.

“That’s the thing for an entrepreneur, trusting your gut and not letting money be the motivation. Letting the results, letting what you know, why you started this, why are you doing this — let that be your fuel,” Dickson advised. 

Since 2017, PopCom has raised $7M from a combination of VC funding, angel investors, and even equity crowdfunding.

Mandy Price of Kanarys

Kanarys, a SaaS platform for DEI, faced many risks and struggled to get off the ground and become the unicorn it is today. CEO and co-founder Mandy Price started her career as a lawyer, but she noticed the lack of women who were being promoted in her industry. However she became passionate about data and DEI initiatives, and Price noticed the lack of data in making more inclusive workspaces.

Following many microaggressions at work, Price decided to leave the firm and convinced her husband, Bennie King, to leave his job as well to work on what is now Kanarys. But fundraising was even more challenging than expected.

“We did not anticipate there was going to be 2.5 almost 3 years before we could take a salary, that we would have to empty our 401ks, use all of our savings,” Price said. 

Price’s dad was the company’s first investor, putting all of his retirement savings into Kanarys. Price knew getting funding from additional investors would be difficult, as founders who are Black women make up only 0.06% of recipients of VC funding.

“When you look at the challenges, even though there’s lots of other studies that show that Black women are one of the fastest groups going into entrepreneurship, the funding is not going along with it,” Price said.

Many people did not believe in or understand what the company wanted to do, but Price anticipated the challenges. The team at Kanarys tried to plan not just for positive questions about business promotion and growth, but they prepared to be asked many questions about business risk. They also practiced ways to turn questions about risk and prevention around to discuss the opportunities Kanarys provided.

Ultimately, they succeeded. Kanarys recently raised $5M in Series A in 2023 and has raised $10.5 million total since its founding.

Adam Chekroud of Spring Health

Spring Health is a mental health solution for companies to provide mental healthcare access to employees. While today it provides this access to over 5 million people, it wasn’t an easy process to get investors to trust the founders and believe in the vision the way they themselves did.

“At every single point, there were reasons to give up. The first thing was that we were basically three kids, and VCs hated this from day one,” Adam Chekroud, co-founder of Spring Health, told HubSpot for Startups. “It was basically three close to first-time founders with no credibility, who want to take on a problem in mental health, which is a massive space that's incredibly complicated, and we already had competitors in the space that had already started raising hundreds of millions of dollars of venture money.”

Chekroud explained that during the seed round, it took an estimated 150 rejections before they started getting interested investors. The process was brutal and made the founders feel like failures, but they were hearing from customers that mental health care was too expensive and difficult to access. They had to push through, knowing they had a disruptive idea that would make a difference. Listening to feedback from potential vendors also helped shift the focus to the angle of providing mental healthcare access to employees, which benefited clients and drew the attention of investors.

Now, the company is a unicorn valued at $2.5B. Last year, it raised $71 million in funding.

(Coming soon)

Go forth and fundraise … flexibly

There’s not a straightforward path to follow when it comes to raising money for a startup. Instead, the art of fundraising for tech startups is all about being creative and persevering. You may want to shift your focus based on feedback from clients, or forgo VC fundraising to try out crowdfunding instead. Or maybe you’ll bootstrap your way to success. 

Ultimately, tech startups will need to have a plan and strategy in place to raise money for their business ventures, but they should also be flexible enough to go with the flow and adapt as needed. It’s not just a good skill for fundraising — this approach can also benefit running a startup as a whole.