Raising Startup Capital

Jeffrey  Bussgang

Background Note | HBS Case Collection | February 2014

Raising Startup Capital

Abstract

Entrepreneurs typically focus their full energies on business-building. But raising capital is a core part of building a valuable business. Developing expertise in raising capital is more than a necessary evil, it is a competitive weapon. Master it and you will be in a better position to make your company a massive success. But how do you finance a new venture? In this note, I will try to help answer this question by addressing the following topics:
• Types of funding. The two major types of startup capital are equity funding and debt funding although there are a few hybrid flavors as well.
• Sources of funding. These include venture capital firms, angel investors, crowd-funding, and accelerators/incubators.
• What investors look for. Each source has a different funding process and set of criteria which you need to understand before seeking funding from that source.
• The mechanics of equity funding. Seeking and securing funding involves setting amounts, agreeing to terms, and defining relationships.

Keywords: fund raising; venture capital; venture capital term sheet; venture creation/development; venture investing; venture philanthropy; entrepreneurial finance; entrepreneurial management; entrepreneurs; entrepreneurship; Jumpstart Our Business Startups (JOBS) Act; Non-equity financing; Convertible notes; convertible debt; debt financing; Raising Capital; National Venture Capital Association; venture capital firm compensation; crowdfunding; crowd-funding; Startup; start-up; startup management; Startups; angel investors; angels; accelerator; Venture Capital; Financing and Loans; Entrepreneurship; Business Startups; Financial Services Industry; United States;

Language: English

Format: Print

27 pages

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Citation:

Bussgang, Jeffrey. "Raising Startup Capital." Harvard Business School Background Note 814-089, February 2014.

Laura Behrens Wu, CEO of software start-up Shippo, prepares her pitch for a Series A funding round following a successful seed round. Customer adoption of Shippo’s e-commerce dashboard application, which allows small and medium retailers to compare delivery rates between shipping providers and print package labels, has been steady in the nine months since it went live. But traction with the firm’s developer friendly product, an API that allows large enterprise customers to automate their shipping needs, had initially been slow until one customer single handedly tripled the API label volume in late August. Now in November 2014, with nine months of runway remaining, Behrens Wu must decide where to direct the company’s limited resources. Should Shippo stay focused on the app while raising the next round of funding, pivot to an API-focused strategy, or pursue both products?

By August 2015, two-year-old mobile imaging software startup Lightricks had developed and released two best-selling paid mobile apps, grown to a team of 30, earned a revenue run rate of nearly $10 million, and achieved modest profitability. The bootstrapped company had explored raising funds, met with venture capital firms, and was presented with a term sheet. The cofounders believed the financing would allow them to scale up quicker, but they also worried about losing control of their company.

In late 2016, Paris Wallace, the CEO of Ovia Health, and the rest of the company’s co-founders faced a difficult decision about the best way to grow Ovia Health’s revenue. Founded in 2012, Ovia Health specialized in mobile and web applications in the women’s health space. After building a strong user base with its original app (Ovia Fertility, which helped women conceive by tracking ovulation and other factors), the young company launched a second app, Ovia Pregnancy, which helped women have a healthy pregnancy by tracking various health metrics. Ovia Health’s apps were free to use, and most of the company’s revenue came from charging advertisers to host ads on its native advertising platform. Wallace believed that the family benefits market was a promising growth area, but he was not sure of the best way to enter the market. Recently, a top health benefits provider had offered Ovia Health a multi-million-dollar contract, but Wallace wondered whether Ovia Health could create a better family benefits solution by turning down the contract and selling directly to employers’ HR departments. Participants will need to examine how Ovia Health evolved its strategy over time and decide which growth opportunity was the better choice.

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Raising Startup Capital

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