The Startup Capital Continuum Re-Imagined

A few years ago I developed a concept of what I called the “Capital Continuum”. The concept captured how I saw the various steps in raising capital for a startup including the typical order in which investors get involved. In April of this year I re-recorded a version of the presentation that I give to incubators and accelerators. You can see that video here or checkout the PowerPoint.

Since developing the idea over five years ago I have not made many changes to it since the original concept seems to still hold true. Raising capital for high-growth startups still tends to follow a prescribed flow starting with people close to the venture, moving on to angel investors, and then toward venture capital. The earlier an investor gets involved the more they base their investment decision on futuristic ideas (i.e. the promise of how a startup will perform). While later stage investors tend to be more focused on historical performance (i.e. how many customers do you have? how much revenue? etc.).

That all said, I have recently decided to make one change to the timeline of the Capital Continuum.

The Capital Continuum Re-imagined

The change is pretty minor so you might not notice it in the imagine below. What is the change? Well, most people talk about the very first round of capital coming through the F.F.F. round or family, friends, and founders. Based on years of working with startups I have decided that the last F, founders, deserves to be broken out from the other two. In fact, my new model of the Capital Continuum puts the founders as the first source of capital followed by family and friends.

I decided to this for a few reasons. First of all I am a firm believer that founders should risk some of their own capital before they ask other people to invest in their business. Regardless of the amount, founders should have skin in the game. Second, raising money from family and friends, while not the same process as raising money from angel investors or venture capitalists, is still different than a founder investing their own money. As a startup founder it should be a pretty easy process to invest your own money in your business. Raising money from family and friends is probably a simpler process than raising capital from investors that you don’t know. But I argue that the process should be similar to raising capital from investors outside your immediate sphere of influence. In fact, when attempting to raise a family and friends round, I tell all startups to treat them as they would any other investor. That includes using a pitch deck, presentation, due diligence, etc.

I still keep lenders on the timeline. While few startups will ever raise capital from lenders it does happen. In those cases we call it “venture debt”. In most cases a “startup” will only raise capital through loans when it has matured to the point of being a sustainable business and has significant existing revenue to support loan payments.

So, what?

The reason this whole concept of a Capital Continuum matters is that it is designed to help startup founders understand a few key concepts. First, a concept I have already shared, is that depending on the investor and the lifecycle stage that your startup is in the investment decision will largely be based on either historical performance (denoted with a “2” on the infographic) or perceived futuristic performance (denoted with a “1” on the infographic). Second, understanding those differences will go a long way toward helping your startup figure out which type(s) of investors to approach for funding. For example, few startups leap right to receiving funding from venture capital firms at the ideation stage. Whereas a family and friend round isn’t likely to net your startup millions of dollars if that is how much capital you need. All of this plays into being able to intelligently target the right investors in the first place.

I hope that helps. Until next time I hope you “find your voice”.