AngeBlog by Basil Peters

Startup Funding Is Not Easy

It's not easy to fund a startup.

In many ways, it's easier to raise $5 or 10 million than it is to raise $500,000 or $1 million.

There are several reasons for this:

Supply - there are more big funds than small funds

In any big city there are more $50 million to $1 billion venture funds than there are $1 to $5 million angel funds. The reason is simple economics - the partners who manage big funds can earn excellent salaries from the 2.5% management fee. In a small fund, 2.5% barely covers the costs, which means the managers only real income is from their share of the 20% gains.

There are lots of individual angel investors but they usually invest relatively small amounts of money. That means a large number of angels are needed to complete even a $500,000 financing.

Demand

The number of entrepreneurs looking for startup funding is probably 20 to 50 times greater than the number looking for a $5 or 10 million VC round. The small funds and individual angels are usually deluged with requests for financing.

Availability of Information

Big funds have lots of money and less deal flow than they would like (these days). They all have extensive websites and often host industry events to maximize their profiles. They want to be easy to find, so they make information available. Angel funds are also reasonably easy to find, but are significantly fewer in number.

Angels are relatively numerous but most work very hard at maintaining a low profile - in part because so many entrepreneurs are looking for startup funding. It's impossible to get a list of contact information for individual angel investors. This means entrepreneurs have to work much harder to find angel investors.

Fees

The fees that are available to engage professionals are probably the biggest reason it's easier to raise $10 million than $1 million. The costs to execute a financing are relatively constant as a percentage of the total financing. As the amounts of capital being raised increases, the process gets more efficient for the reasons described above, and the market rate for the financing fees go down a little. The total external fees for professionals assisting in an equity financing are usually in the ranges below.

Size of Financing
$500,000 to $ 1 million
$1 to 10 million
Fees as a percent of equity raised
10 to 12%
7 to 10%

If a company wants to raise $10 million from VCs, or public venture capital, the fees can be in the range of $750,000. The fees to raise $ 1 million are around $100,000. The problem is the small financing requires more work to complete than the larger one. As a result, there are not very many professionals who want to be engaged to facilitate a $500,000 to
$1 million financing. Wikipedia has some perspective on brokers in angel financings here.

Experience

Compounding all of these other factors is the reality that the entrepreneurs working on their first startup funding are likely a lot less experienced than the entrepreneurs trying to raise a $10 million VC round.

Summary

It's really hard to fund a startup - even a great one. Most entrepreneurs need as much help as they can get from mentors, directors and professionals (if they can find them.)

Final Note

Almost all public financings involve fees paid to professionals - usually licensed brokers. With private financings, fees paid to professionals are controversial. Many funds don't like to see a professional charging a success fee to help complete an equity financing. Nevertheless, most entrepreneurs would complete financings faster, and with better terms, with the help of an experienced professional.