✨Note: This post eventually led to the creation of The Holloway Guide to Raising Venture Capital, a 340-page resource for entrepreneurs, with technical detail, practical knowledge, real-world scenarios, and pitfalls to avoid. Get your copy here!
Whether you’re new to the startup world as a current or aspiring founder, you just got a job at a startup, or you can’t get enough of the HBO Silicon Valley series, the nomenclature of startups can be hard to digest.
Below, Josh Levy and I lay out detailed definitions of the players & basic terms in order to make the startup & fundraising worlds accessible to the 100% and the 100% topically ignorant.
Together, Josh and I have either founded or been early hires at companies that have collectively raised more than $100M, and we’ve drawn from a broad set of knowledge published in print or on the web. Remember that this is one small piece of a larger guide, eventually including all topics outlined here.
Why an Open Guide?
The Open Guide to Startup Fundraising is a work in progress and will eventually be published on GitHub in a format similar to The Open Guides to Amazon Web Services & Equity Compensation. Unlike a blog, it is living and can be improved. This is a preliminary version and no doubt has some errors and shortcomings, but we want to see it evolve.
Emoji Legend
🌪 Significant disagreement within the community
❗ “Serious” gotcha: consequences of ignorance can be deadly
🔸 “Regular” gotcha: consequences of ignorance can be painful
🔹 Important or often overlooked tip
📈 Chart or slide deck
📖 Important or expanded reading on a topic
🚧 Areas where correction or improvement are needed (possibly with a link to an issue — do help!)
Table of Contents
1. Basic Terminology
2. Entrepreneurs
3. Angel Investors
4. Venture Capitalists
5. Accelerators
6. Incubators
7. Crowdfunding Platforms
8. Syndicates
9. Lawyers
Basic Terminology
We use the term “company” as a broad term to describe different types of legally registered business entities formed for the purpose of conducting trade.
In order to finance a company, founders sometimes sell part of their business in exchange for money or “capital” from investors. This is called fundraising.
Entrepreneurs
In this guide, the terms entrepreneur and founder will be used interchangeably. Both terms refer to the individuals who start and run companies.
Angel Investors
- Angel investors or “angels” are usually wealthy individuals who invest their own money into companies.
- 🔸 Security & Exchange Commission (SEC) regulates accredited investors, a term which refers to individuals who meet certain net worth or income standards. Before accepting money from an investor, you should familiarize yourself with the concept & check with your legal counsel if individuals interested in investing don’t meet the standards.
- Angels are almost exclusively active at the pre-seed and seed stages (FM16, 11).
- The most comprehensive list of Angel investors can be found on AngelList.
- A super angel is a term for an extraordinarily active angel investor, and these individuals often go on to start Micro VC firms (FM16, 12).
Venture Capitalists
Venture capitalist or “VC” is a term used to refer to either a venture capital firm (“venture firm”) or the individual venture capitalists who work at firms.
- 🔹 Only some individuals have the ability to make an investment or “write a check”. Despite similar structures and titles, do not assume structures and titles used at one firm will be the same at another. It’s almost always a good move to ask the individual you’re meeting with if they can unilaterally invest.
- 🔸 Just because someone at a venture firm can’t independently decide to invest in your company doesn’t mean they don’t have influence. Treating associates poorly is unadvised because it’s rude, and it’s not in your interest to do so.
Individual VCs can hold one of many different roles at a venture firm:
Top-Level:
- Managing Directors (“MD”) & General Partners (“GP”). Individuals with these titles almost always make final decisions on investments & sit on boards (FM16, 6).
- Partners 🔸: At most firms, an individual with a Partner title is one of the most senior people and is able to write a check. Some firms use the Partner title more broadly for individuals who cannot write a check.
Mid-Level:
- Principals & Directors. Individuals holding one of these titles will rarely be able to make an investment decision without approval from a more senior individual at the firm (FM16, 7).
- Venture Partners & Operating Partners 🔸: At some firms, Venture & Operating Partners have similar standing to those of Principals & Directors, while at other firms, they are experienced angels or entrepreneurs who work part-time for the firm (FM16, 7).
Lower-Level:
Just as startups raise capital from VCs, venture firms raise capital from LPs & the partnership itself.
- Most of the money a VC invests is money raised from investors called Limited Partners or “LPs.”
- Most VC firms require senior members to invest their own money into funds they raise and eventually deploy into companies, but some do not.
Venture firms come in all shapes and sizes:
🔹 The classification of venture firms by the stage they invest in is dynamic. For a few years, a firm could be a seed-stage firm, but then they might raise a larger fund and decide to invest in later stage companies.
- 📈 Rob Go at NextView Ventures recently illustrated how investment stages have shifted from 2002–2016.
- 📈 As of 9/30/2016, PitchBook reports ~40% of funds are under $50M, and another ~40% are between $50–250M.
- 📖 As of August 2016, the mean size of a fund was $286M, and the median was $120M (GGNS16, 43).
- Pre-seed firms will invest in pre-products. They write checks ranging from $50–500k.
- Seed-stage firms occasionally invest in pre-products but typically invest once a company has a prototype.
- Micro-VC firms usually invest out of a fund that is less than $100M and can invest at the pre-seed and seed stages. They often only have one partner (FM16, 10).
- The term “early-stage” is used broadly and is not standardized. Some firms that call themselves “early stage” will invest all the way from pre-product to Series A, while others will only do seed deals.
🔹 If a firm describes themselves as “early stage,” it’s worth asking how many deals they have done in pre-seed, seed, and A in the last year to get an idea of where their sweet spot is.
- Mid-stage firms will invest at or right after a company reaches product-market fit, which is usually around Series A or Series B.
- Late-stage firms will invest in post-product-market fit. Capital invested at this stage is usually deployed to help a company get to IPO.
🔹 Regardless of a fund’s size, a VC returns money to their investors. Understanding how VCs do that can help entrepreneurs understand why VCs do some of the things they do. If you’re curious, read both of these posts on VC fund economics by Fred Wilson at Union Square Ventures.
🌪 — VCs are a confident bunch, especially when it comes to telling you how helpful they’ll be. As of March 2016, CB Insights compiled an analysis of today’s top 100 individual VCs by considering investors’ exits, connectivity to other investors, consistency of investments by stage & industry, illiquid portfolio value, and recency of performance.
Accelerators
The term “accelerator” is used to describe early stage institutions that invest anywhere from $10k — $100k+ in exchange for 2–10% of the company. After being accepted through an application process, companies go in “batches” through the recurring program.
- Companies accepted to these programs are generally offered perks of access to a network of investors, mentors, office space, and, finally, a “demo day” to pitch investors at the end of the program.
- Many accelerators accept applications via AngelList here.
🌪 There are hundreds of accelerators out there that all flaunt the power of their networks, but the quality of these networks ranges drastically.
As of March of 2016 The Seed Accelerator Rankings Project has analyzed data on outcomes and named the following accelerators as “Platinum:”
🚧 Most accelerators are vertical agnostic, but a few are vertical specific:
Incubators
The term “incubator” is a very broad term to describe institutions that offer some combination of office space, cash, and expertise. Some incubators offer these things in exchange for equity, some for a fee, and some for free.
- An important distinction between accelerators and incubators is that accelerators have a graduation date or demo day that is consistently short (usually < 3 months), whereas incubators can work with companies for much longer periods of time.
Crowdfunding Platforms
🚧 — Crowdfunding platforms are websites that allow entrepreneurs to raise money from a large community. These platforms can be divided into three types: cash-for-support, cash-for-equity, and cash donation.
- Cash-for-support platforms popped up first, with IndieGoGo & Kickstarter leading the way in 2008 & 2009 respectively. Since its launch, WeFunder has also become popular for this sort of crowdfunding.
- Individuals donate money to entrepreneurs on these platforms to help them create their products. In most cases, after an individual pledges enough money, the entrepreneurs promise to send them merchandise in exchange for their support.
- In 2010, Naval Ravikant and Babak Nivi, the writers of the popular blog, VentureHacks, teamed up with Kevin Laws & Stan Chudnovsky to start one of the most popular cash-for-equity platforms, AngelList. AngelList initially started as a directory of active angels & founders but has since evolved into a platform for startups to raise capital & recruit talent. Other well-regarded cash-for-equity platforms include CircleUp, FundersClub, Gust, and SeedInvest.
- In 2013, Patreon launched to give creators a way to get paid by their fans and has since become the most popular cash donation platform
❗ Not all crowdfunding methods are created equal. Some platforms allow companies to raise money from unaccredited investors in line with SEC rules on Regulation Crowdfunding, which could lead to messy cap tables and other unintended consequences that could scare away downstream institutional investors.
Syndicates
The term “syndicates” has evolved to have multiple meanings in the fundraising ecosystem.
🔸 Having more than one firm involved with the company can have benefits and risks.
Lawyers
🔸 Every entrepreneur should make sure to get a lawyer with previous experience working with venture-backed startups. Do not give in to the temptation to use your college buddy, who is a defence attorney.