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When you're seeking venture capital for your business, fundability plays a crucial role. Fundability refers to how appealing your business looks to investors, showing that it has the potential to succeed and grow. It includes everything from your team’s capabilities to your product’s market fit. Let’s explore what fundability means and why it matters when raising money from venture capital firms.

Fundability and company financing

Fundability determines how likely investors are to provide capital for your company. When it comes to company financing, equity investors look at several key factors before deciding to invest:

• Strong Team: Investors want to see that you have a capable, complementary team. A mix of business and technical expertise boosts your fundability, as it shows you can execute the vision for your business.
• Proof of Concept: Investors are hesitant to fund mere ideas. They need to see proof that your product or service works, such as through a minimum viable product (MVP) or early customer feedback. This reduces their risk.
• Clear Business Model: Your business model must demonstrate how your company will make money and grow. Investors want to see that you have a well-thought-out plan for revenue generation and scaling.
• Solid Financials: Having strong financials or a clear financial roadmap shows that you can manage funds responsibly. Investors want to know that their equity investment will be well-utilized to achieve growth and profitability.

For more insights on how to improve your chances of securing funding, check out this guide from WISC Partners.

Why fundability matters to venture capital firms

1. Attracting VC Firms: The more fundable your business, the better your chances of attracting venture capital firms. Investors are drawn to companies that demonstrate a high potential for success.
2. Leverage in Capital Raising: When your business is fundable, you gain more leverage during the capital-raising process. This can help you negotiate better terms, such as how much equity you keep and the level of control you maintain.
3. Maintaining Control on the Capitalization Table: A fundable business allows you to maintain more control over your company’s capitalization table. This means retaining more ownership and influence over key business decisions.
4. Efficient Seed Round Funding: Fundraising can take a lot of time and energy. The more fundable you are, the faster you can close a seed round or other financing, allowing you to focus on growing your business.
5. Access to Angel Networks and Strategic Investors: Fundable businesses often attract not just venture capital but also support from angel networks and strategic partners. These investors can provide valuable advice and connections to help your company thrive.

How to improve your fundability for VC firms

To increase your fundability and attract venture capital firms, focus on these areas:

• Build a Strong Team: Ensure your team has the right balance of business and technical expertise. If you’re missing key skills, consider bringing in new members or advisors who can strengthen your leadership.
• Prove Your Concept: Investors want to see a working product or service. Develop a prototype, gather early customer feedback, or demonstrate your product’s viability to reduce perceived risks.
• Refine Your Business Model: Make sure your business model clearly shows how you’ll generate revenue and grow. Investors want confidence in your path to profitability.
• Strengthen Financial Management: Investors look at your financial management closely. Ensure you have a clear understanding of your financial needs, burn rate, and runway to make your business more attractive.

For more advice on improving your fundability, take a look at OpenVC’s comprehensive guide.

Conclusion: Why fundability is key to venture capital success

Fundability is essential when seeking equity investment from venture capital firms. It’s not just about having a great idea; you need to show that your business can grow and succeed. By strengthening your team, proving your concept, refining your business model, and managing your finances well, you increase your chances of attracting investors and closing a successful seed round. Fundability sets the foundation for long-term success in the venture capital world.

When investors look at pre-seed startups, the most important thing they care about isn’t just your idea—it’s your team. At this early stage, most startups don’t have many customers or much traction, so investors focus on the people running the company. Simply put, venture capital firms and equity investors aren’t just investing in your idea, they’re investing in you and your co-founders. Here’s how to talk about your team in a way that gives investors confidence during capital raising.

For more insights on building a strong team and securing capital, check out Raise Millions from Hustle Fund here.

1. Relevant skills and experience

Venture capital and equity investors want to see that your team has the right skills and background to solve the problem you’re addressing. Even if your business idea sounds great, it won’t matter if investors don’t believe you and your co-founders have the expertise to make it happen.

For example, if you’re pitching a business idea to stop COVID but your background is in social media marketing, VC firms won’t be convinced. However, if you’ve worked in medicine development and your co-founder has experience in biomedical sales, you’re more likely to get their attention.

When pitching, make sure to highlight why your team is the right fit for this business. Explain how your skills and experience give you an advantage over others. It’s not just about big names on your resume—it’s about showing that you deeply understand your market and can deliver results. This can be especially important when trying to secure a seed round or early equity investment.

For example, if your startup helps musicians grow their audience, share your personal experience as a musician. This will help venture capital firms and angel networks see that you understand your customers’ needs and have useful connections in the industry.

2. The co-founder relationship

Building a startup is tough. It takes long hours and lots of hard work, and you’ll face many challenges. Having a co-founder can help, but investors want to know that you work well together.

Many startups fail because co-founders don’t get along. They might disagree about the product roadmap, hiring decisions, or communication. When co-founders can’t work well together, it can cause even bigger problems, like employees leaving or customers abandoning the business. This is why venture capital firms want to see a strong co-founder relationship—they need to trust that you can handle disagreements without hurting the company. In fact, co-founder relationships are so important that conflicts between founders are one of the main reasons startups fail, as discussed in Harshad Oak's article on the co-founder dilemma.

When pitching your team, show that you and your co-founder have a solid relationship. Investors want to feel confident that you can handle the ups and downs of running a startup. You can prove this by sharing examples of how you’ve worked together before, such as:

• Competing in hackathons together.
• Organizing an event or launching a product as a team.
• Working closely together at a previous company.

These examples will reassure equity investors and VC firms that you and your co-founder have already faced challenges together and can take on the pressures of running a startup.

Conclusion: Why your team is key to venture capital

In a pre-seed startup, the team is the most important factor for venture capital firms and equity investors. They want to know that you have the right experience and that your co-founder relationship is strong. By emphasizing your skills, experience, and ability to work together, you’ll give investors the confidence they need to back your company during capital raising and beyond.

When you hear that a startup has a high valuation, it might sound like a win. It makes the company look valuable, and founders get to keep a larger ownership stake. However, having a high valuation can cause issues that could hurt your business in the long run, especially when working with venture capital firms or raising money from equity investors. Let’s look at why high valuations aren’t always a good thing when it comes to company financing and capital raising.

For more insights on this topic, you can check out this post on LinkedIn by Jasenko Hadzic here.

1. Investors may not prioritize your company

When you raise money from venture capital firms or angel networks, these investors offer more than just capital. They provide guidance, industry connections, and support to help your business grow. However, investors have limited time and resources, and they’ll focus more on businesses where they own a larger stake.

For example, if an investor owns 1% of your business but has 10% in another company, they’re likely to spend more time helping the company where they have a bigger stake. A high valuation often means your investors hold a smaller percentage of your company, which may result in less support from them. This can be an issue in seed rounds or early-stage equity investment when you need all the help you can get to grow.

2. Startups need time to grow into high valuations

A high valuation is based on the expectation that your company will grow rapidly. But what happens if your startup doesn’t meet those expectations as quickly as investors hoped?

Let’s say you raise money at a $12 million valuation during your seed round. You spend the funds on product development and hiring, but after several months, the business isn’t gaining traction. Now, you need to raise more money, but investors might lose confidence in your company. As a result, they could suggest a lower valuation for the next round of capital raising, which can signal to others that your business is struggling.

This situation can hurt your chances of getting further company financing from VC firms and other equity investors. In a crowded market where investors see hundreds of pitches, a lower valuation can make them choose a new opportunity over your startup. For a deeper dive into why high valuations can be tricky, you can read Rob Day’s perspective on why founders shouldn’t always be excited by high valuations here.

However, in times of tight capital, like in 2023, a down round (lower valuation) isn’t always a bad sign. It shows that investors still believe in your business and are willing to support it, even at a lower valuation.

3. Recruiting becomes more challenging

Most startups don’t have the cash to offer competitive salaries to attract top talent. Instead, they use stock options as part of their capitalization table to motivate employees. These stock options give workers the chance to own a piece of the company, and if the company succeeds, their shares could be worth a lot of money.

However, if your company has a high valuation, the cost for employees to buy their stock options is also high. This makes the options less appealing, as employees might not be able to afford them. Combine that with lower salaries and long hours, and employees may lose motivation.

Potential hires who ask about your capitalization table and realize that stock options are expensive might also be discouraged from joining your team. This can make it harder to recruit the skilled workers you need to grow.

Conclusion: High valuations aren’t always better for venture capital and company growth

While a high valuation might seem like a success, it can cause problems for your startup, especially when working with venture capital firms and equity investors. It can affect how much attention you get from investors, slow down your growth, and make it harder to attract top talent.

For successful capital raising and equity investment, it’s important to have a balanced valuation that allows your company to grow over time. This way, you can keep investors engaged, give your business time to meet expectations, and motivate employees with realistic stock options, ensuring your startup thrives in the long run.

If you're raising money for your startup, understanding equity, SAFEs, and dilution is crucial. Without this knowledge, you could accidentally give away too much of your business and end up with a smaller share when it becomes successful. Let’s break down these key concepts to ensure you're ready for venture capital and company financing.

For more insights into company financing, venture capital, and SAFEs, check out Raise Millions from Hustle Fund here.

Your pizza (company) and equity

Imagine a pizza in front of you. At the start, you and your co-founders own 100% of the pizza—this represents your business. Let’s say your pizza is worth $20, but your goal is to grow its value. Ideally, this pizza could be worth $1 billion someday, with the help of equity investors.

To achieve that growth, you’ll need help from others—venture capital firms, angel networks, or key employees. In return for their contributions, you'll give away slices of the pizza. Each slice represents equity investment, or ownership in your company. For example, if an investor receives 5% equity, they now own 5% of your business.

The upside of sharing your pizza

Giving away equity means your ownership decreases, but the right partners can help increase the value of your pizza. Even if you own only 15% of the pizza by the end, if the company’s value grows to $1 billion, your slice will be worth $150 million. This is why smart capital raising can be so valuable.

However, it’s crucial to be cautious about how much equity you give away during each seed round or VC firm investment. Each slice you give away represents a portion of your company, so you want to make sure you retain enough to stay motivated and in control.

Be careful with equity and dilution

Every time you give away a slice of your pizza (equity), your ownership percentage shrinks—this is called dilution. Founders typically give away 10-20% of their equity during each fundraising round. After a seed round, it’s common for founders to still own the majority of their company. However, by the time you reach your Series B, your slice may be smaller, but if the company is growing, this isn’t necessarily a bad thing.

Understanding the capitalization table (cap table) is critical here. The capitalization table tracks who owns what slice of the company and how ownership changes with each investment round. This helps you maintain control over your business and see how much equity each investor—whether they come from angel networks or VC firms—has received.

What are SAFEs?

Now, let’s talk about SAFEs (Simple Agreement for Future Equity). A SAFE isn’t a slice of pizza right away—it’s more like a ticket for a slice that the investor can claim in the future. With a SAFE, an investor isn’t given immediate equity; instead, they receive the promise of equity investment later.

In other words, a SAFE is an agreement that converts into equity when your company goes through an equity financing round, an acquisition, or an IPO. If the company fails, the SAFEs become worthless, which is why it’s important to understand how SAFEs impact your capital raising and company financing strategy.

For a deeper understanding of SAFEs, you can read an Investopedia article on this topic here.

Pre-money vs. post-money SAFEs

There are two types of SAFEs: pre-money and post-money. Pre-money SAFEs were introduced by venture capital accelerator Y Combinator to make it easier for startups to raise funds. However, pre-money SAFEs can make it hard to track how much of your pizza you’ve given away, leading to confusion about your actual ownership.

One founder discovered too late that he only owned 35% of his company after using pre-money SAFEs for several rounds of funding. This is why it’s important to keep your capitalization table up-to-date and clear.

Post-money SAFEs, on the other hand, provide more clarity. With post-money SAFEs, you can easily calculate how much of your company you’re selling in exchange for funding. For example:

• Example 1: If you raise $500,000 on a $5 million post-money valuation, you’re selling 10% of your company.
• Example 2: If you raise $1 million on a $5 million post-money valuation, you’re selling 20%.

This straightforward math helps both you and your equity investors understand how much equity is being given away with each capital raising round.

Conclusion: Protect your slice

In the end, it’s important to be strategic about how you distribute your equity. Whether you’re raising money through a seed round, SAFEs, or a direct equity investment from VC firms or angel networks, knowing how to manage dilution and understanding your capitalization table will help you maintain control over your company.

When you're starting a business, one of the most important decisions you'll make is where to incorporate your company. Eric Bahn, a successful entrepreneur and investor, learned this the hard way when he chose to set up his education startup as a California LLC rather than a Delaware C-Corp. Upon selling the business, his accountant revealed that he could have saved a significant amount on taxes had he chosen to incorporate in Delaware.

To help you avoid this costly mistake, here’s why incorporating your business in Delaware could be a smart move—especially if you’re planning to raise venture capital or seek equity investors.

1. Delaware is great for business

Delaware is renowned for its business-friendly laws, which are designed to help businesses thrive. The state's corporate governance laws make it easier for companies to handle compliance, legal matters, and lawsuits compared to other states with stricter regulations. This is particularly advantageous when dealing with equity investment and navigating the complexities of a capitalization table.

By incorporating in Delaware, you’ll have fewer legal obstacles, giving you more time to focus on growing your business and attracting venture capital firms.

2. Significant tax savings

A major reason why so many entrepreneurs opt for Delaware C-Corps is the potential for substantial tax savings. Under the Qualified Small Business Stock (QSBS) exemption, if your company has been operating as a Delaware C-Corp for over five years before being acquired, you could be exempt from paying federal taxes on the sale.

This tax break could save founders and equity investors a significant amount of money. For Eric Bahn, incorporating in Delaware could have greatly reduced his tax bill after the sale of his business. Additionally, venture capital and angel networks are more inclined to invest in Delaware C-Corps due to these tax advantages, ensuring everyone benefits during a capital raising event or exit.

It's important to consult a tax expert to understand all the specifics, but these savings make Delaware an appealing option for businesses looking to attract equity investors and venture-backed financing.

3. Investors and VCs prefer Delaware

Incorporating as a Delaware C-Corp is a no-brainer if you're planning to raise money from VC firms or angel networks. Investors, especially in seed rounds, prefer Delaware C-Corps due to the state’s predictable legal framework and favorable tax treatment. For example, investors won’t be taxed on profits while the business is operating but only on their gains when the company is sold or goes public.

By setting up as a Delaware C-Corp, you make your business more attractive to venture capital and equity investors, helping you secure investment more easily. In fact, many venture capital firms actively seek out Delaware C-Corps, so incorporating there puts you in a prime position to raise funding. Learn more about why venture capitalists prefer Delaware C-Corps here.

4. Switching to a Delaware C-Corp is simple

If you've already incorporated your company in another state, don’t worry—switching to a Delaware C-Corp is relatively straightforward. There are legal services that can help you transition quickly and smoothly, so you can start enjoying the benefits of Delaware incorporation right away.

Conclusion

Incorporating your business in Delaware offers several benefits, from its business-friendly laws to potential tax savings and increased attractiveness to venture capital firms and equity investors. The state's corporate structure is ideal for businesses planning to go through multiple rounds of capital raising or those preparing for a future seed round.

For entrepreneurs who want to maximize their opportunities and minimize their tax burdens, Delaware is a top choice. Take the time now to explore the advantages of Delaware incorporation—it could save you significant money and make your business more appealing to investors down the line.

For more insights on company financing and raising venture capital, check out Raise Millions from Hustle Fund here.

Getting an offer from an investor for your business is a big deal. It might feel like the right move is to say "yes" right away, but slowing down and thinking things through can actually help you get more than just money from the deal. Here are two important steps to take before agreeing to any investor's offer.

1. Say thank you, but don’t rush

When an investor shows interest in your business, the first thing you should do is thank them for believing in your idea. However, instead of quickly agreeing to their offer, let them know you're still figuring out the details of your fundraising.

One way to do this is by asking them to fill out a form that shows how much they want to invest and how they can help your business beyond just giving you money. This puts the decision-making power back in your hands, allowing you to see if they’re the right fit for your business.

By taking your time and not rushing to accept, you give yourself a chance to make sure this investor can provide more than just financial support. It also shows them that you’re careful and thoughtful about who you bring into your business.

For more details on this, you can check out this blog post from Hustle Fund.

2. Find out what they can offer besides money

Money is important, but a good investor can also offer advice, experience, and connections. Some investors have skills in different areas like marketing, leadership, or building strong teams. These skills can be just as valuable as their investment.

When deciding whether to accept an investor’s offer, think about how their knowledge and network could help you grow your business. The best investors bring more to the table than just cash—they can open doors, provide guidance, and help you avoid common mistakes.

Even if you don’t have many offers on the table, it’s still important to take the time to ask how an investor can contribute beyond money. Building relationships with investors who have a variety of skills will give your business more tools to succeed.

Questions to ask before you say yes

Before making a final decision, ask yourself these key questions:

• Does this investor have experience in my industry or with similar businesses?
• Can they introduce me to people who could help my company grow?
• How involved will they be beyond their financial investment?
• Do their long-term goals match up with mine for the company?
• Are their terms and expectations fair for where my business is right now?

These questions will help you figure out if an investor is truly the right fit for your company. For more questions to consider, take a look at this helpful Forbes article.

Conclusion: Take your time and choose wisely

Accepting an investor’s offer is a big decision. Instead of jumping at the first chance for funding, take a little time to evaluate whether this investor can offer more than just money. The right investor will be a long-term partner who helps you grow your business in different ways. By thinking carefully and making smart choices, you’ll be setting your business up for future success.