The Differences Between Early-Stage Funding and Late-Stage Funding for Energy Startups

As you’re seeking out funding for your business, you may go through several stages — and each one looks a little different. Early-stage fundraising will be drastically different from your late-stage funding efforts, too.

As an entrepreneur, you should be prepared for those differences and:

  • How the differences could impact your conversations with investors
  • What you need to do to prepare for investor meetings
  • What investors will expect in return for their funding at those different stages

The Four Phases of Startup Fundraising

To set up your startup for as much success as possible, you’ll need to conduct fundraising to help you meet your goals. Most businesses run several rounds of fundraising, including both early-stage and late-stage funding, to help them achieve their financial goals.

Phase I

You’re ready to begin your initial developments. You have a solid concept, but you may not yet have a working prototype of your energy advances. You may have discovered new clean energy advances or have found a specific niche you’d like to operate in, but you may not yet have a working version of what you’d like to create. You’re ready to get started, but you haven’t put the pieces together. This phase is also often referred to as the “seed phase.”

Phase II

You’ve got that prototype up and running — and it works according to your specifications. This is when you’re ready to turn to a venture capital investment group that can help you reach your place in the market. During this phase, you’ll generally look for more money. These funds are for tasks like marketing your business, continuing to develop your product(s), and getting the word out about what you can accomplish.

Phase III

In the next phase of fundraising, you’re ready to get started. But you need an infusion of capital to get your business off the ground. During Phase III fundraising, you may ask for — and receive — a great deal more capital than you did in previous rounds of fundraising. You have a working model, you can provide a presentation about what you have to offer that will convince investors that it’s worth buying in on what you’re doing, and you have revenue (the most important kind of non-dilutive capital) to prove it.

Phase IV

During the last stage of fundraising, your startup is growing. You’ve secured a corner of the market and proven that you can accomplish the goals you’ve described to your investors in the past. Now, you need additional funds to help spread your business: to reach new markets, to attempt new advances, or to fund a new type of technology for your startup.

Moderating Your Expectations

As you move through the fundraising process, you must carefully consider your personal expectations (and the expectations of your business) for what you can acquire as you move through each stage. In the early phases of fundraising, you should expect to raise comparatively low funds for your startup. In the first phase, you’ll generally get only as much seed money as you need to start moving your business from concept to reality. As your business grows, you’ll be in a position to acquire more funds from the investors who commit to helping you grow your startup and establish your place in the energy industry.

As a result, it’s important to carefully consider what you plan to do with those funds. If you squander fund during the early phases, it could be harder to get investors to commit during the later stages of your fundraising efforts.

What Do Investors Expect?

small teams navigating river rapids in canoes as a representation of how early-stage and late-stage funding differ
Small startups need to navigate early-stage funding differently from how more established companies get late-stage funding.

In addition to carefully considering your expectations (that is, what you should expect to receive from your fundraising rounds), you should also consider what your investors expect of you.

Securing Early-Stage and Late-Stage Funding From Investors

The further down the road your startup is in the fundraising process, the greater the expectations of your investors. In the early stages of fundraising, for example, you’ll need to show that you have a reasonable concept, an idea of what corner of the market you need to occupy, and your traction toward that market. As you move down that timeline and look for higher investments from venture capitalists, however, you’ll need to ensure that you can provide evidence that you’re accomplishing your goals and investing those funds wisely.

Chances are, you’ll need to do a presentation to your investors — or provide them with documentation that will help encourage them to invest in your business.

Proof During Early-Stage Funding

In the early stages of your fundraising, you’ll need to provide clear proof to your investors that you have a business they can expect to succeed. Consider these elements:

1. The fit of your product within the market.

You can show a great product concept, but fail to adequately demonstrate its place in the market. If you don’t know your product’s place in the market, you’ll struggle to make your startup a success. Carefully consider where your product fits in the market and provide proof of that fit to your investors.

2. A big vision of what your startup can accomplish and a compelling narrative of how you plan to get there.

In short, you’ll need to explain to these investors why they should invest in you. Emphasize both what they stand to gain and how your company can develop its place in the industry.

3. A growing, capable team.

The team you put together will make a big impact on your potential investors. They want to see that you have the skills necessary to complete your goals and maintain your business. As your team grows and your business continues to support that growth, your investors will have more confidence in you.

4. Social proof.

You want to show that people are talking about your business and what you can accomplish. Can you reach your goals? Are you offering a product that can fit a genuine need within the industry? The right answers can help show that you’re meeting your goals.

Proof During Late-Stage Funding

As your business grows, the proof you present to your investors will change along with it. If you’re fundraising in the later days of developing your startup, you’ll need to show that you’re already working toward your goals and accomplishing things in your industry. You may need to show:

1. Traction within your industry. 

Is your business growing? Are you meeting your goals? If you aren’t currently meeting your goals, you may need to show how late-stage funding has the potential to transform what you can offer and make it possible for your business to succeed.

2. A plan you can scale.

As your energy startup grows, you should have a solid idea of how you’re going to scale it. How will you meet your goals if your business grows exponentially? What if your business falls flat and fails to meet your expectations, or needs to fit a smaller corner of your market? Show how you’ll fit industry needs as your business scales.

3. A defensible budget.

What will you do with the funds your investors commit to your project? What return should those investors expect on their contributions?

4. Proof.

As your business grows, you should be able to show more proof of your fit within the market, your sales, and the advances you’ve been able to make within the industry. The larger your business grows (and the more money you’re asking for from investors and venture capitalists), the more proof you’ll need to show that this is a wise investment and that you can, in fact, do what you say you’re going to do.

Other Tips for Early-Stage and Late-Stage Funding

Because of the differences between early-stage and late-stage fundraising, you need to stay on top of managing expectations. Keep some of these tips in mind as you prepare your presentations.

1. Get organized — especially in later fundraising stages. 

When you first start fundraising, many venture capitalists are willing to accept a slightly disorganized presentation. As your business grows, however, you’ll find that investor expectations often grow along with it. A clear, organized presentation can go a long way toward convincing investors that you know what you’re talking about.

2. Include as much data as possible.

As your startup grows, you’ll collect a great deal of data about everything from market position to the tools you’ll need to help your startup succeed. Include as much data as possible in your presentation. Add charts and graphs. If your investors have a question, they should be able to answer it with the data in your reports.

3. Show what investors stand to gain at all stages of the fundraising process.

Investors who are ready to commit to your business during any stage of funding are interested in seeing what they can gain from it over time. They’re willing to invest, but they want to know that you’re trustworthy and will use it well. Provide projections of the returns they can expect to see and how your company has the potential to grow.

If you’re struggling with your fundraising efforts, you’re not alone. There’s plenty of VC money out there, especially in the Houston area, but many startups struggle to get off the ground with early-stage funding, late-stage funding, or even both. If you want to launch your clean energy startup and have questions, message me to learn more about how I can help you reach your goals.

 

This article was originally published on KirkCoburn.

Kirk Coburn

I am an active investor into entrepreneurs solving the world's climate & energy problems, energy entrepreneur, start-up advocate, outside(r), surfer, and ordinary athlete.

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