GUIDE: Bootstrapped to Exit

There are no absolutes, no clear-cut rules when it comes to fundraising for new ventures. Young companies can often survive on very little cash in the earliest days, as many founders work from their homes or garages and often build out the core technology framework themselves. More seasoned founders may have had previous successful exits, or may be emerging from accomplished careers in their areas of expertise, enabling them to raise substantial capital right out of the gate.

These differences are apparent in later stages of funding as well.  A company’s capacity to run through multiple rounds of financing varies, depending on cash needs, long-term goals and other idiosyncratic factors. Some companies are built to be sold, some are built to go public, and most don’t end up going down a path exactly according to plan.

Even among the largest, most successful tech companies in the past decade, there are huge differences. Google held only one formal venture round, raising just over $25 million in total before its IPO in 2004, while Facebook went through at least six rounds of funding, including debt financing and two large private equity rounds, raising over $2 billion before finally going public in 2012.

Capital raising practices will vary widely by dollar size, investor profile, number of rounds, and investor terms.  However, there are some widely recognized norms for the industry, or averages, that can be used to help clarify typical capital raising practices.

Landscape

Debt financing may also be available to companies at some point in their lifecycle. Companies would typically prefer to add some amount of debt financing rather than continue to part with large ownership stakes. Sophisticated debt financing products and lease financing vehicles are offered by several Bay Area firms, such as TriplePoint Capital, while Silicon Valley Bank is one of the most influential sources of capital for entrepreneurs globally.

A capital event may occur at any point in a company’s lifecycle, where a young company is purchased by a larger entity, or is able to make a secondary market offering or have an IPO. This, of course, is the ultimate goal. While these events are often accompanied by significant dilution to existing investors, capital events should nonetheless benefit those investors substantially. This is particularly true if the investors have purchased securities providing material anti-dilution protection, the company has demonstrated sufficient growth, and the company has established a strong hand with acquirers and venture capital investors.

No matter the financing path a particular company takes, it is important to remember that raising more money does not necessarily mean a profitable exit for investors.  Nevertheless, the more money a company is able to raise, and the longer the company is able to continue to grow and develop, the better the odds of an ultimately profitable exit.