Fundraising for Startups - Why Raise, How It Works, and What Changes After Investment

Table of contents

• Fundraising: why raise?
• The main stages of fundraising
  • Estimate your funding needs
  • Preparation: the most decisive phase
  • Investor outreach and roadshow
  • Letter of intent
  • Due diligence
  • Negotiating the bylaws and shareholders' agreement
  • Closing
• Financing instruments
  • Non-dilutive financing
  • Equity financing (dilutive)
  • Hybrid instruments
  • How investors view hybrid instruments
  • Think like an investor
• After the round: what changes
• Conclusion

1. Fundraising: why raise?

Fundraising typically happens at a key moment in a company’s life—when the business needs to execute a structured plan that requires a level of investment that cannot be covered by operating cash flow or a standard bank loan.

That plan might be the launch of a new product, scaling commercial execution, expanding internationally, or making heavy technology investments. In that context, fundraising means financing the costs of the plan while giving investors clear growth projections and value-creation assumptions.

It’s essential to understand that you don’t raise money without a clearly identified project and a precise estimate of its cost. One of the fastest ways to jeopardize a round is to take an opportunistic approach—assuming the roadmap will be defined after you see how much capital you manage to raise. Investors expect the opposite: a clear, structured, quantified plan.

Likewise, a fundraising round whose primary objective is to finance founders’ salaries—without a credible expansion or development thesis—is typically poorly received. Investors invest first and foremost in value-creating projects, not in maintaining the status quo.

2. The main stages of fundraising

2.1 Estimate your funding needs

The first step in any fundraising process is to define your funding needs precisely. This requires a clear roadmap that sets the plan’s objectives, milestones, and the time horizon you’re operating on.

You then need to estimate all associated costs and investments: hiring, product or technology development, marketing spend, operating overhead, and any tangible or intangible investments. These estimates must be realistic and consistent with the company’s maturity.

Beyond direct investment, you also need to account for the cash impact of working capital requirements (WCR). Customer payment terms, inventory build, and fixed costs can create meaningful cash burn.

Finally, some growth phases imply temporary losses during ramp-up. Those should be anticipated and incorporated into the financing plan to avoid liquidity stress mid-execution.

2.2 Preparation: the most decisive phase

Preparation is arguably the most important phase for a successful round. Its goal is to reduce the uncertainty perceived by investors and financing partners, by presenting a coherent, well-documented, and execution-ready plan.

It starts with building the core fundraising materials: a concise teaser and a structured pitch deck that clearly explain the project, the market, the business model, and the team. In parallel, you should build a data room to centralize the financial, legal, and operational documents investors will require.

This phase also includes a deep reflection on company valuation and the resulting dilution for founders. It’s crucial to understand the short- and long-term implications.

You should also anticipate the type of securities offered (common shares, preferred shares, or hybrid instruments) and the rights granted to minority investors—information rights, governance rights, and liquidity protections.

Finally, preparation means defining your fundraising timeline, selecting advisors (especially legal counsel), identifying target investors, and practicing the pitch until it is crisp, consistent, and convincing.

2.3 Investor outreach and roadshow

Once preparation is complete, the company can begin investor outreach. This often relies on networks, qualified introductions, or direct outreach.

Your narrative should be adapted to each investor profile, taking into account their track record, investment criteria, and expectations. Repeated meetings help collect feedback, identify objections, and—when needed—refine elements of the plan or the presentation.

2.4 Letter of intent

When discussions progress positively, a letter of intent (often called a term sheet) is typically issued. This document frames the deal’s main terms: valuation, amount invested, instrument type, and key investor rights.

Even when some clauses are non-binding, the term sheet is a structuring milestone in the fundraising process.

2.5 Due diligence

Due diligence allows investors to verify that what was presented matches the reality of the business. It typically covers financial, legal, and operational topics.

This phase relies on transparency and consistency. Any inconsistency or approximation can weaken trust and jeopardize the transaction.

2.6 Negotiating the bylaws and shareholders' agreement

Once due diligence is completed, discussions shift to negotiating the company bylaws and the shareholders' agreement. These documents formalize the relationship between founders and investors.

They define governance rules, liquidity rights, investor protections, and mutual commitments. The objective is to find a balance between investor protection and founders’ ability to execute.

2.7 Closing

Closing is the finalization of the transaction. It includes signing the legal documentation, releasing the funds, and—when relevant—communicating publicly about the round.

3. Financing instruments

Choosing the right financing instrument is a structuring decision in any fundraising round. Each instrument comes with a different dilution profile, rights package, and risk-return trade-off for the investor. Understanding your options is essential before finalizing a fundraising strategy.

3.1 Non-dilutive financing

Non-dilutive financing can fund part (or sometimes most) of a plan without opening the company’s equity. It is often attractive at early stages, but tends to be constrained in amounts and permitted use.

Main categories include:

• Grants
  Non-repayable funding, often designed to support innovation, R&D, or strategic sectors.
  Benefit: no dilution and no repayment.
  Limitation: long processes, strict criteria, and sometimes limited amounts.

• Repayable advances
  Public or quasi-public funding that is repaid only if the project succeeds.
  Benefit: risk-sharing with the funding body.
  Limitation: future repayment that can impact cash runway.

• Traditional bank debt
  Loans granted by banks, typically conditional on:

  • proven repayment capacity,
  • personal or asset guarantees.
    Benefit: no dilution.
    Limitation: often hard to access for young or highly innovative companies.

• Innovation debt / venture debt
  Debt instruments adapted to startups, sometimes with fewer guarantees but higher cost.
  Benefit: leverage without immediate dilution.
  Limitation: increases financial risk if growth does not materialize.

In practice, non-dilutive financing is most often used as a complement to an equity round, and rarely as the only funding source for an ambitious plan.

3.2 Equity financing (dilutive)

Equity financing means bringing investors into the company’s share capital in exchange for shares. It is the core mechanism of classic fundraising rounds.

Main equity instruments include:

• Common shares
  Standard shares that typically grant:

  • voting rights,
  • rights to dividends (if any),
  • a share of exit proceeds.
    Simple and easy to understand; common in early rounds.

• Preferred shares
  Shares with additional rights, frequently used by professional investors.
  They can include:

  • liquidation preferences,
  • enhanced financial rights,
  • anti-dilution protections,
  • specific governance rights.

Equity implies immediate dilution, but provides stable capital with no repayment obligation and long-term alignment with investors.

3.3 Hybrid instruments

Hybrid instruments sit between debt and equity. They are often used when the company’s valuation is hard to define at the time of investment.

Common hybrid instruments include:

• Convertible notes
  Debt that can convert into equity at a future event (new round, maturity).
  Conversion terms typically include:

  • a discount,
  • a valuation cap,
  • a maturity date.

• BSA (share subscription warrants)
  Instruments that grant the right to subscribe later to shares at a predetermined price.
  They are often combined with an initial financing.

• BSA Air
  A variant frequently used in early-stage contexts.
  It defers valuation discussions to a later round while securing the initial investment.

These instruments offer flexibility, but require rigorous legal drafting to avoid future ambiguity.

3.4 How investors view hybrid instruments

From an investor’s perspective, hybrid instruments are often seen as a risk-management tool, especially at very early stages.

Perceived benefits:

• Deferring the valuation discussion.
• Early access to a future equity entry.
• Protection mechanisms in success and failure scenarios.

Key watch-outs:

• Governance clarity before conversion.
• Stacking too many hybrid lines, which can complicate the cap table.
• Misalignment with founders if terms are poorly calibrated.

Experienced investors typically prefer instruments that are simple, readable, and consistent with the company’s trajectory.

3.5 Think like an investor

Whatever instrument you choose, one principle should guide the structuring of the round: think from the investor’s point of view.

An investor will evaluate in particular:

• the rights attached to the securities,
• the liquidity path over the medium to long term,
• the readability of governance,
• the plausible exit scenarios.

An effective structure isn’t the one that maximizes short-term advantage for the founder—it’s the one that durably aligns founders’ and investors’ interests around a shared value-creation objective.

4. After the round: what changes

A fundraising round marks a turning point in a company’s life. It comes with new reporting obligations, with regular monitoring of financial and operational KPIs.

Governance also evolves: decisions become shared and, often, more formal bodies are put in place. Performance pressure increases, as investors expect disciplined execution against the plan.

Finally, from the first round onward, it’s important to anticipate the next one. Building a strong performance track record becomes a key lever to prepare future fundraising rounds and to sustain a long-term growth trajectory.

Conclusion

Fundraising is a structuring act in a company’s journey. It is neither an end in itself nor a miracle solution—it is a lever to execute a clearly identified plan that requires capital aligned with the company’s ambitions.

A successful fundraising process depends on rigorous preparation: precisely estimating needs, building a credible roadmap, selecting the right financing instruments, and understanding investor expectations. Every decision made upstream—amount raised, valuation, security type, and investor rights—has lasting consequences for governance, dilution, and the company’s future trajectory.

It’s equally important to remember that raising capital moves the company into a new phase. Expectations around transparency, performance, and operational control intensify, and the investor relationship becomes a central part of long-term strategy.

Ultimately, a successful round is one that aligns founders and investors around a shared vision, clear objectives, and strong execution. Approached with method and realism, fundraising can become a powerful accelerator of growth and a catalyst for value creation.