You finally took the leap and started working on a new SaaS idea that you've been excited about for some time.
By Lior Ronen
After you've come up with an idea and decided to pursue it, your brain is working overtime. You may feel overwhelmed by questions about how to proceed with your new project.
Is it a good idea?
Has anyone built it before?
Would anyone want to pay for this?
Is that idea really in a new niche, or is it adjacent to existing niches?
Is there even enough space in the niche for one more service?
And the list goes on and on and on.
Some of these questions can only be answered once you release an Alpha version or other very early versions of your product.
Other questions can be answered by researching and talking to other founders or mentors.
Now, you and the other founders begin working on the product development while continuing to research the market and competitors.
You have some minor expenses for software licenses, graphic design, and maybe branding, and pay these expenses from your savings.
Sooner or later, you will face more significant expenses like hiring additional developers, marketing, and design, and you will need to think about how to fund your startup.
An early-stage startup typically has three main options:
Bootstrapping. This means you and the other founders pay for all the expenses out of your own pockets. While this is a great way to remain independent, it's not doable for many founders, who need capital to fund their ideas.
Bank loan. This is the traditional way of funding a new business. Just build a high-level financial forecast and business plan, go to your local bank and ask for a small loan to get your business started. Some banks have specific loans for starting a business. They're also willing to work with you on repayment terms if you have trouble paying back the loan. But taking on debt is not for everyone.
Equity. Selling shares or equity in the business to outside investors is a very common way to inject cash into a business. There are, however, some drawbacks to this option: after the deal is done, you will have partners in the company that can influence major decisions.
Bootstrapping is not available to everyone, and taking a bank loan can be risky for a new business.
Many new founders choose to go down the equity path reluctantly, but they do so because they understand that it is often the best option available.
This is where founders can fall into the fundraising rabbit hall.
What is the right valuation for my startup?
What do the competitors were valued at this stage?
How should you go about negotiating the best terms for the deal?
Should the business ask for a high valuation? Or should it aim for a lower number?
What happens if you receive investment at a much lower or higher valuation than you expected?
Should you use a valuation firm? They can help you defend your value.
However, in such an early-stage stage, startups can postpone the valuation discussion by raising initial funds in an unpriced round.
In an unpriced round, early-stage investors and founders use mechanisms like SAFEs and convertible notes that allow founders to receive money now under the valuation of their next priced round. In a priced round, a startup sells shares at a share price derived from its own valuation.
So, if the previous round was unpriced, in the next round, which can take place in 6 months, investors will be able to better judge how much the business is worth.
Although this process sounds simple, it includes some legal work and adds liability to the company to price its shares as soon as possible. This helps keep shares from remaining in limbo or recognized at cost on the investor's side—which can increase stress and tension.
So an unpriced round can be a really good option for early-stage founders, who can just focus on building their product and handle valuation and shares at a later stage.
Lior Ronen is the founder of Finro Financial Consulting. Finro has helped more than 200 startups with financial modeling and valuation over the past decade, helping these companies raise over $1.4B in funding.