Mind the Capital Gap

Having spoken to a whole bunch of startups in the past two years, time and time again the teams seem to be stuck in the capital gap. The capital gap is the grey area of capital to raise, which is too much for an angel/seed investor and too little for a VC fund – which means that your fund raising is stuck in nowhere land.

Let me explain: Angel and seed investors have a certain upper limit in what they can and will invest per company; sometimes you can syndicate a couple of angels into a joint investment but this round is ultimately also limited by the individual investment capacity of an angel. VCs on the other hand often have some sort of minimum investment – below this threshold it simply doesn’t make sense for them to invest (which is a direct function out of the VC business model). Now – if your capital need is between these two brackets you are in the capital gap (and pretty screwed). The exact boundaries of the capital gap vary by industry, investment background, country you seek to raise capital, etc. But in general the lowest figure which makes sense for a VC is 7-digit (aka a million plus) and most angels won’t invest (even syndicated) more than 250-500k.

What amazes me is the fact how many startups actually aim for exactly this gap – asking for something like ‘half a million pound’ and thus making their fund raising unnecessarily hard…

What can you do about it? Well – for a lot of the companies I talk to, VC money is not yet the right step (as they are too young, their business models to unproven, etc), so I suggest: Sit down with your financial model and figure out how much money you really need to get to that next step. Often it is significantly less than you thought it should be. Financing a startup usually is a multi-step approach – prepare for this: You start by raising a few 10k from friends and family to build the first shot of your service; you raise a small angel round to build your first real prototype and try it out in the marketplace; you raise a larger seed round to refine your model and generate traction; you raise a series A to build your product out, generate real traction; you raise a series B to internationalize; you sell your company. Easy as pie. Seriously though: Don’t fall for the capital gap and make your life harder than it should be.