Startup Funding: Alexis Ohanian’s Tips for Securing Funding

Alexis Ohanian Sr. is a longtime entrepreneur and startup enthusiast. As the cofounder of Reddit, he partnered with Y Combinator and Condé Nast to make the forum site what it is today. He also founded and served as a managing partner for Initialized Capital before moving on to start another venture capital firm called Seven Seven Six.

Startup funding refers to a series of venture capital investments throughout the early stages of a new business’ life. Early-stage startup costs are often too high for individual entrepreneurs to cover on their own. To bridge the gap, they seek seed capital and series funding to make their way toward an initial public offering (IPO).

Fundraising for your new company requires a lot of outreach and ingenuity. Consider these six stages of startup funding:

1. 1. Pre-seed stage: In the very early stages of funding your startup, you might have to tap into your personal savings. Pre-seed funding is almost always self-funding. This is why you might hear people refer to this part of the process as “bootstrapping”—a reference to “pulling yourself up by your bootstraps,” i.e., reaching into your own bank account to cover costs.
2. 2. Seed funding stage: After putting some of your own money into your business, you can start to turn to friends and family for personal loans. In this startup funding round, you might also start to look for angel investors or microloans from venture capital firms. Others may turn to crowdfunding platforms rather than reaching out to individual new investors.
3. 3. Series A funding round: Once you attain a hefty amount of seed money, you can branch out further to sell stock to venture funds and other types of funding sources. At this point, you’re still not on the public market, but you’re beginning to court more and more private investors.
4. 4. Series B funding round: As you enter the series B round, you’ve already offered stock to venture capitalists to increase your cash flow and scale your business. In this round, you may exchange an equity stake in the ownership of your company for higher amounts of money.
5. 5. Series C funding round: This round of late-stage funding usually involves reaching out to hedge funds, investment banks, and other institutional investors to acquire any additional funding necessary before going public. Some startups may move on to series D funding prior to their debut on the public market, but it roughly correlates to the same sort of outreach you would do in Series C funding.
6. 6. IPO: When you make an initial public offering (IPO), you’re declaring your company’s valuation on the public market. After all your time pitching potential investors, you’ll now have the ability to sell stock in new markets across the globe.

There are a lot of ways to fund a new company. Here are four financing options you can look into as a startup entrepreneur:

1. 1. Accelerators: These sorts of incubators form valuable partnerships with startups during their seed rounds. They may offer microloans or simply invest in the company to get the ball rolling in the early days of development.
2. 2. Angel investors: This type of investor prioritizes funding projects in the earliest stages. They sometimes serve as mentors for the startup team at the same time they help cover the operating expenses of their new company.
3. 3. Small business loans: You can reach out to banks and other lenders to help fund your startup. The US Small Business Administration (SBA) sets parameters and regulations for small business grants and loans to ensure repayment standards are fair.
4. 4. Venture capital firms: Certain investment groups composed of venture capitalists (or VCs) are always on the lookout to help new and exciting companies grow. Venture capital funds (or individual venture capitalists) may ask for an equity stake in the company to make their investment more profitable.

As a startup founder and entrepreneur, you’ll need an ironclad business strategy and a ton of tenacity to succeed. These are a few steps to keep in mind as you bring your company to life:

• Create a solid business plan. Investors will be more likely to offer you a traditional business loan or seed money if you can prove you have a sustainable and growable business model. Show you’ve done your due diligence when it comes to understanding your customer base and product-market fit.
• Move through all the stages. Each stage of the startup funding process is essential unless you’re already wealthy enough to fund your initiatives on your own. Successful entrepreneurship requires going through the motions of each development stage before debuting on the public market in almost all cases.
• Seek out like-minded people. Try to find backers who you believe in and who believe in you. Just as you would do market research to better understand your customer base, take the same approach to finding investors. Remember these people can also offer you valuable mentorship along the way.
• Use common sense. Stick with sensible funding options. Maxing out business credit cards or acting like lower interest rates will last forever are both unsustainable growth models. Work with investors who understand the fundamentals of finance, and avoid get-rich-quick methods.

Startup owner and investor Alexis Ohanian has helped usher dozens of companies from their initial ideation to a high market valuation. Here are five of his tips on navigating the world of startup funding:

1. 1. Display your worth. Every startup needs to show it can solve a problem for customers. “Clearly and concisely, right up front, explain the problem,” Alexis says. “What is the thing that you’re ultimately going to solve?” Let your investors know what your new company or startup business will do to generate value.
2. 2. Never pay to pitch. Alexis warns everyone to steer clear of people who say they’ll pitch your company for you. “Do not pay anyone to pitch your startup,” he says. “Instead, look for opportunities . . . where you can have the chance to get five minutes on stage talking about your business, talking about your aspirations.” If you want to take your company to the next level, look for mentoring rather than for someone who will do your work for you.
3. 3. Offer something concrete. Business owners need to show potential investors they have something concrete and innovative to offer. “The best way to break in is shipping, building something great,” Alexis says, “because that reputation is what opens doors. That’s what unlocks your way into investors. It’s proof of execution. It’s actually showing what you’ve built, the happy customers you have, the growth you’ve gotten.” If you’ve already got a good track record in the early phases of development, people will be more willing to invest in the rest of your journey.
4. 4. Use clear language. Strive to explain each new product or business you come up with in laypeople’s terms to investors. “One thing you might be tempted to do is use jargon,” Alexis says. “That is a mistake. That is automatically a red flag for me as an investor because I want to hear something explained to me in as plain English as possible.” Great businesses are easier to sell when you can boil them down to their purest essence.

To build a successful startup, you must first find a problem to solve and learn how to counter the competition. Sign up for a MasterClass Annual Membership to discover Alexis Ohanian’s approach to thinking creatively, being resourceful, finding funding, and nailing your execution.