Fundraising is a perennial challenge for startups, particularly in the early stages. It’s a tremendous strain on founders, in both time and energy. However, when it goes well, it’s a thrilling confidence boost.Often an emotionally-charged experience, it’s crucial to approach fundraising with a plan and a process to ensure you remain focused and level-headed throughout pitching and decision-making.
- Fundraising at the right time
The prerequisites will change depending on the stage and angle of your business
But investors also need persuading. Usually a product they can see, use, or touch will not be enough. They will want to know that there is product market fit and that the product is experiencing actual growth.
Therefore, founders should raise money when they have figured out what the market opportunity is and who the customer is, and when they have delivered a product that matches their needs and is being adopted at an interestingly rapid rate. How rapid is interesting? This depends, but a rate of 10% per week for several weeks is impressive. And to raise money founders need to impress.
- No Success without Research
If you know who you are talking to, what they do and what they want you are setting yourself up for success. If you don’t, you won’t catch the investors attention.
Always remember, you are one of MANY who tried to get his/her attention that day. Good research is your foot in the door.
There are a few simple rules to follow when preparing to meet with investors. First, make sure you know your audience--do research on what they like to invest in and try to figure out why. Second, simplify your pitch to the essential--why this is a great product (demos are almost a requirement nowadays), why you are precisely the right team to build it, and why together you should all dream about creating the next gigantic company. Next make sure you listen carefully to what the investor has to say. If you can get the investor to talk more than you, your probability of a deal skyrockets. In the same vein, do what you can to connect with the investor. This is one of the main reasons to do research. An investment in a company is a long term commitment and most investors see lots of deals. Unless they like you and feel connected to your outcome, they will most certainly not write a check.
- Choose your Investors
Approaching the right ones, the right way and in the right order
- Where did they invest?
- What do they talk about?
- Do they have competitors in their portfolio?
- Am I at the right stage?
- How well are they performing? Do they have a track record?
- How much to raise?
Knowing how much to ask is crucial for credibility.
Ideally, you should raise as much money as you need to reach profitability, so that you’ll never have to raise money again. If you succeed in this, not only will you find it easier to raise money in the future, you’ll be able to survive without new funding if the funding environment gets tight. That said, certain kinds of startups will need a follow-on round, such as those building hardware. Their goal should be to raise as much money as needed to get to their next “fundable” milestone, which will usually be 12 to 18 months later.
In choosing how much to raise you are trading off several variables, including how much progress that amount of money will purchase, credibility with investors, and dilution. If you can manage to give up as little as 10% of your company in your seed round, that is wonderful, but most rounds will require up to 20% dilution and you should try to avoid more than 25%. In any event, the amount you are asking for must be tied to a believable plan. That plan will buy you the credibility necessary to persuade investors that their money will have a chance to grow. It is usually a good idea to create multiple plans assuming different amounts raised and to carefully articulate your belief that the company will be successful whether you raise the full or some lesser amount. The difference will be how fast you can grow.
- Build your credibility
In investor relations, credibility is everything. When your authority is damaged, everything you tell the Street will be filtered through the jaded minds of professional skeptics who remember your past failure to deliver, or a time they felt misdirected. That’s why it’s vital to maintain a constant focus on sustaining and growing your level of trust with investors.
Fundamentally, building credibility is about being forthright, transparent, and accessible. It’s about understanding what your investors want, and delivering it consistently. That’s not always easy to do, but do it you must if you want to maintain happy relations with your analysts and investors. A strategic investor relations firm can often be a powerful ally.
- The Art of Pitching : 90% HOW &10% WHAT
Why Investors Only Give Your Idea 10% of Their Attention? If they ever talk about you, the only question they will be asking each other is : how can we make money out of it?
If they think your idea has that potential – vast growth, solves a big problem in a credible way, you the entrepreneur is uniquely qualified to take on a specific market, or even if this is a new and incredibly intriguing product – guess what:
Then, they just as quickly, they will stop talking about the idea and start talking business.
- What does it cost to acquire customers (note, they never mention viral, because they don't believe in it)!
- Is this enough money to get it off the ground?
- How big can this be and how much would they be likely to recoup?
- Who would acquire? (No one really discusses IPOs and never, ICOs)
- How big is the competition and can they reasonably be faced? (If the competition happens to be Google, Apple or Microsoft, go home.)
- Can this entrepreneur (and team) really pull this off?
Instead of fussing over every last feature in your offering, you would get down to the issues of what makes you and your team good enough to make this fly, exactly how you plan to do this and with how much.
- How to Pitch your Startup
- Business description
This is the most important slide because it is read when investors are at the peak of the attention spasm (around 30 seconds).
If they don’t understand what your business is about here, they won’t understand the rest of the deck and will pass.Therefore, it is important to describe your business in the most simple and straight forward way possible.Note that at this stage, yous should notinclude the problem you are addressing and business model, they will come later.
Describe your Business as you would do it to customers. An investor wants to understand who, why and for how much somebody would buy your offering.
What problem are your addressing and why doesit exist? What makes your offering needed by the market? Sometimes this is self-explanatory so try to focus on why YOUR offering is wanted.
Give the feeling of inevitability: that problem is going to be there and somebody is going to take advantage of it, whether it is you or somebody else.
If you succeed in presenting the problem this way, the VC will not wonder if there is a business case but everything will become just a matter of “who”, of evaluating if you are the right company for that.The rest of the deck should prove that.
- Solution : Why are you the best company to solve the problem?
Explain your value proposition to serve the problem. And, Highlight your USP (Unique Selling Proposition) to prove that you are the right company to solve the problem.
You can use: User cases & Example with comparables, or any other material that proves your point according to your company’s situation.
The answer should be in line with the features of the problem you described.
- Market size
Now that the investor sees that there is a problem in the market and a business opportunity to provide a solution, the next logical question is : How big is this business opportunity?
There are a lot of theories on how to estimate the market size, you can read more on it in this article.
Use references close to your product and solution. Example of ice-cream factory: don’t use market size of frozen products worldwide, but limit it to your local market and ice-creams.
Don’t be afraid to use comparable companies as a reference (e.g.: combined turnover of current players): if you follow our instructions, investors will already have a hint on why you will be able to win the market.
After calculating the market size, target a market share to reach within a number of years. The market share should not be larger than the market share of the present market leader unless the sector is growing through rapid changes and disruption.
- Competitive landscape and differentiation
The best way is to identify 2 to 4 competitors and benchmark your company on a given set of features (possibly the same the customers of your problem want to see) and highlight how your offering is superior and will stand out.
What do investors want to understand from this slide? That you perfectly understand what the customers wants, because they are the key to solve the market. Moreover, this slide shows that you studied the market and learned from your competitors’ experience to develop your company.
If you don’t have any competitor yet, include comparable companies.This is very useful in case you are creating a new market. If you don’t include them, investors don’t have anything to do research upon or evaluate your offering and you risk that they doubt there is even a market opportunity (not accomplishing the goal or mitigation of perceived risk).
Example: booking website for ski rentals used as a comparable company for a bike rental booking website
Sustainable competitive advantageThe previous part explains why you are superior to your competitors today.In this one you should focus on how you will be able to retain your competitive advantage over time in face of new competition that will definitely arise if the opportunity is as big as you pitched in the first slides.
How is your offering not going to be copied or even improved? In other terms: What barriers to entry will you create to new competition (coming from new entrants or even incumbents)?
They vary according to the various business models, but some example are: Network effects, Data supremacy, Fast distribution, Lock in effects.
Keep in mind that “First mover advantage” is not convincing enough.Investors should not doubt that you will be able to keep that edge over competition.
- Traction / stage of development
What have you achieved to prove what you stated so far? Give facts!
Traction can be based on a lot of different KPIs according to your business case. Especially in early stages, companies may on purpose decide to focus on one KPI instead of another, that can be different even for companies operating in the same market.
Focus on giving numbers on the factors that you highlighted as your main competitive advantage in the previous slides.
Examples includes: MaU (Monthly active Users); DaU (Daily active Users). Annual or Monthly Recurring Revenues (ARR or MRR) -for e.g. SaaS models-;Volume on transaction -for, e.g., payment service providers or a market place-; Number of customers; Important distribution partnerships; Prototypes if you have tangible products.
Choose two to three important KPIs for you and show what you have done to achieve them until now.
- Business model and monetization
This topic can also be included before or as part of the previous slide, depending on your case, but it is usually better to separate them.
You should explain here how you will be able to generate substantial cash flows and revenues in the future, which is also connected to your competitive advantage.
Clearly define how the company will generate most of its revenues and when.
Some companies may plan a change in business model, decide to monetize at a later stage, or increase prices in the future. This is not a problem, as soon as you make sure that investors clearly understand where are you heading to.
- Milestones and investment proposition
The most effective way to present the capital need and the use of funds is to describe the use of capital in function of reaching target KPIs (the same of the traction slide to be consistent and logical).
Make a timeline
Outline how the capital will grow each KPI you described in the traction slide
This approach is very clear to understand and easy to measure after the investment.
Time horizon should be 18 months (max. 3 years, more than that sounds too speculative)
Don’t give the impression the capital will be used to finish products or startup operations but rather say EXPAND. Websites are never done, everybody knows that. Why would you say that then? It sounds early stage and increases the perceived risk.
Example: don’t say “adding Spanish language” but rather “expanding to Spanish-speaking countries”
Not sure about valuation? Check out here
For ranges of equity to grant investors at different stages, check out here
At early stages investors are investing in the people more than on the business. This is your slide to shine. It can be that you want to include it earlier in the deck, but it depends on the specific cases.
What do investors look for? Experience in the field (from previous employments or startups) + Successful exits + How many years you worked together with founders and colleagues.
The team should be cross-functional. If you are raising money to hire developers to build the platform from scratch, good luck! It is important to have a team that, at current stage, can already deliver upon the most important elements for building the venture. You should also be able to work in a complementary way, so that the output is bigger than the sum.
Thank you note and contact details: Email, Phone number, Company address (geography is an important factor)
Include only one contact person. He/she should be in charge of fundraising, better if it’s the CEO: investors want to talk to leaders. This will be the only reference person during the negotiation and after the transaction.