Raising capital for your startup can be critical, considering a startups runway – mistakes could kill your project for good! External funding (Venture Capital) will enable you to grow your company much faster, more professionally and globally competitive. All of the startups which made it to the unicorn club in the first quarter of 2015, have been backed by several Venture Capital Funds and Business Angels, as stated in the CB Insights Blog Article.
Money alone never made a Unicorn out of a startup- it most definitely needs much more! Still if your business is in need of risk-taking investors, you should make sure to attract the right ones, at the right time, with a reasonable amount of money to gain enough traction, improve your product and eventually make it to the next stage. So, what are the best tips to get funding for your startup? Here’s five of them to remember.
#1 Plan your financing round in advance
One of the most common mistakes is that too many startups start looking to raise money once they have spent all of their cash. This is too late: once you are desperately looking for money, you end up in a very weak negotiation position, and therefore are tempted to accept any investment offer, under any circumstances or conditions.
A good timeline would be to start searching for investment at least 6 to 9 months in advance, even if you do not currently need cash at this moment. Per example, if you have just closed a seed investment round of 50K EUR, which represents a 9 months runway for your company, start planning the next round right away by setting objectives. If you announce tangible KPIs for the next three months in terms of traction, you will have solid numbers which will show investors your progress, achievement (even over achievements) and overall management capabilities. Don’t forget: working with investors requires relationship building, which takes time and trust.
#2 It is all about Smart Money
Many founders believe that raising money is just about filling your bank account and having a great burn-rate running “happily ever after”. This is obviously not true! Money alone keeps your project alive for another couple of months, but smart money gives you wings to fly! You could also think about it in this way: Money is just like petrol for a car – without a vehicle it will still burn, but at the end of the day will not take you anywhere.
Smart money also means that a startup doesn’t only apply to an investor: An investor also applies to be part of a startup’s growth because he or she can bring special added value to the startup. In fact I have realized that the best investors are willing to fight for a shot at the best startups. With the right investor you will feel like in a rocket launch – forget about cars and petrol, if you have the chance to reach for the stars!
#3 Profile your potential Investors
Venture Capitalists and Business Angels screen hundreds of startups per year, and quickly develop a set of criteria which help them judge if a startup is interesting to invest in or not. Getting to know-how an investor ticks is crucial, as you can nail your pitch right at this point.
According to the Angel Resource Institute, most investors base themselves on the following factors as being Best Practices in Dealscreening
- Region: Most Investors have a strong preference to Ventures which lay less than two hours flight from their offices.
- Technological/Industrial Focus: Investors tend to finance startups in industries where they have strong knowledge and expertise. Don’t pitch your Biotech startup to VC with focus on e-commerce.
- Growth potential: Investors rate market growth potential as top factor when considering a company. This means for some that the startup is already generating revenue and for others that the startup has a viable competitive edge which will lead to fast market capture.
- Management Team: Here, basic criteria often include trustworthy and commitment. Furthermore, the team has to be balanced, which means a founding team which includes technical, managerial and sales knowledge.
#4 A rocking pitch deck
The fundament for raising capital is a killer pitch deck, or in other words a document presenting your company in a simple and understandable way. Remember: the aim here is to hook the potential investor from the very first look. The pitch deck needs therefor to be extremely clear and concise, one which can be understood by everyone, especially if this person is not familiar with the companies sector. Ten slides are usually more than enough to give the overall picture. Realize that professional Investors and Analysts do not have more than 10 Minutes to decide, if your project is worth to dig deeper, or not – as they see a huge amount of deal-flow every day! I really think Guy Kawasaki’s nailed it in his article the only ten slides you need for a pitch.
#5 Take the most out of NO’s
Let’s face it: you will most probably get several rejections during your finding process. Fundraising is just like a sales process, so you will get to be familiar soon with the 10-3 -1 ratio: it will take you on average 10 meetings to get to three leads, and of these you may eventually get one investment. According to the Harvard Business Review, Venture Capital is even tougher. Only a tiny fraction of the total amount of startups applying for Venture capital money got investments, lower than 1%! You will probably fall several times in the 98 or 99% of startups rejected. And there is a lot to learn out of it. Does the investor see a problem in the team, market or strategy? Or is it just a misfit regarding the fund focus?
A good way to approach this is to get as much investor feedback as possible and aggregate them. You will probably very soon notice a clear pattern, which will teach you a lot about how your startup is perceived by externals.
Overall, it is crucial not to underestimate the fundraising process, which requires a lot of effort, time, network and specific expertise. From our experience, three to six months of intense fundraising has an opportunity cost which is always higher compared to hiring a professional advisory team to work on it. We are proud to have advised successfully more than 50 Startups and closed transactions with an overall volume of about 350 Million Euros over the last two and a half years.
To find out more how Venionaire can help your startup in fundraising, get in touch.