Steps before raising a round of funding
4 minute read
Seed funding (or seed money) is a type of equity-based funding where an investor invests capital into a business in its starting stages in exchange for an equity stake.
The owner receives capital to fund their idea and the investor acquires a portion of the actual ownership of the company. The investor’s aim is to earn a profit once the business becomes successful, while the main goal of the startup is to kick things off as fast as possible.
Many new companies can’t turn a profit simply because they lack the funding required to get the business going. Getting the debt-based capital is often quite difficult due to a bad cashflow and limited operating history. Therefore, this kind of funding is a great solution.
Without further ado, let’s see what needs to be done before raising a round of funding.
What do you mean by raising funds?
Fundraising is a process which is rather easy to understand. Entrepreneurs that are yet to reach serious growth stages seek to gather voluntary contributions by engaging individuals, businesses, charities, or government agencies.
Even though fundraising usually refers to gathering money for non-profit organizations, it is often used to refer to the detection and solicitation of investors or other sources of capital for common companies (for-profit businesses).
Back in the day, fundraising consisted of asking for donations on the street or at people’s doors. Nowadays, there are new forms such as online fundraising. However, almost all of them are based on older methods that have already worked for many organizations in the past.
When to raise money
When an entrepreneur comes up with an attractive idea and an investor or more of them think that the idea has potential, investors are ready to write a check.
However, the idea has to be well-built and the goal has to be both realistic and attractive. Investors want to hear exactly how and when the idea will be realized. But most importantly, they want to know what’s in it for them.
Some entrepreneurs believe that having a story is enough. However, investors also require a tangible idea, a product, and often some amount of customer adoption.
For instance, if you are in the software development industry, you will be glad to know that sophisticated web or mobile products can be developed and delivered quite fast at a low price.
On the other hand, do know that investors also need to be persuaded. It often happens that a product they see is not enough. They are eager to know that there is a market to fit the product and that it can actually experience growth.
As a startup owner, you should raise capital when you figure out your market opportunity and your ideal customer. Also, try to predict how high you want your company to grow and whether that is something the investors consider realistic.
The bottom line is that you need to impress investors but remain realistic with both feet on the ground at the same time.
Now that you are familiar with fundraising, it is time to go through some necessary steps that will help you actually get the funds your business needs to take off.
Business plan/Executive summary
As a serious entrepreneur, you need to have a solid business plan if you want to succeed. Having a good business plan can improve a company’s growth by an average of 30%.
Unfortunately, many investors don’t put too much emphasis on business plans. Some investors don’t even bother to read them. On the other hand, some see your failure to present a business plan as a huge red flag.
So, just in case, make sure to prepare a business plan before raising a round of funding. Be diligent and don’t worry if some investors don’t ask for it.
A good business plan needs to include the following:
- Executive summary
- Company description
- Promising target market
- Competition analysis
- Detailed product description
- Marketing and sales strategies
- Financial projection (3 to 5 years)
Finally, there is a benefit of developing a good plan and putting it down on paper — your company’s mission, vision, and goal will remain on top of mind. This puts you in a good position to pitch to investors, as you will be brimming over with confidence.
Don’t start looking for investors if you haven’t got a capitalization table that you know how to read.
A detailed capitalization table allows you to tell who owns what aspect of your company. It is quite an important tool when raising funds, since it tracks critical ownership insights such as:
- Ownership stakes — who owns what at your company and who needs to sign off on important company decisions
- Share types — who owns preferred stocks, common shares, and so on
- Paid-up capital — the money your company has received from shareholders in exchange for shares of stock
Once you begin pitching to investors, a capitalization table helps you understand if you can meet the terms of an offer. For instance, if a new investor requires options that cover a percentage of company ownership, a capitalization table can help you figure out the answers to these questions:
- Do you have enough shares available to meet the offer?
- How many shares are required to cover the required percentage?
- How dilutive will this grant be to other holders?
Keep in mind that some business founders regret taking on investments due to how much company ownership they have to give away. Let a good cap table help you avoid making this same mistake.
Valuation of the startup/project
Before you start raising funds, it’s important to calculate startup valuation. However, to do this, you should learn about the factors that influence the valuation of a company:
- Traction — one of the major factors that impact the valuation for the seed stage. It is the quantitative proof of customer demand that indicates if the business is taking off or not.
- Reputation — as a founder, it is up to you to ensure a good image in the market. Investors look at the company’s reputation before investing. This tells them a lot about the company policies and the founder’s capabilities.
- Prototype — having a prototype can make a huge impact on the decision of an investor. Before pitching, make sure that your prototype is ready.
- Pre-valuation revenues — these are important, since they make it easier for investors to carry out the valuation. If a product has hit the market and is already generating revenue, it could push an investor to decide in your favor.
- Distribution channel — as a founder, one should be careful about the distribution channel that is being used, as it can have a direct impact on the valuation.
- Industry — if a company belongs to a thriving industry, it is likely that investors will pay a premium. Choose the right sector and increase the worth of your business enterprise.
Finally, it is important to carry out self-assessment which includes making a list of assets.
Make sure to meet investor criteria
Meeting investor criteria isn’t always easy and there is no clear-cut formula for success. However, there are components that most investors look for.
Showing that you have thought about every element of your business and that you have a realistic plan to scale certainly builds your credibility and emphasizes your potential for success.
Help yourself by answering the following questions:
- Can we solve a clearly-defined problem?
- Are we offering a feasible solution?
- Have we done enough to prove product-market fit?
- Do we understand the competitive landscape and our differentiators?
- Is there any traction or at least a detailed plan for entering the market?
If you aren’t so sure about the answers, don’t start pitching to potential investors yet. It is crucial to find out true answers first and only then start preparing a pitch.
Prepare an amazing pitch
Impressing an investor is no easy task. Still, that is more than a good reason for you to prepare a good pitch deck that articulates a compelling story in a short period.
Avoid wordy slides and do not create more than 20 of them. Try to be clear and concise. Obviously, you need to impact the audience, but make sure not to go off on a tangent.
To help yourself, take a look at the elements of a great pitch deck:
- Company overview — a clear and concise summary of your company
- Mission, vision, and drive of you and your team
- Core team — core team members and their backgrounds
- Problem you want to solve
- Solution to the problem
- Market opportunity
- Product — specifics of your offerings
- Your target customers and their level of demand
- Rivals — the competition and their market share
Pro tip: Before pitching, share the pitch deck with your core team and advisors. Use their feedback to improve your deck before you actually get to talk to investors.
Raising funds comes down to asking and convincing investors to help you out. However, when you do it properly, it becomes less of a plea and more of a transformative experience for everyone involved.
Remember to go through this guide at least one more time before you start raising funding rounds. By following all the listed steps, you will ensure that your fundraising efforts are effective.