Original article posted on N2 Technology Thursday, April 8th.
If you’ve read the first instalment of our three-part series, you’ll have completed the ideation stage of building a start-up, and this time, it’s all about getting investor-ready and finding the right investor for your business.
The global startup ecosystem
It’s not easy, it’s overwhelming, and frankly, it’s exhausting trawling through an abundance of websites, all offering conflicting advice on what to do, say, and who to talk to. You could spend weeks - if not months - reading article after article, and still, you wouldn’t feel confident on how to approach investors. In our article The Reality Of How Investors Find Black-Swan Startups, we delve into the limitations of the current, archaic deal-sourcing process, stifled by claustrophobic localised networks prioritising who-you-know connections over what-you-knows.
Winning investment is an enduring process, and you will soon realise that it takes quite a bit longer than an episode of Dragons' Den (or Shark Tank for our American readers) to secure a deal. By this point, you've already hit the key milestones in your startup journey. You’ve produced your pitch deck, built your MVP, found your product-market fit, and validated your proof of concept. Now it’s time to reach out to investors to raise a funding round. Over the past 30 years, this process has remained unchanged, and we've constructed a guideline to grant startups the best chance of finding, connecting with and speaking to the right investors.
Venture Capital Deal Sourcing to Funding Pipeline
Primarily consisting of five main steps, raising capital can be broken down as follows:
Drafting the business plan and investor material (2 months)
Building a list of investors to contact (1 month)
Qualifying investors and identifying the right person in each firm (2 months)
Contacting, organising a pitch, and responding to various requests (3 to 6 months)
Negotiating and closing the funding round (2 to 4 months)
Total time required: best case: 10 months, average case: 15 months.
Read more: 33 Tips on Being Investor Ready
Step 1: Mental preparations
Similar to the ideation stage, fundraising also requires mental preparation. Talk to your significant other and discuss the potential of a frustrating endeavour filled with exhilarating highs and emotion that might wear you down. There will be more work than time, and some avenues will lead you nowhere, provoking false hopes and failed expectations, so support at home will prove invaluable.
Secondly, be ready to part with equity and some control. Investors will almost always take consent rights over your business, so they may prevent you from making decisions that could erode shareholder value. If you want external investment, get comfortable with no longer being the sole decision-maker.
Thirdly, a co-founder might be an excellent investment for many reasons. Aside from easing the pressure, fundraising is a full-time job - so it’s best to allocate someone to run the business whilst you’re focussing on winning funding - but choose wisely. Avoid scrolling through your text messages and finding the most underemployed friend - you don’t want to lose your business as well as a friend if times get tough. Attend startup events and look for like-minded entrepreneurs who bring passion, vision, complementary skill sets and challenging opinions to the table.
Finally, figure out what you want from an investor. Besides bringing money, VCs can offer knowledge, contacts and experience. Some will claim they can provide everything, so as the owner, you must decide what you are willing to lose to gain - and for how much. Do you want them to sit on your board? How involved do you want them to be? Are you looking for a door-opening network? There's a big pool of investors out there, and it is impossible to speak to them all - so why waste your time on investors who can't provide what you need?
Read more: 10 books every Startup founder should read
Step 2: Figure out the logistics
Clear your diary. Chances are, you will be meeting lots of people in different cities around the world, so when an investor is interested, you will not want to miss the opportunity due to poor scheduling and risk them walking away.
Some people say fundraising is one of the hardest things they have ever worked on. It forces us to step out of our comfort zones by presenting in front of people and striking conversations with strangers, so make sure to remove all other distractions. As soon as investors put money into your business, they become your partners - so it's imperative to commit and deliver to your team. Often, this is done formally via a Service Agreement that ensures you will devote all your time to making your startup a success, so if you ever needed a sign to quit…
Read more: How To Build a Start-Up: Ideation
Step 3: The proposition
Why should anyone invest in you? This should be the predominant question in your mind when preparing your proposition and pitch decks. You’ll need sensible milestones, a strong value proposition and thorough knowledge of the investors you’ve secured meetings with. Begin with a list of thirty investors who have a proven track record in your industry and target them. Some VCs will receive over 250 proposals a month - so make your first contact count! Ensure to open with an elevator pitch that clearly and simply explains what your company does, what value it will bring to the market, the problem it will solve and how well you know your target market. Prepare a compelling teaser proposal that outlines who you are and what you need the funding for.
Top tips from N2 Founder, Derek Watson:
Remember you are pitching for an investment, not a customer - so talk in the investors language,
Explain how your product benefits the customer and in turn will benefit the investor,
Get in the feedback loop ASAP with early-adopters to refine your offering,
Display that you and your team are masters at execution.
Step 4: Valuation
The value you put on your company will determine how many shares you’re willing to let go of - so make it defensible. Although daunting dealing with current annualised revenues, cash investments, scalability, and monthly profitability, your company's valuation has to be realistic, backed up with industry-specific benchmarks and within a range that fits your expectations. Don’t forget to factor in future raises and take into account economic uncertainty to enable a broader market context.
Step 5: Team
Investors want to know that your business plans are supported by a leader and team that can deliver - after all, people invest in people. Ensure your team’s skillsets and backgrounds are diverse and consist of multi-dimensional expertise across all departments. If you’re unable to cover the bases internally, it will be worth investing in external experts. Look to build a squad filled with passionate people who are excited to see the company grow.
Step 6: Know your exit strategy
Investors often buy into a startup with the intent to exit for profit. Will that be through a trade sale or an IPO? Investors will pry into any major disagreements amongst founders, so before entering meetings, ensure that everyone's vision for the company - and in particular - the exit strategy, are aligned. This guarantees that everyone is on the same page and that their goals are in sync.
Step 7: Finding investors
Finding the right investor is difficult. The identification process is challenging, and you must determine who can act as lead investor. Begin by ensuring the investor has enough capital to deploy in new startups, can invest in your jurisdiction, industry, deal stage, technology and the amount you require.
Following that, entrepreneurs must understand what the investor is looking for, and find ways to get in front of the right person, at the right time, and on their preferable channel. Make sure you understand the details and implications of your term sheet and shareholder agreement, prepare for unanswered calls and emails, and don’t underestimate the time this will take!
Over the past 30 years, the VC deal sourcing to funding pipeline success is a 1000 to 1. So it might be wise to look into platforms that collect, compile and utilise data to matchmake perfect-fit entrepreneurs with relevant investors. Solutions such as N2 Technology make archaic processes redundant, free up time for more important tasks, allow previously overlooked entrepreneurs the opportunity to be found, and enable entrepreneurs a direct route to qualified investors.
Step 8: The pitch deck presentation
Congrats - you’ve made it through to your first meeting! Now it’s time to ‘wow’ with an impressive presentation. Fuelled by FOMO (fear of missing out), investors are devoted to finding the next unicorn without losing money - so talk in numbers, be data-centric and ensure your stats are on point. Showcase how you intend to turn a profit with your chosen revenue model, marketing strategy, product roadmap and identified potential clients. Explain where you fit into the competitive landscape and break down the revenue projections for the next 12 months (ideally three years). Prepare to go through your cash needs and, if possible, demonstrate already achieved traction through sales, early adopter data, engagement and operational metrics.
Step 9: Interacting with investors
Advice from the pros:
Learn to love feedback,
Be prepared for extensive questioning,
If you don’t know the answer, be honest, do your research and come back with the correct information,
Educate yourself and understand the terminology,
Know your business inside-out,
Approach from a commercial angle,
Always leave a meeting knowing the next steps.
As a founder, your startup is your vision, so find investors that believe in where you want to take your company. When it comes to the fundraising process, make sure to be prepared for the rewarding yet treacherous journey ahead. Mentally prepare, go all-in, quit your job, and make your idea a reality. Chances are you’ve already done the groundwork in part one of this series, so although it will be tiresome, challenging and at times forsaken, the rewards will most certainly supersede.
For the third and final instalment on how to get funding, read here… (coming soon).