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Generally, what separates a small business from a startup is the approach and long-term vision. A small business owner may raise some capital in the form of bank loans or investment from friends and family, but they’re likely to grow more organically at a slower rate. On the other hand, startup founders know that to accelerate growth and get to market sooner, they’ll be pitching angel investors and venture capitalists at some point.
One of the biggest mistakes founders make is trying to raise capital too soon. You have likely heard the advice that you don’t want to give up equity before you absolutely have to, but there are other implications to consider.
Fundraising takes time and energy. Plus, you really only get one shot with any given investor. Pitching too soon will take your focus off creating an investable business and potentially ruin first impressions with investors. Use this as a guide to ensure you’re ready to start fundraising.
Is your business investable?
The hard truth for many founders is that their company doesn’t meet investor criteria. In my experience, while there isn’t a clear-cut formula to follow, there are components that most investors are looking for. Being able to demonstrate that you’ve thought about every element of your business and have a viable plan to scale builds your credibility and highlights your potential for success. Some questions to ask yourself (and your team):
• Are we solving a clearly defined problem?
• Is our solution feasible?
• Have we proven product-market fit?
• Are the total available market (TAM) and serviceable available market (SAM) large enough?
• Do we understand the competitive landscape and our differentiators?
• Do we have any traction or at least a detailed plan for entering the market?
• Are our financials in good shape? (See next section for more info.)
If you don’t feel confident in your answers, now you know what to focus on before you start pitching.
Are your financials in good shape?
Understand that fundraising comes in phases. You’re not going to get all you need in one deal, so financial forecasting is essential. Identify what you need, when you need it and how much it will cost. It’s best to start with a simple approach. Identify a milestone like building your prototype or launching a beta. Then, ask these questions to calculate how much you need to raise:
• What materials, labor and other expenses (including overhead) do we need?
• How long do these funds need to last?
• What market information is available (i.e., salaries for developers or rates for ads)?
Once you know what you need, how do you determine what the investor gets? I recommend considering a convertible note for the early fundraising rounds. Convertible notes eliminate the need for valuation in the early stages of your enterprise. Otherwise, it’s best to seek the counsel of someone who is familiar with your industry and related valuations.
Investors also want to see market size information and financial projections for sales. You won’t need to project the actual ROI and timeline, but they’ll want to see that you have thought through your operating plan. Financial forecasts can be tricky, especially for subscription-based companies that collect payment upfront, so you’ll need to show that you understand your cash flow, not just the annual picture.
In addition, you want to demonstrate that you’re currently managing your finances in a savvy manner. You need to have a separate account for your business, even if you’re a solo operation and bootstrapping or pre-revenue. Always get a signed agreement, even if you already have verbal agreements in place. Once you have employees, use a payroll service. Taxes can be complicated, and it’s not where you should be spending your time.
Do you have a fundraising game plan?
Before diving in, understand your options for raising capital. Going back to the idea that you don’t want to give up equity too early, consider if a loan or seed money from family and friends makes sense. Explore crowdfunding, especially if you have consumer goods. If you’re serving a niche market or highly regulated industry, think about established corporations you can partner with.
My company once worked with a client that provided a service to medical patients. After struggling to capture the attention of venture capitalists, they found success by partnering with established insurance companies and other complementary service providers.
Once you land on a strategy, you’ll want to figure out who to talk to. Consider the investor’s reputation, how they can help advise and their strategic relationships. Create a short list of people and firms you want to pitch to, and be efficient.
Is your pitch on point?
You can have all the right pieces in the right places and still struggle to raise capital if you’re not good at pitching. In addition to your pitch deck and a 10-minute talk track, have a succinct written executive summary. Be prepared to pitch over the phone, on video calls and in person.
Before you begin, walk through everything with your team, including marketing, legal and other advisers. Get their input, and make sure everyone can tell your company’s story. Use them and other trusted advisers to practice pitching and answering different questions.
The final element of preparation is to network. Let people know that you’re raising funds, and ask for recommendations and introductions to investors, potential partners and other founders who can help increase your chances.
April 4, 2019 at 08:22AM
Forbes – Entrepreneurs