There is something about building a company that gets the adrenaline going. The late-night meetings, bottomless coffee, and tons of ideas freely flowing all add to the excitement. Everything seems to be going smoothly as planned until you realize that these ideas need funds: someone else’s money!
You are not alone. Most companies start this way. The thing is, raising capital to start a company or grow an existing business is tough. A well-rehearsed pitch is not sufficient to convince the venture capitalist to part with their own money to fund your project. In a recent survey, 66% of entrepreneurs found it hard to get the capital they needed to start or grow their business.
Why is it hard to get funded?
Many founders have a common notion that venture capitalists will jump into any random high potential startup they come across. Unfortunately, it is more complicated than that. Venture Capitalists do not base their decisions on whether they like you or your idea or not, or that they think the industry has high potential or the number of people investing in a company.
Investors, especially the seasoned ones, have what they call an investment thesis. Investopedia describes it as a “reasoned argument for a particular investment strategy, backed up by research and analysis.” This ensures that the VC sticks to what they know because most venture capitalists are highly specialized. It is their way of avoiding an emotional response to a particular market which makes them invest haphazardly.
Capital raising tips
It is always a great idea to come to a meeting with prospective investors fully prepared since they will assume that you already have the basics in place before you request funds.
- Prepare your business plan.
You should present your current state as well as your plans for the company. Explain thoroughly the industry in which your business is going to operate. Your business plan must show who you are going to compete with, how you are going to be different from them in terms of your product, management, marketing, distribution, technology, client reach, and your competitive advantages.
- Demonstrate a solid understanding
Your prospective investors will want you to illustrate your knowledge of your target market. This will include the size of the market, your customers, accessibility, the potential for growth, demand, and intellectual property issues. Being up-front about competition and threats is also key; as it is always better to present you SWOT (Strengths, Weaknesses, Opportunities, and Threats)vs waiting to be asked these tough questions.
- Know your numbers
As the founder, you probably know the history as well as the current and projected numbers of your business. Auditors should check them before you present these numbers to investors. Potential investors will want to see if you have a deep understanding of the numbers that form the basis for your business strategy and all assumptions upon which they are based.
Most investors usually look for the Customer Acquisition Cost (CAC) and the Customer Lifetime Value (CLTV). CAC refers to the cost of gaining new customers, while CLTV predicts the net profit you can gain from the entire relationship with a customer over time.
- Be ready to answer tough questions
These are a few of the potential questions an investor might ask you during a meeting.
- Who are your customers?
- Who are your employees and suppliers?
- Who are your competitors?
- What is your strategy when it comes to the product, marketing, and business units?
- What role does government regulation play?
- Where are your markets?
- Where are your facilities?
- How much are the costs for your business and investment plans?
- How do your operational and marketing plans work?
- Why are your leadership and management plans important?
The success of your pitch will partly hinge on your answers to these questions.
- Show investors a return on investment
Demonstrate to prospective investors a clear justification as to how you are going to use the funds from the capital raising. An ROI is crucial if you are to convince the investors. Also, give a clear exit strategy and timeline; something all investors are looking for. They often purchase shares at a particular price hoping to sell them for a higher price in the future.
- Identify risks
Simple Agreement For Future Equity (SAFE)
One option for you to raise funds is through SAFE. Experts have noted that it is easier and more convenient to use for founders than convertible notes. It is a contract between a founder and investor that has the same conversion features but without the debt. It has no set maturity dates nor accruing interests.
While startups welcome SAFEs, the concept itself gets mixed reactions from investors. It is primarily due to the maturity date concept. The good news is that SAFEs have a good track record of payback. For entrepreneurs, it is a less complicated structure and a simpler way of getting funding.
It helps if you can get creative in trying to raise capital for your business. One of the best ways to raise money is through your initial satisfied customers and their referrals. Cut costs where you can: lease equipment instead of buying, and outsource services where applicable. Finally, get a mentor who can help you in this process that specializes in your niche. Thinking like a VC and getting in front of VC’s who have experience in your market and invest in your niche can be the key that unlocks your funding success.