Investment for startup is one of the most difficult activities to be traversed by the Founder. Questions founder’s keep asking are, ‘Is it an absolute must to go to for funding for startup and if so when. How to get funding for startup, how much to raise and when ? What to share with the financer for business and what not to ?’ Given below are answers to some of the leading queries of founders with respect to fund raise.
Do we really need to external funds raise?
The answer to this question is based on the end objective of the founders.
- If the objective is to grow faster then it is best to go ahead and fund the starup with external funds as they would help in hiring more manpower, expand to larger territory and invest in product development etc much faster than when the company grows organically. One concern many founders have is the interference of investors when they become part of the company, which is not unfounded. Most of the well known VCs limit themselves to reviewing the progress and giving their feedback on the business plan. However there are umpteen instances of VCs tending to micromanage founders and influence the business, be it product road map, pricing & GTM strategies etc and which could be very annoying to founders who would have had a different vision. These conflicts can sometimes lead to an eventual failure of the startup. However in most cases VCs are ex-founders themselves and it is best to take advantage of their experience in relevant areas.
- If the founder’s objective is to grow organically with less stress and with no external influence at all in that case one should avoid fund raise. Founder’s who are also concerned about dilution of their stake should also not raise funds. However those founder’s thinking of stake dilution should remember that they should not be unreasonable towards investors if they ever take investments. It is these funds that would have boosted growth and thereby investors should be rewarded aptly. Some founders are worried about the mega multiple returns that the investor receives however here again they should remember that it is the invested amount that has helped in this mega growth.
To go for external investments thereby is a matter of choice and you should weigh all options before even venturing into it.
Right time to Fund Business
The golden rule is raise when you have sufficient startup funds and the business is doing good. That is when you will get better valuation, you are in a better position to negotiate as you are not under pressure to accept whatever comes your way and potential investors would be stalking you as the business is doing well. On the contrary when business is not good, by natural extension cashflows would be low, and thus lesser number of interest from investors and as a corollary you would be under tremendous pressure to accept even a raw deal.
So what is the ideal time. You surely cannot go and raise funds the day after raising the last round as potential next investors would question the intent. The best time is mid way from the last fund raise and the next expected time when the money should hit your bank.
Now the above is not applicable when the startup is boot strapping as the startup anyway has no cash. During the angel round the best time is to wait it out as long and as further into the startup. That is when either the product is half or fully developed and if you can stretch your own funds further then try and get some revenues and cashflow in. The further the company is in its evolution, the higher the interest from potential investors and valuations get better too and which means lesser equity dilution
Prep towards Fund Raise
Typically there are 2 focus areas towards fund raise one is the pitch deck and the second being the pitch in itself. These are of course the obvious visible ones, however there are many more activities that support the fund raise process.
Accounts : First of all the company’s books should be in order. Auditing of accounts, is a must as investors would only want to be associated with a well governed company. Audited accounts also help in forecasting better.
Website and marketing : Ensure the website is up-to-date and the storyline of both the pitch deck as well as the website and all marketing collaterals are consistent. Ensure any reviews online be it from clients or employees, are attended to, such that any adverse remarks do not give a wrong impression. If not already done increase online presence either at Social media websites, Blogs, Youtube videos etc. Investors do a lot of research when they are evaluating the company. Since the founder’s may not get as much time to explain everything during the 20~60 min presentation, all that needs to be communicated can be placed in different channels to express the company’s vision, product and market. A bit of PR if affordable can also be helpful.
Data to be collected :
As soon as there is interest from an investor they would be a flurry of activity starting with sharing collaterals. You should strike when the iron is hot and any delay from your end can reduce interest at the investor end as delay can cause investors to start getting interested in the next stratup. Given below is a list of collaterals that you need to keep ready. The data collated in these documents should always be substantiated by acceptable reports and research data.
Market Size : Investors would like to invest in companies that have a large market for its products or services. Since Startups by nature create new markets with new gen products it may not be easy to assess market size or it may not just be available. In such scenario it is best to calculate the market size using available data and demographics from allied industries and competition who are serving allied markets. These with reasonable assumptions can give a better calculated market size
Competition : You should also have sufficient knowledge and data about your competitors, including their product differentiation, USPs, risks, future plans and of course your products’ edge over competition. If you can get data of the fund raise history of a well performing competition it would also help in convincing investors to invest in you.
Favourable Factors : Apart from a good product and team, what is also helpful if there are favourable factors that can help your company scale. These could be a forecasted increase in the usage pattern or interest of your target audience eg usage of social media (for a social media company), or increased acceptance of online purchases (for an ecommerce company), or presence of a large pool of target audience (eg unskilled resources for skills training company). If there are govt policies that are favourable to the growth of a sector then they should also be highlighted.
Profiles of Founder & Senior Leaders : For an early stage company this is very important as in the absence of a visible product, investors assess the company based on the profile of the team. Thus a short, crisp note highlighting the most important achievements of each of the founder with a job distribution of each founder would be good. Include any aspects viz patents, certifications etc. It is also great if there is a founder’s agreement is in place, shows clarity and long term vision of founders.
Investments & Exit in same space : It helps to share data on any investments received by similar startups or at least in allied fields. Sometimes there are similar companies in different geographies, any information on them and if there are exits would be helpful.
Sales Collaterals and data : To understand the Sales preparedness or sales growth prospects of fairly matured companies investors sometimes ask for sales collaterals, leads database, lead status, reports from the CRM as well as sales communication drafts. Even for the best managed companies it may take a few days to collate and dress up some of these. It would be wise keep these up-to-date and be ready to share as and when asked for.
Pitch Deck : It is by far the most important document in the fund raise process. The deck would lead the way towards a great presentation.
- it should be crisp,
- flowing in a story format and
- containing as much details as possible.
The number of slides would be defined by the amount of time available. Sometimes time allotted is 15 mins, sometimes 30 mins and sometimes 60 mins. At all times it is important to remember to work the presentation to be over within 75 % of allotted time to allow 25% of time to listen to questions and fine tune the balance information to be shared based on the questions that emanate. Sometimes the time allotted would be less say 15 mins but the investor would continue to listen and thereby it is best to have a short presentation with much much more “Additional Slides” at the end of the deck to be taken up as the meeting continues.
Information Memorandum :
Information Memorandum should be made in two.
- Information Memorandum Teaser: This is the first document that would be sent to assess interest of a potential investor. Thereby an IM Teaser should contain only the top level achievements and forecast of the company and details of the founders, just enough to generate interest. They could be sent as a as mailer to a lot of VCs in your list. This is sort of a lead generation strategy. However remember VCs receive tons of such IM teasers and thereby the Subject line and Highlighted portions of the document should say the uniqueness of the business model.
- Information Memorandum Detailed: This document is sent to any potential investor who would have expressed interest in the company. This can be a 1 page or sometimes can be even 2 page. However shorter the better as that would ensure only the most important achievements are shared.
All data contained in these documents should be substantiated by information available from reliable resources. Also all those points that help in projecting the company’s future and growth in good stead should be highlighted, some of them may seem obvious but a good data point can swing interest levels.
Pitch
This is the final test to all the preparations and needs a lot of practice. Unfortunately this is one part where most founders do not spend time at all. Most founders and as is in the case of any presentations/discussions enough time is spent on preparing the deck, with most presenting for the first one in the meeting itself. Instead you should actually practice presenting, record the presentation, make changes to the script, then present in front of an audience and then take feedback. The audience can be colleagues or if you can get access to entrepreneur who has raised funds in the past. This helps in managing time, ensuring within the said time all that you wanted to communicate is done and also ensuring the key message is communicated in the least possible time
