An Entrepreneur’s 5-Step Guide to Funding a Startup
Setting up for the Pregame and Strategizing for the End Game
Sleepless nights and caffeine-high mornings are sure to be a familiar scene when starting your business, and it’s all for the purpose of bringing the fruits of your labor to life. But unfortunately, hard work is only a piece of the larger puzzle that’ll determine whether your start-up will take off running or stumble short in its tracks. There are never any guarantees in a competitive market, but that shouldn’t discourage first-time entrepreneurs like you from taking the market by storm with brilliant and marketable ideas.
As a insider in the start-up industry and having supported many businesses in my lifetime, I’ve seen where entrepreneurs both tend to succeed and fail in their ventures. And from my experience, most first-time founders focus most of their time on developing their product or service, building their all-star team, racking up sales revenue and establishing a happy and growing customer base. But the one thing that holds them all back is that they underestimate the amount of work of raising coins!
While it’s important to build up your company, you need to be able to fund it in some shape or form. And from what I’ve seen, most start-ups only have so much to contribute out-of-pocket. But getting the attention of investors is no easy task, and once you do, the road ahead only gets longer and harder.
That’s why I want to offer first-time entrepreneurs a head start in their fund-raising strategy with this 5-step guide. It starts with a pregame setup and leaves you with a reliable strategy for achieving measurable results on the follow through.
Step 1: Breaking a False Narrative
A common misstep I see of first-time startups comes from the mindset they go into the venture capital market with. Entrepreneurs are excited by the prospect of million-dollar napkin pitch stories they’ve heard or believe that their product is just the best and consumers are just itching to buy it.
It’s great to have these feelings of inspiration to help drive progression for your startup. The problem comes when entrepreneurs get lazy because they’re too convinced things will work out in their favor. This false narrative of VC markets has stopped too many startups in their tracks due to:
· Placing too much emphasis on the early game rather than the long haul
· Letting first-time founders get sloppy in reaching milestones and driving valuation to attract potential investors
· Failing to execute key phases of their startup
· Becoming vulnerable to too many high-risk factors
· Leaving entrepreneurs overall unprepared for the competitive VC markets
Rid yourself of this mindset. If your product is the best out there and the world needs to have it, then you need to prove it — not just believe it. Don’t get pulled in by the miracles in entrepreneurship. They’re one in a hundred…no, one in a million even. So your chances of being that one in a billion are highly unlikely.
Step 2: Understanding Investors
Now that’s out of the way, I want to present a better understanding of the VC market. To keep it simple, you’ll need money and a lot of it. So how do you get it? Well, investors of course.
Out of the gate, first-time founders are at a disadvantage against other entrepreneurs who have already sold investors on multiple prior successful startups. It’s just the nature of the game. VC’s like to place their money in something they can trust and with someone that has a proven track record to succeed. I often hear “It’s all about people!!!”.
So what will turn investors toward your startup? The answer is simple — value. The valuation of your startup greatly determines the potential for your business to grow and succeed. Investors are looking for startups who can achieve a repeatable and scalable business model and pay back many times over on their investment.
What confuses most starting entrepreneurs is that they think the value of their startup is equated to just revenue and assets. This isn’t exactly true. Rather, investors are looking at big-picture milestones your company can make to achieve greatness and compete in the market. What they’re looking for is in no particular order:
· Proof of customer traction
· A market need for your product or service
· Evidence that your product or service addresses a need, is functional and reliable
· A robust team of leaders that can execute company goals and milestones
· A working monetizing strategy
· Continued exponential growth in revenue
· And So Much More!
Of course, all of this is balanced on a risk and reward scale. You as the entrepreneur must prove to potential investors that you can overcome the risks and maximize rewards. Bringing new technology to the industry, then you must prove that it’s not only needed but also works. Have a service that will meet a need but not sure how to profit from it, then you need to develop a successful monetization strategy. The list of risks and rewards can go on. Whatever they may be for your startup, investors will be keenly aware of these potential risks and will constantly probe your startup before every round of fundraising.
It pays to come prepared, and Step 3 will tell you how.
Step 3: Preparing Your Startup for Series A Funding
Every successful start-up really starts with great Series A funding. This is likely the first serious investment into your startup and your first major hurdle in making your business idea into reality. That’s why it is so important to prepare early on, ideally 7 to 8 months prior to when you need the funding.
Fundraising is taxing on entrepreneurs, but it’s critical to receiving the backing and resources you need to grow your startup into an actual business. During this 7–8 month preparation period, you need to:
1. Find what active VC’s are available in your market and what they’re looking for — don’t underestimate the latter
2. Leverage your contacts and networks to give insights and speak on your behalf before investors
3. Learn standard market practice to stay knowledgeable and competitive during negotiations
4. Meet with many experienced entrepreneurs to practice your pitch and receive valuable market insights
5. Gather the proper documentation, customer reviews, case studies, and other evidence pertinent to show your startup’s worth against measured risks
6. Prepare due diligence paperwork to save investors time and demonstrate your preparedness in this venture
7. Develop a sound business plan with set goals and milestones — not always required but better to be ready
8. Prepare some insurance to give investors security and incentive to back your startup
9. Get a lawyer with great reputation in the field
As far as insurance goes, VC’s typically expect first-time startups to show recurring revenue from their products and services and regular revenue growth. This usually means at least $75,000-$125,000 in monthly recurring revenue (MRR) or $900,000-$1M in annual recurring revenue (ARR). And expected monthly rate of growth (MRG) should be upwards to 15–20%. MRG can be easily calculated by taking:
(This Month’s Revenue — Last Month’s Revenue)/Last Month’s Revenue
Be sure to be observant of inconsistent or declining trends. You don’t want to be caught with faulty data on the get-go.
If your startup isn’t at a point to be generating this much recurring revenue, then you’ll have to lean on demonstrating product superiority and outstanding market opportunity.
Step 4: Building a Sound Fundraising Strategy
Once you have successfully pitched your Series A funding, congratulations! You’ve made it past the hard hurdle. But don’t relax just yet because there is still a long way to go. Fundraising isn’t just a one-off process on your to-do list. It’s recurring with multiple rounds of investments. You’ve got the interest of the VC’s, now you need to work for your money.
1. You Need to Secure Your Series A Funding
Now you’ll need to work out the logistics and terms with your investors. Make sure to enlist the aid of a lawyer with extensive experience in venture capital financing. They’ll be able to put together everything much faster and secure your best interests according to the terms you agreed on.
And be aware that this is only the first hard round of investments into your startup. To get more, you must use this investment to improve your company’s valuation. And as all best-laid plans are bound to face some form of obstruction, it’s best to negotiate 10–15% more than what you may need during this first round. This will act as a buffer against the unexpected.
2. Prepare for Subsequent Rounds of Fundraising
Now that you have the money, put it to good use. You need to come out of this investment with higher value than you came in. Plan spending accordingly to time up with target objectives before the next round.
If you find that you fundraised less than what you need, you might need to adjust milestones to your available cash. For instance, if you can’t release the beta of your product for customer testing, prepare a case study or wireframe and get consumers behind your cause. Always find an opportunity to make the most of your investment. Also, if you need investment to bridge your Series A and B (like Seed and A) — you will have to be ready to justify it WHY to the investment community. Investors like to see that entrepreneurs know how to control your costs…
And remember to never raise too much. If you do, then you may be setting up your business for a down-round by not matching the new valuation of your startup with the level of investment.
Step 5: Reach Milestones and Increase Valuation of Your Business
Finally, think of your valuation during each round as a stair-step rather than linear growth — we call it the hocky. With each milestone achieved, you’re exceeding the value of investment to create an up-round. This will allow for subsequent investments into your startup and produce real growth for your business.
At this stage, you need to focus all energies into reaching each subsequent milestone in your startup. Once you get distracted, you risk overspending and wasting resources. This compromises your relationship with your investors, lowers morale in the company, gives your company a negative reputation and may lead to higher dilution of your company. In a worst-case scenario, investors may pull out and sink all chances of realizing your dream business.
So remain dedicated to your cause and keep up the momentum with this 5-step guide. By sticking to this guide, you set yourself for a greater chance of being funded by VC’s.
Wherever you are raising in EU — I’ve put a small list of investors per country hoping that could help.