3 Questions to ask before raising funds for start-up
Start-up founders’ biggest problem is to raise the fund to run the business or grow the company. Entrepreneur need money at every stage of a start-up. They use the money to either invest in technology or marketing, improve logistics, buy supplies or simply pay themselves a salary. While working with a network of Angel Investors and Venture Capital firms, I have assessed more than 100 investment pitch deck and have performed due-diligence. A lot of time I have seen Investors turning down offers because the entrepreneurs were not well prepared.
I am writing this blog to share the three most important questions you should ask your team before thinking about raising funds. These questions will help you prepare and increase your chances to seal the deal. Every start-up is unique and has different demands, however, this guide will be helpful for everyone.
Question 1: Whom should I ask for money?
One of the most important questions which should come to your mind. The first stage should always be to ask your family and friends (f&f). The investors value the company more if the entrepreneur own investment is also involved.
If you just have an idea or basic prototype of the product then you should not give away ownership of your company in early stages till you actually understand the actual worthiness of your company. If you believe that idea is really cool and will be popular among general population then you should use the Kickstarter platform to raise the fund. Almost 30% of the investment in the startup ecosystem is happening through Kickstarter. You should not ignore this opportunity.
If you are in the early/pre-seed stages then Angel Investors is the best option. Angel investors want to not only invest their money but also invest their time and expertise within the company. If your company is in early stages and need some expert advice then Angel Investors are the best mentor you can get. They will also help you in exploring opportunities using their network.
Finally, if your business is already running and earning revenue then Venture Capital (VC) firms are the answer to your problems. VC firms are more disciplined investors with a narrow focus on a particular industry or location. You should check those investment policies, and if your company satisfy those criteria then only you should pitch in front of those VCs.
Question 2: How much money should I ask?
One should put a great emphasis on finding the amount of fund needed to be raised. Most entrepreneurs get excited when they raise a large amount of money during the funding. Even though this bring some positive attention to the company, this can be disastrous for the company. If a company raises more than expected then it shows that the company was not aware of the actual use of funds. The entrepreneur ends up selling a bigger part of the company in a really early stage. This also adds extra pressure on the company to perform to match the market valuation. Finally, this overvaluation creates a problem in future rounds of funding if the company has not grown enough to match the value. Remember, Snap, Inc?
Question 3: What information should be there in my pitch book?
The Investment pitch book is really important. All the impression the investors has is based on the information provided in the book. It should answers all the important questions in the investors’ mind. Here are few questions which investors want in a pitch book.
- Problem Statement — What problem are you planning to solve and whether the problem is worth solving?
- Market opportunities — What is the market you are planning to address? What is future market growth? Also, the quantitative values for TAM, SOM, and SAM.
- Management Team — Whether the management team have enough industry expertise and have exit experiences?
- Use of Funds — Where are you going to invest the money? This shows whether the team has the good business skills
- Competitive Advantage — What competitive advantage your company has? Any IP or strategic partnership?
- Exit Plans — What are the potential exit plans? After all investors need return on their money, right?
- Financial Projections — The accuracy of the financial projections is not the biggest concern because it is really difficult and changes frequently with the strategy. The Investors want to know what is the growth plan and what is the underline assumption behind the projection.
Bonus Question: What other information investors look for when they hear the investment pitch?
I have been involved in a fair share of investors meetings, and I have seen a variety of investment pitches. Nothing is perfect, however I have seen many smart entrepreneurs missing the investment opportunity because of some silly mistake. If you want the perfect deal then you have to have the prefect investment pitch.
- Commitment — Entrepreneurs should show that they are really committed towards the business. The investors want them to be full commitment and focus on the business full-time. An investor does not want to put money on someone who is not fully committed.
- Accepting Criticism/Failure — A lot of entrepreneurs do not agree when someone raises any issue in the business plan or overall strategy. They become overprotective. Investors have seen hundreds of deals and can easily sense if there is an issue. So, instead of arguing against that and ruining your relationship with the investors, you should focus on answering how the funds will help you solve those problems. The investors only want to invest in someone whom they can also mentor.
Based on my experiences, these questions have helped the entrepreneurs to be better prepared. This solves the biggest roadblock to your success.
I am also adding a list of top angel investors, venture capital and Private equity firms in the bottom of the article. Once you are ready then go ahead and start raising funds to grow your business.
Top Venture Capital — https://www.cbinsights.com/research/top-venture-capital-partners/
Top Private Equity Firm — https://www.privateequityinternational.com/pei/pei300/