What I wish every early stage startup knew about funding.
The number one question I get from early-stage startups in the global entrepreneurial community is
“What advice do you have for us to get funding?”
It leads to a lengthy answer that I find myself repeating quite a bit, so I’ve consolidated my advice here.
Get your family and friends to invest first.
So many startups start looking for funding from VCs or angel investors before they’ve gotten funding from their circle of friends and family. Let me let you in on a not so little secret…
If you can’t convince your family or friends to invest in your idea — the people that know you and believe in you the most — how do you expect to convince a third party investor that their hard earned money is worth handing over?
This may come as no surprise, but if you can’t figure out how to convince your family and friends to invest, most investors you’d want won’t invest. The only way around this is if you’ve been successful in validating your idea and business model (and hopefully earning a bit of money from it) on your own with no outside investment.
It likely goes without saying, but I’ll say it anyway:
Potential investors want to see that you’ve suffered some pain for your idea.
What does that mean? Do you believe enough in your idea to take out a second mortgage on your home? Sell your car? Live on ramen for two years to make it possible? If you don’t believe in your company enough to experience some pain, why should they part with their money to fund you?
Not all VC’s or Investors are the same.
Do not mass email every VC or investor you know or can find. It makes you look desperate and unfocused. Every VC and every investor is unique, and they don’t all invest in the same things.
A VC cares about two things: making money on their investments and not missing out on something good (FOMO).
When it’s time to start establishing relationships with potential investors you need to find the ones that care about your industry, space, or idea. Some VCs are interested in companies of a certain size, and some specialize in early stage or seed funding rounds. It can be hard to figure this out, so an investment group (NfX) recently launched VCMatchApp.com. Check it out.
When you do decide who you are going to reach out to, send more than a distinct pitch. Show them you’re an expert in your area and teach them something about it — investors receive so many pitches and inquiries, they aren’t going to be able to check out every one. So tell them something interesting about your business, your industry, or yourself as a founder — give them a reason to feel like they are really going to miss out (FOMO) or lose a chance to make money if they don’t take a look at your company and your pitch.
It’s easier to get attention if you’re in a hot area.
Some industries are just hot right now. If your startup is focused on blockchain, AI, AR, VR, autonomous driving, genomics, or innovative agriculture, you’ll have an easier time attracting attention from VC’s and investors. But if you’re not in one of these areas, don’t fret — you can still get attention. Take a look at the next point.
But traction beats all.
Regardless of industry, if you have traction, you can drive interest. Remember that above all, VCs want to make money and have crazy FOMO. That means if you can show your idea has legs and is going somewhere, you can make investors pay attention. How do you know you have traction? Is your business experiencing any of these things?
1. Is your user base growing aggressively and rapidly based on virality, with little to no paid marketing effort?
2. Are you or your business getting a lot of free press? Have you been profiled on cutting industry sites, or your startup featured in the popular media?
3. Are potential employees or team members coming to you? Does your business have so much appeal that finding talent has more to do with wading through top tier applicants than convincing folks to apply?
4. Are you already profitable or making money?
There may be other signs, but if you meet these — you may have the traction you need (and need to highlight) to pitch VCs.
Your idea isn’t that important, but a validated idea the best thing you can offer.
Does your grand idea actually work? Have you proved it out? Some businesses may be built on a premise that involves high capital investment. (E.g. Uber. Think about the infrastructure, training, insurance and the fleet of local drivers willing to give their time and use their vehicles) The idea in concept or business plan format sounds really great — but can you make it work in real life? However you can figure out to pilot your idea or business model, validate it, and prove it works will help you get that funding you need to take it to the next level. Remember, VCs care about making money on their investments, and they don’t want to miss out on something (FOMO). If you’ve already validated your idea or business, you’ve reduced the amount of risk any potential investor would have to take on.
I know I’ve said it before, but I’m repeating it here because it matters. Cash is King. Profitability = Freedom. When you’re looking for funding, remember V’s are looking to make money on their investments. Investing in a company that is already profitable, or has a clear path to profitability, is much more attractive than investing in one that doesn’t.
If you treat your investors like piggy banks, that’s all they will be.
VCs and angel investors have vast networks and get to know a lot of startups across industries. Founders can sometimes look at an investment round as transactional, but a great relationship with your investors can deliver rewards beyond just money. Tap into their industry knowledge and advice as you grow your business, and make them trusted advisors. They can help with talent identification, business model, partnerships, and may even represent you and stand behind you in future funding rounds. Don’t miss this chance by making your relationship transactional.
Don’t take the easy money.
This is a mistake I see many startups make. Taking money early on before founders have had time to prove out their idea or validate their business model can put undue pressure on the startup. Be wary of investors that are willing to invest in you before you’ve shown promise with the factors I’ve detailed here — they may have mismatched expectations, and they will be more trouble than they are worth.
Do these rules apply to every startup, all the time? As with any entrepreneurial advice, there will be exceptions and rule breakers, but for the most part, this should hold pretty solid for most startups.
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At work, I create startup education, programs, and curriculum to help entrepreneurs grow and scale their businesses while engaging global founder communities. At home, my husband and I have two wonderful children. I love music and am a cellist (formally trained for 14 years) who is learning to play again after an 18-year hiatus. Travel, meeting new people, writing, and spending time with my family makes me happy.
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