7 Smart Ways to Approach Startup Funding
This is part eight of my big ol’ nine-part series, exploring every imaginable aspect of startup funding. From funding rounds to valuation methodologies, get ready for a complete crash-course in funding.
Click to read all nine parts as a complete post, or download as a PDF.
Starting a business is inherently risky, and there are serious risks associated with raising investment.
However, you’re an entrepreneur — the type of person that starts a business when 90% are destined to fail. Armed with a suitable warning, you’ll be able to side-step the risks we’ve covered, and make funding work for you.
But risks aside, there are good ways to raise funding, and there are great ways. To get the most out of every funding round, it’s important to approach your investors with a game plan, to pre-empt their expectations and raise investment in the best way possible.
1) RAISE BEFORE YOU NEED IT
It’s easy to get capital when you don’t need it; when growth is ramping up and revenue is turning from a trickle into a torrent. But leave it too late, and try to raise capital when you’re relying on it for continued growth, and you’ll have a much harder time convincing investors.
2) DON’T LEAVE IT TOO LATE
Securing investment is usually a long, slow process.
A study by DocSend and Harvard Business School found that startups need an average of 40 investor meetings to close a funding round. Seed rounds take an average of nearly 13 weeks to complete, and given the increasing levels of scrutiny and due diligence expected as you raise further funding, expect those timescales to increase through Series A and beyond.
3) DON’T GET GREEDY
Investment should never be a goal in its own right. If that sounds trite, it shouldn’t: early company valuations are largely driven by the amount you raise, so the more money you secure, the more valuable your company appears.
But investment is designed to be spent. No matter how much money you raise, you’ll likely spend it at the same rate — and not always in the smartest way. As Mark Suster argues, over-funding can even stifle creativity, allowing founders to spend their way out of a problem instead of thinking their way clear.
Over-raising also makes it harder to raise subsequent rounds. Any investor wants to see the value of your company increase between rounds, but if you’ve inflated your valuation from the get-go, you’ve made it much harder to justify your next stratospheric valuation, and the next.
4) PRE-EMPT DUE DILIGENCE
Due diligence is a necessary evil of the startup funding process, but that doesn’t mean you should bury your head and passively endure it.
Most investors will seek out similar types of information, so you can ease the process by preparing data in several core fields:
- Key performance metrics
- Financial plan
- Customer acquisition channels
- Current sales pipeline
5) VET YOUR INVESTORS…
It’s hard to find great investors: in DocSend’s study, their participants reached out to an average of 20–30 good-fit investors before closing their round.
But the laborious process of finding investors doesn’t mean you should settle for just anyone.
Your investors will be involved in your business for the long-haul. Their ideas and willingness to contribute will shape the direction of your startup in ways you can’t even imagine — and as your company grows, their support grows more and more important.
With each additional round, you increase the number of people vying for control, so the more investors you have aligned with your vision, the better.
6) …AND THEIR FUND
Ethos and attitude aside, it’s also essential to dig into the mechanics of any investor’s fund.
Different types of fund require different sizes of exit to generate a suitable return, and their needs will have a direct impact on the direction they encourage your business to go.
If you work with a smaller fund, a more “modest” exit will be acceptable, but partnering with the biggest funds can seriously up the pressure to hit vaunted unicorn status.
7) DON’T ASSUME IT’S A DONE DEAL
Finally, even if you survive the meetings, pitches, scepticism, scrutiny and final due diligence, don’t assume that the deal is done.
When Christoph Janz surveyed 110 founders, a significant percentage had experienced VCs backing-out at the final stages of the fundraising process.
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