Your first funding round - be prepared, consider your options and forecast properly
Fundraising - one of the most vital, yet difficult tasks that a startup will be faced with. Hardly ever does it happen that investors line up to offer a startup everything or anything they are asking for, so raising funds requires extremely hard work, and even more patience. No CEO or founder enjoys having to perfect a pitch, going over it so many times, you could actually say it backward. Being sleep-deprived, stressed and worried about the round of investment coming up makes it understandable that one gets frustrated with the process. However, being aligned with the right investor(s) is vital for the future of the company and very much worth the wait.
As if fundraising weren’t the most difficult part of the process already, more and more startups are popping up daily and competing with each other to reach their funding goals - which can lead startups to try more than one approach to score the amount they need. Having a fundraising plan that is all-over-the-place is just as counterproductive as having none at all and will probably lead to a messy and less (or un-) successful round of funding. Keeping it structured, clean, with a great overview and short term goals is most likely the smartest and most efficient way of going into the next round. Have a plan that doesn’t just focus on the desired amount, but also outlines the type of investors you would like to pitch to and which is the best approach for these specific profiles. This is just as important as gathering the funds and will guide you through times of setbacks that will most likely come during the fundraising.
Before pitching to future investors, it is important to understand what exactly it is that you are offering with your startup and your product, what makes you worth the money. You need to present a clear market strategy, who are your consumers and “how” the product works, but more than that, the investor(s) will want to know about the future prospects, and how the startup is able to evolve and grow – how is your company scalable and what’s in it for them in the long run-. Side-note during a pitch: Try not to project too much, as it might come off as a bit of a delusion and could even distract from the otherwise strong pitch. Promising too much and then not delivering is even worse than just sticking to the basics.
Not only learning a great pitch but learning how to tailor it to your individual investors is important. Every investor is different and therefore have different agendas. Some want active involvement in the company, while others prefer standing on the sidelines and watching carefully from a distance. It really depends on the investor so you must be prepared for each possible outcome. Looking for fundraising is filled with No’s - rude no’s that hit you right in the face, passive no’s that are disguised with a “let’s keep in touch and we will follow your growth”, and even no’s that come from a lasting silence after many promising meetings-. But no’s are part of the game and you just have to keep on playing.
Some professionals, CEOs, and founders advise seeking feedback and support in the angel community before even going into a first round of investment. These individuals are usually less formal and give more honest and direct feedback. Many feel more comfortable getting a first-time rejection from an angel instead of a VC firm, as these rejections are usually less embarrassing, more friendly and light-hearted and less loud (in terms of signaling).
- signaling = VCs, especially during seed stage talk. They all mostly hear about good and bad deals and one shall assume, that a deck will get forwarded. This creates an echo-chamber and it can feel like your pitch is being aired out on live television, and a “no” from an investor means everyone will find out about it, and the likelihood of another decline is higher.
Compromise is key in pretty much every relationship we build in our lives, and that includes the one we establish with our investors. For this matter it’s important to properly define the areas in which we are willing to compromise and those that are set in stone. Take time to study the offer, read the fine print, and be prepared to walk away if you don’t feel 100% comfortable with the terms. Having investors is more than just gaining financial stability, it is a partnership. Always look for connections and influence that your investor(s) can leverage your startup with. Finding ones that can open the right doors and offer you the guidance you need is often more valuable than a huge amount of hollow investment.
Choose partners over brands - even though it might feel tempting to get attention from a large-named VC firm, it is much less about the brand, and more about the partner who will be backing your startup. This is not to say that large-named VC firms are something to avoid, yet dig a bit deeper and make sure to choose one that follows similar goals, strategies, and shares your global views. All-in-all one doesn’t enter into a partnership with the brand itself, but with a single person working for the brand. Therefore you want to work with someone you highly respect and know you can gain a lot from. There is nothing greater than partners who really get their hands dirty while growing your startup with you.
One of the main topics VCs will want to discuss and see projected is your forecast in terms of revenue and growth. Not only is this a winning point to get funding but financial forecasts will help a startup develop operational and staffing plans - known to make businesses more successful!-.
Financial forecasts should be understandable, realistic and logical. Start with expenses, not revenues - divided into fixed costs (rent, utilities, salaries, legal, advertising…) and variable costs (direct labor costs, cost of goods…). Then, follow these rules while financially forecasting your expenses:
- Double the estimates for advertising and marketing! They are known to escalate beyond expectations.
- Triple the estimates for legal, insurance, and licensing fees. They are very difficult to predict without possessing much knowledge.
- Keeping track of direct sales and customer service as direct labor costs (even though startups usually do these tasks themselves), will be of much help once your startup has more clients and these expenses need to be forecast.
On the other hand, forecasting revenues using a conservative and aggressive case builds the perfect balance between wishful thinking and a realistic state of mind. By building both, one forces themselves to build two sets of revenue projections - make conservative assumptions that are then relaxed by the aggressive ones.
- low price point
- few marketing channels
- no sales staff
- one new product each year for the first three
- low price point for the base product, followed by a premium product
- more than two marketing channels
- two salespeople paid on commission
- one new product/service introduced in the first year, followed by new products for each segment of the market
- After making aggressive revenue forecasts, it is easier to forget about expenses - make sure to check the key ratios such as gross margin, operating profit margin and total headcount per client, in order to make sure the projects are safe and sound.
Building financial forecasts takes time and patience. Don’t be thrown off when you realize these projections evolve and change. With an overview of any change made, find an easy way that is understandable for all to stay on track, keep up with adjustments, and make sure they have the possibilities to reach the goals listed.
Finally, keep in mind that there are alternative ways to get the funding you need other than the typical angel or VC investment that are worth considering when the time comes. See here a few examples:
- Get the crowd involved - If you are a regular on any social media channel, then you know how easy it is to get support from the crowd on various crowdfunding platforms. Oriented Fundable and MicroVenture platforms seem to be one of the trendiest ways to turn your eager audience into vested members of your project.
- Pick a different market - Nowadays we are more globally connected than ever before, meaning there is nothing wrong with trying out something different and targeting a market that might not immediately seem to be your audience. It is time to think from a worldly perspective as one maps out the next major move of the brand. Sometimes, going public with your startup in a different region than expected isn’t only about trying to outmaneuver the competition, and gain access to additional funds, but to also lead to the best route of success (on a different path), so be bold.
- Government help - a lot of governments have programs in place to help startups get their feet off the ground, and even if they don’t it’s always a good approach to just take matters into one’s hands and give it a try. Present your project, and you might be pleasantly surprised by the outcome. Grants tend to help to serve as conduits for low seaside capital, provided that your brand meets the development goals set forth by the administrators of the program you chose.
- Microfinancing - While this is relatively new in the United States, these small loans up to $10,000 are gaining popularity. Loans are based on your experience, passion, market opportunity and sales. Organizations include Accion USA, Grameen Bank and Kiva. Remember:It is a good alternative if you have an appealing idea and need a small about of money.
- Business plan competitions or other contests - When all else fails, try to win the money! There are a lot of regional and national competitions giving away substantial amounts of money. These include the MIT $100K Entrepreneurship Challenge, The GE Ecomagination Challenge and the Amazon Web Services Start Up Challenge. Remember: This is really show business that loves a great idea and very competent team. You also need to be a good presenter.
- Peer2Peer lending - It is now possible to go online and get funding from people you do not know at sites such as Prosper.com and Lending Club. The amount paid for the loan depends on your credit score, the economy, the length of the loan and “your story.” Remember: P2P loans are not easy to get and the interest rates can be very high.
- Bootstrapping - Bootstrapping is essentially just self-funding – you use your own capital to get the business going. This method has been growing during recent years, particularly because the costs to start a new business are lower than ever. As many as 82% of today’s startups are self-funded.
- You don’t give up any equity or creative control
- Your only stakeholders are your customers and your team
- Limited capital can force you to find creative solutions
- Well-suited to businesses with exceptionally low startup costs
- When profits come, they’re entirely yours
- A dip in revenue limits what you can do
- You lose out on the partnership & additional knowledge an investor might bring
- Self-funded startups can seem less credible
- More personal risk because you’re putting up your own money
- Growth can be slow without a large influx of capital
- Look for strategic investors - Strategic investors are the best type of investor you could find for your business because their interests align with your startup. Additionally, strategic investors may give you a higher valuation because they see benefit from your business idea beyond the financial upside. Who is a strategic investor? A strategic investor is expecting to gain more than just a financial return from the success of your venture. Strategic investors can be both companies and individuals. Look for companies with mature business models that aim to expand in new areas. Such companies invest in startups to either solve a problem they currently face or to expand into new markets. Many large corporations, such as State Street, IBM, Intel, Lucent have venture arms that invest in startups. Google and Microsoft are companies with significant cash reserves and venture arms that make both early and later-stage investments and add tremendous credibility. Other companies may be willing to do so opportunistically. In addition to investing early on, corporate strategic investors can end up being clients, promoters, go to market partners, and even potential acquirers. Individual angel investors with deep knowledge of your marketplace help not only in terms of financial support but also through advice and validation. Such angel investors may join your board. Many experienced professionals make angel investments to stay engaged in the business world. Others may invest because they perceive a potential future partnership between their own business and your startup. For example, Doug Rotella and Rick Flynn, founders of Homebridge, the eleventh largest mortgage bank in the United States, invested in Accordance Technology, understanding the complexity of the compliance space.
Finding funding can be the hardest part of getting your business off the ground, but also the most rewarding. Once you’ve saved, gotten approved for a loan, or found other people to invest in your business, you can get back to—or start—your dream job! Though it can be a long road to success, finding allies along the way (whether they’re friends, angel investors, or venture capitalists) to help keep your business afloat can make all the difference in the world. Whichever way you choose to make your startup boom, always remember, the whole world can say no, you just need one person to say yes! Good luck.