The Art of Startup Fundraising

The Art of Startup Fundraising

by Alejandro Cremades

The Art of Startup Fundraising is a step-by-step guide to help entrepreneurs clearly understand the fundraising game. It will teach you the different strategies for raising capital and the techniques for impressing potential investors. By applying the actions in this book, you’ll surely get people to invest in your business and work with them to ensure your start-up’s success!

Summary Notes

Raising Capital for Your Startup

“Before rushing into preparing pitching materials, meeting investors, and hammering out funding terms, it is critical to get your mindset, expectations, math, and strategy right.”

Typically, entrepreneurs and opportunists view fundraising as an opportunity to get someone to invest in their dream business and make it a reality. But from an investor’s standpoint, this actually poses a significant risk.

If you really want to raise capital for your startup, you can apply a better approach to this: build your product and service first and then build some traction so that your business will keep running regardless of additional funds. This puts you in a stronger position in terms of fundraising and negotiating, as well as building investor confidence in terms of minimized risk.

Once you’re ready to perform fundraising, remember to do everything that would make it successful, such as making connections, marketing, proving yourself and the product as well as having the right mindset and expectations.

The best place to start is to create a business plan that incorporates your fundraising plan as a way to ensure you meet your key milestones. The amount of funding should have a built-in cushion for any overages as well as a budget for marketing to raise more funds.

Actions to take

Expectations of Investors

“So, what do investors really want? In asking this question, it’s often easiest to first address what they don’t want.”

When presenting yourself and your business to potential investors, it’s important to understand what they want and their expectations from you. These include having a well-thought-out business idea and plan, proof of demand, consideration of the safety of their capital and time, and so on.

In terms of character, they’re looking for someone they can get along with easily, who is coachable, has put their heart into the project, is open to receiving feedback from others, etc. Remember that you’re selling an investment in your company, so if you want to secure it, you have to make yourself and your business appear presentable and worth investing in.

Now that you know how to entice investors, the next step is to understand the best ways to attract capital for your start-up:

  1. Outperforming the competition – This is the best approach and will definitely help your pitches and presentations to investors boost your results and negotiating power.
    There are different measures of outperforming. This could be based on profit margin, sales, social media, start-up battles, growth, or even fundraising. The key here is to identify your strengths and lean in.

  2. Marketing – All marketing speaks to potential investors as it tells your company's story and what you are really about. If initial marketing and branding are done with fundraising in mind, results can be maximized.
    Your marketing may include branding materials, websites, apps, testing rounds, sponsorships, product placement, social media, networking, and more. The key here is to create a long-term marketing plan and not burn out.

  3. Storytelling – Storytelling is a critical part of marketing, branding, building customer loyalty, and growth for start-ups. Every company has a unique story, which, when told properly, can attract key talent and investors.
    Zappo’s story is about company culture. Apple is about Steve Jobs. Some of the best entrepreneurs are highly articulate in telling their stories, the problems they solve, and the reasons they started.
    Even if you don’t plan to use storytelling purposefully, it’s still worth documenting the journey, so you have something to look back on in the future. If you don’t tell the story, others might, and this may not serve you or your business well.

  4. Leveraging help – Don’t be shy about getting some help. Truly wise entrepreneurs will know what they don’t know and when to leverage an expert. This could be seeking help with storytelling, fundraising, creating a pitch deck, branding, PR, or negotiating funding terms.
    Help can come in many different ways and meet young start-ups' shoestring budgets. This could range from friends, family, and mentors to professional advisors, networks, and freelancers.

  5. Divide & Conquer – Another option is to have one co-founder focus on fundraising, particularly if you have a founder specializing in finance and marketing. If you don’t have a cofounder, it may be worth looking for someone with this expertise.
    It is worth noting that investors normally prefer multi-founder start-ups. They can often think you are flying solo because you can’t convince anyone else that you have a good idea! However, be wary of bringing on too many people. Having more than four founders can be difficult in terms of dilution and decision-making.

Actions to take

Learn to Love Rejection

“Learning to embrace and savor rejection is one of the best things that entrepreneurs can do.”

One of the key challenges an entrepreneur will need to overcome is dealing with rejection. If you’ve ever worked in sales, you may have an advantage. Sales pros are trained to embrace rejection from day one; they are taught that “nine no’s lead to one yes.” So, every no means you are getting closer to that yes, that sale, that capital.

When you hear a “no” because your investors think you are too early or have not yet built up enough traction, this means you need to keep them updated. If you execute and deliver on what you promised in your communications, there’s a great chance an investor will end up investing. Keep people in the loop about your milestones and accomplishments.

Handling rejection objectively is the best approach. Sometimes you will receive a no because the timing is bad, or maybe the investor doesn’t hear you right, so you need to connect the dots for them. Whatever the reason, don’t let your emotions run away with you and cause you to burn valuable bridges. Be kind and open to all types of feedback.

Actions to take

Setting Yourself Up for Success

“Business success requires business preparation. You don’t have to be a master tactician, but you do need to have a plan in place.”

Diligence is a keyword in the business world for a reason. When a potential investor sees that your start-up is well thought out and managed with a high level of expertise, with defined and realistic goals, that investor will know your business is a solid proposition.

Having a core business structure is the key to persuading potential investors to invest in your business. Aside from this, it will also help you cultivate a business and work ethic that can be applied to future business decisions to boost efficiency and your company's success.

Fortunately, there are strategies you can adopt to structure your business so you can secure investments from potential investors:

  • Experienced and talented management team: A strong management team will give an investor more confidence in the direction and potential of a business. Ensure your management team has the industry-specific experience and includes people with a strategic outlook.
  • Organize your corporate structure with a legal team: Your start-up must be effectively organized and have the correct corporate structure in place, including getting the right permits and documents; otherwise, you will either suffer from poor efficiency or end up in legal trouble.
    Remember that investors always perform due diligence before they invest and will require a disclosure schedule that outlines all matters that might put your business at risk. In this sense, it’s better to have your legal ducks all in a row.
  • Helpful advisors: Every start-up founder needs access to skilled individuals who have the experience to advise on relevant scenarios as they arise. Advisors are a sounding board and a well of knowledge that you can return to as needed.
  • Team alignment: Everyone in the organization should be pulling in the same direction. If there is no alignment, this will serve as a red flag to an investor.
  • Show your competitive advantage: Show why your business is special. Assume investors have been in contact with your competitors, as they will be looking for the start-up they feel is the strongest. Investors will have more faith in your business if you can explain why it is better than the others and what makes it unique.
  • Know your terms: If you do not know how much of your business you are willing to trade for a specific amount of capital, then investors will (usually) not want to be involved. You need to know the right valuation of your business so the investor is confident in your ability to manage finances and to make sure you don’t give too much of your start-up away.
  • Vision: Vision is crucial to your success. The vision you have for your start-up should be at the center of everything you do. With a clear vision, you can quickly and concisely outline what the investor’s capital will be used for. Showing an investor where your business will be in a defined amount of time is critical.

Attracting investors requires patience. It can take time to get things right, and your pitch or presentation will change as you start to receive feedback. Evolving your approach and taking the time to prepare correctly will ensure your business is secure and successful in the future.

Actions to take

Crafting the Pitch

“What assets do you need to start approaching investors to get that capital? How should they be optimized to propel success.”

When launching a start-up or asking for funding, you need a business plan that includes the details of your marketing, fundraising, and how you plan to repay the financing.

Here are the elements that help investors make the decision to finance a start-up:

  • Get your message straight, and your team behind it: Consistent messaging pulls investors in. You need to have that internal alignment with your team. When big investors come knocking, the due diligence process will include the investor meeting with other members of your team, and you need to all be on the same page.
  • Elevator pitch: An elevator pitch is simply a quick introduction to your business. It should be around 30 seconds long and should spark interest and response from investors. It should also be clear, authoritative, and relatable—after all, it’s about your customers, not you. Finally, it should highlight your value and what problem you are solving. When presenting the elevator pitch, make sure your team is armed with it. This is your key to unlocking the gates to capital. It can be used in person in actual elevators, online, over the phone, by text message, and by email.
  • Pitch deck: The pitch deck is essential to raising funds and gaining traction. You will need two versions of the pitch deck. One will be sent out to investors with all pertinent information on what you need people to understand about your story and where you are heading. The second version is for use during presentations and will contain illustrative graphics to make an impact. Before presenting this to investors, make sure to look for other areas where competing startups may be weak or where they are boring to them. Excel on these slides! The key with pitch decks is to be clear and simple, compelling, and make the process easy to act on.
  • The one-pager: This brings the whole pitch and all of the elements together on one piece of paper or one screenshot. Even when business plans are requested and used, entrepreneurs will first be asked to provide a brief executive summary. The one-pager is effectively a distilled business plan, pitch deck, mission statement, and tool for uniting the team, and takes thought, skill, and practice. This executive summary is a great way to simplify your fundraising request, making it easy to understand, share and review.

Actions to take

Due Diligence

“Once your pitch collateral starts working, you need to be prepared to back it up and immediately move forward.”

Bloomberg Business reports that two-thirds of the deals made on the TV show Shark Tank end up falling apart. The funding never happens. This often happens because due diligence blows holes in the pitch or other red flags pop up.

The time to polish your due diligence process is now, not after you begin generating interest. Sophisticated investors will have a comprehensive checklist of items they need or things they need to review. Some things you need to include in the “due diligence” process are your team members’ bios and resumes, market size, SWOT analysis, patents, the technology used, financial statement, valuation, and so on. You should also include the capitalization table, which breaks down who the owners are, who has stock and options, what rounds of funding you anticipate to rate, and how much shares should be worth.

References and background checks are important in the fundraising and due diligence processes. Expect investors and third parties to do some digging in terms of checking public records, completing background checks, securing references, and checking social media.

During the due diligence process, your start-up may be visited in person, too. You may meet the investors themselves, insurance representatives, or third-party due diligence experts. In such cases, remember not to panic; instead, use this opportunity to build relationships and investor confidence.

Actions to take

Sources of Capital - Part 1

There are at least ten different sources of funding for start-ups, from seed money to working capital:

  • Bootstrapping: This means launching and growing a start-up with resources that you already have and pulling yourself up by the ‘bootstraps.’ The good thing with bootstrapping is that you do not need to report to any investors, and your equity position is not diluted.
  • Credit cards: Credit cards might be an appealing option for a bootstrapper who is going it alone, but they are perhaps not the best financial choice. If you set boundaries in advance and have an exit plan from the debt, then it can be done.
  • Business loans: Small business loans from banks used to be a common route of funding for entrepreneurs, but now banks rarely make loans to start-ups. There are still options to secure business credit, though, such as through business credit cards, business lines of credit, or small business loans.
  • Friends and family: Securing funding from friends and family offers a great funding source and can prove to be a win-win situation. Your friends and family have the opportunity to join you on your start-up journey and reap the rewards. However, this may also damage your relationships if your business fails.
  • Crowdfunding: Crowdfunding has been around for a while, and more recently, it's been done through online web portals that help promote projects and raise money for them. It can come into two forms: donation and equity crowdfunding. Donation crowdfunding involves promoters raising money in the form of donations in exchange for unique perks. Here, donors do not enjoy ownership or participation in the ongoing profits of the campaign or business launch. Equity crowdfunding, on the other hand, lets individual investors, angel groups, and other capital funds buy shares of private companies and share in their rising value and profits.
  • Angel investors and super angels: These refer to high net-worth individuals that make up the bulk of the ranks of start-up investors. Since they often hold executive positions at large corporations, they can also provide advice and instructions to you in addition to your desired funds. The ability to raise money through fewer investors and contacts, flexible terms, and the potential for additional investment in the future are all good reasons to source an angel investor.
  • Angel groups: Angel investors are increasingly combining to form and join angel groups. Super angels and angel groups clearly often have much more capacity, and the reduced risk they enjoy helps you when negotiating terms.
  • Family offices: These refer to affluent families with millions to invest in companies. Family offices always have a good amount of capital to be invested in high-risk investments like start-ups. The benefit to you is that these entities make decisions and move very quickly.
  • Venture capital (VC): This is provided by organized funds and entities, which are essentially a pool of angel investors, family offices, sovereign funds, high net-worth individuals, and others. They primarily seek early-stage, high-growth potential investments of typically at least $1M.
  • Venture debt: This means effectively borrowing to raise working capital and growth capital. This is a valuable source of funding that doesn’t mean giving up more ownership or diluting equity. Here, financing is normally provided by special entities and banks that offer their services to funded start-ups and growing businesses.

Actions to take

Investment Rounds Explained

“Investment rounds allow start-up founders to seek, attract, and then negotiate the capital they need to take their company to the next stage.”

There are different investment rounds involved when raising capital. Understanding each one can help you better negotiate with potential investors and let them know that your business knowledge is sound:

  • Friends and family: This is the preliminary round of funding which will usually be the first port of call for your start-up. Your four aims for this funding round are to develop a concept for your product/service, to perform preliminary market research, to evaluate the financial viability of your start-up, and to create materials for subsequent investment rounds.
  • Micro-seed round: In this round, investment is made by angel investors, seed venture capitalists, accelerators, incubators, or crowdfunding networks across a limited time frame. Usually, start-ups are provided with just enough capital to work full-time on their project for a limited period. During that period, you need to show that you have a potentially profitable business, and you will be given a subsequent amount of capital. Full investment is therefore not guaranteed.
  • Seed round: Seed investment typically consists of larger investment amounts from larger investment groups with the goal of bringing a start-up to market. Seed investors tend to be angel investors and larger seed VCs that normally manage up to $50 million in capital. They tend to mitigate risk by investing in a number of companies, then seeing which ones pick up traction. Those that do secure follow-on rounds of investing.
  • Series A round: Series A is usually the first big investment a start-up gets from institutional investors. Investment is given through preferred stock, which is a form of fixed dividend given to investors that provides them with priority over subsequent investors. At the Series A stage, the goals are to maximize distribution channels, move into new markets, take your start-up to the next level and cover any cash flow issues.
  • Series B, C, and D investment rounds: Subsequent funding rounds will have specific goals and will be alphabetized. Series B is usually used to help a company scale up its operations. Series C and beyond are usually sought in the event of further expansion or in preparation for a major acquisition.
  • Initial Public Offering (IPO): An initial public offering (IPO) is the first step toward letting the public invest in your company. It happens when the company is already well-known. At this point, you are offering a percentage of your company to anyone who is willing to invest capital legally.

Actions to take

Deciding Investment Amounts & Prospects

“It’s important to have a strategy for how to identify and engage with prospects, as well as a realistic concept of how much to ask from investors.”

When you are deciding investment amounts and prospects, it’s good to know the three different levels of investment that exist. These are:

  • Ideal investment – allows you to put in place your infrastructure, cover your costs and provide a substantial reserve for future expansion.
  • Needed investment – the amount required to meet your start-up's immediate goals, so the absolute minimum to push your start-up forward.
  • Realistic investment – Based on how much capital you can expect to raise overall and how much you can expect to raise from each investor.

Understanding the differences between these investment levels will enable you to chart a course through each investment round. It will also inform your negotiation decisions in terms of the capital needed.

Now that you know what you need, the next step is to determine the valuation of your start-up. This simply refers to how much equity you should give investors in return for their capital. In essence, there are two types of valuation:

  • Founder valuation: How much you believe your business is worth.
  • Market valuation: How much your business is worth to investors when taking into consideration investment risks. In other words, your start-up is worth what someone is willing to pay for it.

The valuation of your company is a fluid, subjective figure, so it is best to have a minimum and maximum range in mind rather than a fixed number. Your job is to persuade investors that your business is worth a certain amount. Having a well-structured business plan, plenty of market research, and a strong financial forecast will help you do this.

Aside from the valuation of your company, you should also make strong financial forecasts. Financial forecasts predict where your business will be per quarter and trading year, and you should normally cover at least three years. The forecast needs to include your projected income, estimated expenses, and expected growth.

A strong forecast shows a potential investor the financial viability of your start-up, potential risks, and future financial needs.

Actions to take

PR: Creating a Storm and Building Momentum

“Done right, PR is the ultimate guerrilla warfare tool for start-ups. Executed poorly, it can cost you the movement you need.”

Press releases (PR) are important in fundraising and start-up success. There are three keys to successfully creating a PR storm that can bring the funding your start-up needs:

  • Timing: Showing some know-how and smart creativity through a focused PR campaign will attract investors who love being among the first to know about and jump in on a savvy investment opportunity.
  • Synergy: All PR has to have synergy. Make sure PR is woven with your messaging and branding and will resonate with your prospective investors and early adopters.
  • Efficiency: Looking too cheap or coming across as too extravagant (or careless) can both be equally destructive. Your PR efforts must deliver results and value, and the outcomes must be fully capitalized on.

When creating a press release, you may connect with local journalists or publications that will help distribute your stories. Usually, going local with PR activities can be the most cost and time-effective option. Alternatively, you may also go with self-distributed press releases.

Whatever way you want to do it, just make sure that your press releases are professionally written, newsworthy, relevant, and have well-researched keywords. Include backlinks to your online assets, social media feeds, images, and iFrames of your website. It’s also important to make sure the timing of the release is optimal for pickup and circulation.

Starting your own blog is also a great way to build momentum. Engaging content can be a great resource in terms of customer acquisition. Search engines also love great content. This can lead to your site showing up in search results when potential investors search for keywords related to your industry.

Actions to take

What to Look for in an Investor

Deciding the best type of investor for your project, screening potential investors, and learning how to effectively communicate with investors are vital. There are three main factors you should look for in investors:

  • Expertise: What expertise can this capital source bring to the table that makes them more valuable than others? If an investor is able to lend their experience to help you build traction this will be invaluable to your start-up.
  • Connections: Well-connected investors can provide some of the best value for your start-up. If you can get a two-for-one in terms of investment and connections, that is not to be passed up.
  • Financial strength: Ensure the prospective investor is financially strong. If they aren’t doing well financially then that will negatively affect you. Save time and move on to another option.

When finding the right investors, remember to avoid the ones that are greedy and are just looking to potentially takeover your start-up in the future. These investors can negatively impact your start-up in terms of bleeding it dry, damaging your reputation, or ousting you from the business.

Actions to take

Closing the Deal

“All of your hard work, preparation, and research has led you to this one pivotal point of your entrepreneurial career - closing the deal.”

No matter how well you pitch your business to investors, it is always possible for a deal to fall through, even at the last minute. Don’t be too alarmed about this, though; just be vigilant and ensure you continue to make appropriate decisions regarding how you present your company to investors, right up until the last possible second.

A great way to move things along for both you and potential investors is to bring in a completion schedule of some kind. This is merely a proposition that clearly defines a closing date—when the deal is expected to be concluded.

Managing expectations in the business relationship is also vital when closing a deal. Without good communication between founders, managers, and investors, there can be no way of knowing how well the company is proceeding and whether everything is on schedule.

To avoid inaccurate expectations:
- Define and state your expectations – these need to be realistic and flexible in the event of unforeseen hurdles, then communicate this to investors, so they understand what they are getting in terms of return on investment (ROI)
- Listen to investors to hear their expectations – they need to clearly outline what they believe are acceptable requests in return for their investment (product launch, market research, prototype development, advertising etc.)
- Compromise - Now that both sides have outlined their expectations, it’s time to come to a consensus. You may have to compromise on your expectations but never agree to unreasonable or unrealistic demands.

Once a deal has been completed, the truly hard work begins. How often you update investors about developments will depend on the investor. Some will require quarterly updates, while others will want to hear what’s happening on a weekly, perhaps even daily, basis. You will need to agree to an update schedule and stick to it.

Raising money and closing a round of financing should never be viewed as milestones; instead, they should be viewed as stepping stones that can help bring you, your team, and your investors to the next step on the journey.

Actions to take

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