Far too many startups approach their fundraising round in panic mode.
They’re not ready, their businesses are not ready, and they don’t really know what they need. As a result, they’re running around in desperation trying to find an investor, but not necessarily the right investor. Unfortunately, this is a situation we come across all too often.
In my mind the first contact you make with an investor should not be a cold email with a pitch deck attached. Meanwhile, the following words are rarely heard: “I would like you to get to know my company and myself before considering investment.”
So before seeking angel or venture investment, here are five questions every founder should ask, to know if their start up is ready:
Is taking investment going to solve your problems?
Before you even start looking for external money, ask yourself whether lack of money is really your problem. Having an extra million dollars or two in the bank may not solve the problems you are facing.
Founders need to have tackled the internal problems of the business (or at least be very much aware of them and how to fix them) before going out to the market for capital. The best founders ensure their businesses are viable before approaching investors to supercharge their growth.
What do I need to have in place before I begin?
Well in advance of going to market, you’ll need to get the basics in order. Have clear objectives, start a data room, have your legal documents prepared, do your forecasting, make sure you have the support of current investors, build your collateral and pitch deck, do your research piece, and have a board agreement in place.
Most importantly, establish relationships with the investors you want to be part of the round. Get on their radar by engaging with them without having an immediate funding need. Introduce your business, keep them updated and build a rapport. It is much easier to invest in a person and a business you know well as opposed to one that has come in cold.
How much should I raise?
Raising too much capital too early on can hurt: it may sound counter-intuitive, but having too much cash on hand can kill a company. The pressure to spend to hit unrealistic targets, running the business down unprofitable paths to spend cash in the bank, the sudden shift from needing to run lean: all these can have a detrimental effect on a startup.
Take too little and you will find yourself raising again shortly after closing one round: one month of excessive burn and next month you have no marketing money. From our standpoint, post-seed stage, the ideal amount is what you need to get you to a cash-flow positive position. By doing so you still have the option as to whether to raise again or not.
When should I start the raising process?
For any angel investor, having a founder call them to say, “we only have five weeks runway left, we need help” sets alarms bells ringing for many reasons. Some investors will want to know a startup for extended periods of time before they’ll tip in money. Others will want to track your progress in a non-aggressive sales manner.
Hot tip: start a monthly update email on your startup’s progress and send it around to existing and potential investors. Include major milestones, client wins and any media coverage your startup has achieved. Given a standard due diligence process can take somewhere between two to three months, the sooner you can begin planning and taking action, the better.
How long will it take to close the round?
You’re not going to close your round in three weeks – it’s much more likely to be three months. Even if you have a group of investors excited about your startup, there will be a heavily involved process that will take months, not weeks, to complete.
It isn’t an easy process getting to know founders and their companies – and going from zero knowledge to being on board with investing takes time.
Smart founders prepare themselves fully. They’ve planned properly; they have begun communicating and engaging with prospective investors in advance of a raise, and they’ve done their own due diligence.
Most importantly, they also know how much they need to raise and what they want it for. This clarity and organisation gives them a much bigger chance of success when seeking funding.
Image: Dan Gavel. Source: Supplied.