This is the third article in a three part series on Startup failure & success by Jamie Pride, author of Unicorn Tears: Why Startups Fail & How To Avoid It, published by Wiley in February 2018.
As a founder and VC, I am often asked my views on the best way to raise capital. Raising capital is time consuming and distracting. The less time you spend raising capital, the more you can spend on the main event, which is leading and running your startup. I have seen startups caught in ‘capital-raising hell’, their cap raise dragging on for months and months — heavily impacting their business — until ultimately it goes ‘cold’, as investors start to think something is wrong with the business or the founder.
If you apply some strategy to how you raise capital you can attract a better quality of investor, and the right investor for you and your startup. Not all investors are created equal, and while some founders believe that money is money, getting the right investors can provide you with more than just the cash: they can bring useful networks that can make your life so much easier. Choosing the right investor also decreases the risk of investor disharmony, one of the 10 main reasons why startups fail.
There are five key elements to successful capital raising;
- Persona — choosing the right investor
- Proof — what investors look for
- Prep — preparing for the raise
- Pitch — your investment value proposition
- Process — driving a successful process.
When each of these elements is considered and executed, a startup has significantly more chance of raising capital at the best possible valuation from the best possible investors in the shortest possible time.
Persona: what to look for in an investor
You will quickly realise that investors are as diverse as startup founders. Some of them shouldn’t be investing in startups at all, and some are veterans with extensive investment success behind them. They fall into four basic categories:
- friends, family and fans (F3)
- angels and super angels
- venture capital funds (VCs)
- institutional investors.
The investors you should focus most of your efforts on are the angels and the VCs. Some VCs are happy to invest early, before your revenue stream has begun, while others will require a particular revenue threshold to be crossed.
Whether you are dealing with an angel or a VC firm, you will ultimately be interacting with an individual. Capital raising is a two-way street. You do your due diligence on them, just as they do their due diligence on you. If they invest in your company you will be interacting with them for a very long time, which makes finding the right investor for you extremely important. So what questions should you ask your potential investor? What are you looking for?
- does their style and expectations match yours?
– do they have experience investing in your space and at you company size?
- what kind of network do they have and what will they bring apart from money?
When determining whether an investor is right for you, ask around. The startup community is relatively small. Ask a potential investor what other startups they have partnered with and how those investments have gone. Speak to founders who have worked with them. Check references.
Proof: what investors look for
Just as you are doing your research on your potential investor, they are doing theirs on you. After all, it is their money (or their fund’s), and they won’t be writing you a cheque without going through their own process.
Founders often ask me what investors look for. Their investment processes — from the heuristic to more analytical approaches — will be as diverse as the investors themselves. Whatever their general approach, most investors look at six key areas when assessing whether a startup is investible:
- team/founders
- market
- plans
- tech
- proof
- terms
Each of these items could be a post in itself – however if you have built a solid company then don’t let the above overwhelm you – trust in what you have built.
Preparation: start before you start
Remember your ABC — always be closing. One thing you can do to dramatically improve the odds of a successful capital raise is to create awareness of your startup within the investment community before you actually need to raise capital. This usually means some level of PR. I also recommend holding awareness meetings: meet with your target investors before your capital raise solely for the purpose of getting your company on their radar. This way, they can get familiar with your startup without the pressure of a raise. Don’t ask for money. In fact, specifically say you are not raising capital at the moment although you will be in the future. The purpose of this meeting is simply to make them familiar with your business. They can get to know you and your team, and you will look so much more professional and in control. It’s refreshing to meet a startup founder who is not raising capital.
Just before starting the process create a data room. A data room should be a secure online location (such as Dropbox) that contains all the important documents an investor will need.
The pitch deck
I have seen hundreds of pitch decks, and most of them were terrible. There is a magic formula for the perfect pitch deck: it should be short (no more than 10–12 slides) and it should cover the key aspects investors want to see. What problem are you solving, for whom, and what makes you different? There are endless resources on this. Google some great pitch decks. Remember, this isn’t about having flash slides. It’s about content — ensuring the investor understands what you are trying to achieve.
The way you pitch will depend largely on your personal style. If you aren’t comfortable presenting, then it’s time to learn. Practise, practise, practise. Understand that you don’t have to do this alone. Use your team to assist you in the pitching process. That doesn’t mean having them sit there and look pretty; it means having them actively involved in the pitch. Your CTO might demonstrate the product, for example, or you could share the pitch between co-founders. If you get this right it will show investors that your team has depth and breadth, and that they aren’t investing in just a single talented founder.
Lastly, the best thing you can do in a pitch is to listen. Ask questions and listen to the responses. Listen to what the investor has to say.
Process: own it!
The best advice I can give you when it comes to raising capital is to own the process. What I mean by that is to proactively get out in front of it. Anticipate when you will need to raise capital, plan for it and manage the process.
There is a right and a wrong time to raise capital. You want to be raising capital from a position of strength, not of weakness, so timing is important. The best time to raise capital is when you don’t need it. This may sound obvious, but I see a lot of startups begin the process too late and end up in a position of desperation. Also allow enough time – it is going to take you anywhere from 2 – 6 months depending on a number of factors – most startups don’t allow enough time.
There is so much more to capital raising that I can cover here, but I will leave you with a quote from Steve Martin – “Be so good they can’t ignore you”.
Jamie Pride is a serial entrepreneur and venture capitalist on a mission to help build better founders and a better venture capital ecosystem to support them. He is the co-founder of The Founder Circle – a not for profit focused on improving founder mental health and wellness. His book, Unicorn Tears: Why Startups Fail & How To Avoid it was published by Wiley in February 2018.