No matter the potential hurdles or anxiety-inducing meetings you may have with investors, the reality is that every startup worth funding will get funding. But attempting to secure funding can be an intimidating and sometimes lengthy process.
In this blog post, we’ll dive into some of the fundamentals and try to outline best practices in layman’s terms. Additionally, you’ll hear insights from top VC and angel investors who were featured in our Pre-Seed Founders Klub program. Though our advice is mainly targeted to pre-seed startups, a lot of the lessons have value in later stages, too. Here we go!
Should I be raising equity, or can I rely on bootstrapped funds?
Especially in the beginning, it can be difficult to gauge whether the risk using your own savings to fund your startup will pay off in the long term. While it’s easy to find bootstrapping success stories, they’re generally a rare breed. Instead, most startups today consider raising some kind of equity.
What are my funding options?
If you decide not to bootstrap or rely on friends and family, there are numerous other tools at your disposal. These include venture capitalists, angel investors, crowdfunding, government grants, bank loans, and startup incubators/accelerators. But many founders overlook nontraditional investors like hedge and pension funds, CVCs, investment banks, and private equity firms, which have increasingly shown interest in startups.
“There has never been a better time to be an entrepreneur or founder pursuing an idea.” says Florian Heinemann, founder of Project A Ventures and former managing director of Rocket Internet. “The options you have to get capital from business angels and VCs, as well as support from various networks, mean the overall conditions have never been better.”
I want to raise money, but how do I know how much to ask for?
To be blunt, aiming to raise as much as you can is naive. But raising too little can also derail your ambitions, since you risk not having enough runway (ie. how much time you need for your business to take off) before your next round. The best way to find your sweet spot is by (a) defining your financial plan and the milestones within them or (b) defining how much you absolutely need for the next 12–18 months, which is the usual length of time investors will allow for you to show some proof of concept.
How do I calculate an effective valuation for my company?
When entrepreneurs waltz into the “Shark Tank” boasting some kind of crazy $300 million valuation, they’re often met with amused reactions from Mark Cuban, Robert Herjavec, and co. While it’s true that there’s no way to prove their valuation is wrong, in reality it’s exceptionally difficult to calculate valuations for pre-revenue startups with no operating revenue. What’s more important for these startups is the market they’re competing in and the traction they’ve generated (identified by user numbers, growth rate, and efficacy of marketing efforts).
“If you know where VCs want to invest and understand their investment model, you can actually use the model to target VCs quite well,” says Jens Lapinski, CEO of Angel Invest Ventures and former managing director at Techstars. Mature startups generally rely on facts and figures to accurately back up their claim. In both cases, it’s helpful to look at deal sizes and funding rounds from similar companies in your industry.
How do I find the right investors for my business?
As an early stage startup, you may feel the urge to accept funding from anyone that offers it to you. However, it is crucial to remember that not all investors are a fit for your business. The relationship they offer is arguably just as valuable as the funding itself.
“It’s important for founders to understand which funds you actually want to work with,” says Jeannette zu Fürstenberg, founder of VC fund La Famiglia. “Once you have an idea of potential partners, try and get an introduction from a mutual contact rather than writing them cold. That usually works best.”
Heinemann echoes this sentiment. “We have roughly 115 people working for Project A, but close to 100 don’t do the actual investment,” he says. “That’s what you’d think a VC would be doing, but they’re actually offering operational support to our portfolio companies .” If an investor’s credentials are solid but their feedback is lacking, you should reconsider whether they’re right for you.
What is a cap table and why do I need one?
Put simply, a cap(italization) table is a chart that shows ownership stakes in your business. It lists your company’s securities (i.e., stock, options, warrants, etc.), how much investors paid for them, and each investor’s ownership percentage in the company. Cap tables are crucial for first-time fundraising — potential investors will thoroughly scrutinize the accuracy of your document to make absolutely sure their ownership position is reasonable.
What do I need to know about term sheets?
Your term sheet specifies the terms of the investment, and is used to draft your final contract. Just as with a cap table, your term sheet needs to be delicately handled, since it will lay the foundation not only for both you and the investor’s interests, but also for your future relationship. It’s up to you to educate yourself on these sheets and what terms are usually offered by investors.
How do I get over my stage fright when meeting with investors?
Don’t put yourself down! Fundraising is a learned skill — VCs have the upper hand because they deal with it every day. If you want to build confidence, the best thing you can do is get in their shoes. Instead of wondering how you should negotiate, instead ask yourself: “How do VCs negotiate?” If you know an investor in your network, try to have an informal discussion with them and ask how they prepare on a meeting day.
“If you dream of speaking to that one favorite investor, don’t speak to them first,” says zu Fürstenberg. “Warm yourself up by speaking to other folks who you think could be interesting but aren’t super top-of-mind, and just try to get used to the questions asked. Sometimes they’ll poke holes in your business plan or unit economics, but that will make you better prepared to answer them next time.”
What do investors continually hear from founders that annoys them?
As Lapinski warns, you need to be well-researched before meeting with investors. “The investor is not a customer — they don’t want to buy your product — they care about investing at a certain share price,” he says.” That’s why the first thing you should do is transform your customer pitch into an investor pitch.” Here’s a grab bag of what not to say:
- “My idea is unique, I just don’t have an USP quite yet!” Well… is it really unique then?
- “Please sign this NDA. It’s important to keep my idea a secret!” Are you really sure you’re the only one who thought of that?
- “I need a six-figure salary.” For investors, research, product development, and expansion are worth more than your jet-setting lifestyle.
- “I haven’t looked into my exit strategy yet…” You need to be ambitions from day one, and establish confidence that your startup is going somewhere.
Summary
Feeling overwhelmed? Don’t worry, that’s totally normal! Learning how to fundraise takes time and practice, but with these tips and tricks, you should be able to get a bit of a head-start. If you’re looking for mentorship in your startup journey, consider joining TOA Pre-Seed Founders Klub. Through cohort-based learning, expert insights, and a supportive community, our programs can help you level up — apply today!
Disclaimer: This blog post has been constructed solely for informational purposes. It should not be relied upon as for any startup-related building or investment decisions.
