What an entrepreneur should know when raising funds
By James Martin
January 5th, 2019
Raising funds for your startup?
The reality could be hard to accept for a young entrepreneur building his first business: it is today almost impossible to raise a large amount of money, based only on an idea.
The reality is that many startups that achieve tens or hundreds of thousands of dollars in sales still struggle to raise funds. An investor will always find the best reason to… not invest in your company!
Whether you are in the launch phase or during the development of your business, what will interest your potential investor is none other than your earnings.
Many business angels also choose to only fund projects that are already launched and have proven some success in terms of turnover.
This is why your economic model will have to be well designed. If you have no initial funding, be sure to knock on the doors in the right order.
Progressive funding should therefore be considered regardless of the relevance of your project. Be sure to evaluate the expected funding that corresponds to the development phase of your project. To raise funds, you have to estimate how much you need. Today, the relation between entrepreneur and investor is more focused on a deep partnership. Investors are more and more involved in the projects in which they engage.
Define which kind of early-stage investor you need
Fundraising is a complex process that takes a lot of time (6 months in average). It is therefore important to choose your investors so that they become real partners that contribute to your development.
In addition to providing funds, investors often offer support, expertise and open their address book.
Some questions to ask yourself:
- Are you looking for a business angel or an investor involved in the business?
- Do you prefer to have on your board an investor who monitors what’s going on?
- Or would you prefer to have an investor that stays away from management and decisions?
Your “ideal investor” also depends on the stage of development of your company. A good practice is to go through an intermediary or use a fundraiser. Each has its specialties and guarantees somewhere the seriousness and involvement of the future investor, while saving you a lot of time searching for investors.
A fundraiser is an intermediary who will search for investors that would be interested to support your project; they are generally remunerated on a fixed basis but also on a % of the amount raised (between 5 to 15%).
When searching for early stage investment, startup founders can also use a crowdfunding platform (such as Republic.co or Seedr).
How to convince investors that they should invest in your company?
Everything goes through a "pitch" and an effective business plan that shows where you come from, where you want to go, what you have done, what is the market and who are the competitors.
Sell a team, not a single entrepreneur:
Today, no one is funding a one man show. Venture capital relies on a team, never on the entrepreneur alone, an isolated founder has no chance of being financed.
A project that is likely to succeed is a project carried by several people. It is important that you enhance the merits of your team and its skills.
A single, isolated entrepreneur is unlikely to convince. It is therefore unlikely that we will decide to finance it. From the outset, there should be at least 3 to 4 people involved in the project who join their efforts and energy to bring it to success.
A team is therefore a guarantee of additional success for a project, regardless of its nature.
"PRE-MONEY" AND "POST-MONEY" VALUATION OF THE STARTUP
You will need to have clearly defined the valuation of your startup. More precisely, you will have defined the valuation of the start-up BEFORE (pre-money) the investment and AFTER (post-money) the investment.
There is not really a method to value a start-up because everything depends on the market, the technology, the team, the potential and what has been done.
Find the good investor:
- Love money: between $20,000 and $50,000
- Business Angels: between $50,000 and $500,000
- VC: if you plan to raise at least $1million.
How to succeed when pitching your startup to investors:
- Stay humble,
- Don’t oversell your business and your project
- Don’t artificially increase the numbers
There is no point trying to fool investors or embellish reality. They will notice it it won’t serve you!
How to make the best business plan and executive summary
Before starting the fundraising process, you must ensure that your business plan and executive summary are solid.
At First Minute Angels, our analysts will establish an internal report gathering all the information related to your project.
They will focus on:
- your team,
- customer references
- Technology stack
- Usage data
This analysis phase allows us to identify your strengths and weaknesses, as well as to highlight the risks of your project. We regularly give feedback to our users and help them improve their deck and business strategy.
What do business angels want?
It all depends on the people, the goal is often the same as the funds, except that it is their personal money. Does investing in an inexperienced young entrepreneur who has nothing more than an idea represent a minimal risk?
The entrepreneur must ask himself what he wants: to raise funds or develop his business?
Without a Business Angel in his entourage, an entrepreneur will spend most of his time looking for him, and will defocus from hi business.
Knowing that the chances of getting up are minimal, the entrepreneur will lose his time and not move forward. The next question will then be: where would it be if he had invested his time in his business rather than in fundraising?
He probably could have learned, developed his prototype himself, or found a co-founder (s) who would have completed the skills that he lacked.
Today there are plenty of free or low-cost solutions to develop a prototype, free training to learn all the skills needed to complete a project, and one thing that money can never buy: experience.
Experience creating a business, dealing with problems encountered and finding solutions. This is that experience that will also seduce investors.
Investors are looking to invest in value, not in an idea.