Raising any type of funding for a startup is hard. But trying to raise funding when you are first-time founders and have no experience of working with investors can be very intimidating.
Getting to the point where you are ready to raise money is an achievement in itself and demonstrates that you have competently managed the very early stages of developing a startup, which are, in themselves, fraught with danger. However, many first-time founders flounder when it comes to securing funding for their startup.
Absolute Essentials to Ensure Funding Success
Before looking to raise startup capital there are a number of essential ingredients that will facilitate your ambitions.
- Have a product – a slide deck with a great idea will not get you an invitation with investors no matter how good your deck colour scheme is!
- Demonstrate some user / client engagement – often referred to as ‘traction’ this is an indicator that you have achieved some success that you think external funding can help accelerate.
- Have a minimum, functional team – you are unlikely to be funded if you are the only person on the team. Secure a co-founder who has complimentary skills so you can demonstrate how you will develop the startup together in the next stage.
- Demonstrate resourcefulness – whether you have self-funded or sought a friends and family round prior to seeking professional investors, you need to be able to illustrate how effectively you have put initial funds to use in the startup.
Key Steps to Raising Startup Funding For First-Time Founders
Assuming you have the essentials covered, the process to ensure success in raising startup capital is pre-determined by a number of steps that you need to get right from the get-go.
1. Financial Model
Having a ‘fit-for-purpose’ financial model that shows the basic elements that explain how your startup works and what drives it is critical. This does not need to be a massive and complicated spreadsheet but does need to give an investor a clear idea that you have thought thoroughly about your startup. Assumptions leading to funding need, and assumptions for growth will give an investor an informed view not only of your startup, but also of the kind of founders they are dealing with. The Financial Model is an important tool to demonstrate to investors that you are credible (as first-time founders) and have prepared thoroughly before seeking funds.
2. Pitch Deck
The Pitch Deck is a brief presentation that needs to present the key facets of your startup succinctly. It is your opportunity to capture the attention and interest of investors but way too often, founders waste this opportunity and end up turning investors off. Prepared in the right way, the Pitch Deck can be a very powerful tool to engage investors and help you secure the funding you need.
3. Capitalisation Table
This is a technical document (spreadsheet) that you need to prepare to have visibility of value at your startup. It is best to start developing this from day one and update it so that you understand how value is building or being diminished as your startup evolves. Disappointingly founders ignore or neglect this discipline and end up making decisions for their startup, which are wrong and detrimental to their business.
4. Identifying the Right Investor
Raising startup capital is a strategic exercise as opposed to opportunistic. Do your preparation early on and you can avoid panic later on that results from an ill thought-out funding campaign. For first-time founders you need to use the deep knowledge of your own niche and startup in order to identify complimentary investors you think you will be able to engage.
5. Making the Approach
If you manage to get this far and have put in the effort to develop a consistent and packaged story, executing by getting the investor on-board with is your next step. However, shooting off cold-emails, which are not thought through, is the best way to waste time and turn off an investor, hence stalling your funding aspirations. Instead, you need to be resourceful and strategic in the way you approach an investor, and intentional in how you expect to stand out against the hundreds of other startups that are vying for their attention.
Pitching is all about building on the interest that has allowed you to have an audience with the investor in the first place. But lack of preparation and not knowing what to expect is often the thing that stifles efforts of many first-time founders. However, the right guidance and awareness can help build confidence and an understanding of what is required, and often this can be the difference between success and failure at this crucial stage.
Startup Funding Myths
First-time founders can be forgiven for having unreal expectations of a funding process based on what they may have seen or heard in the media. It is important to address some of these so you can approach the process with a fresh attitude.
- An idea is enough – you need to show some value you have created
- Raising funding before product or customer – give investors something tangible they can make a decision on
- Working on a detailed Business Plan – even though investors have varying approaches, spending lots of time and effort on a detailed Business Plan early on illuminates nothing and is of limited value
- Valuation matters – valuation is less relevant the earlier you are
- Investor money is a must – it is only relevant at the right time and from the right investor
- Requiring an Non-Disclosure Agreement (NDA) to be signed by investors – people don’t have the time and won’t do it
- I don’t need a team – investors won’t invest in a sole founder
- You want funding for an office or untested scale hiring – you are expected to test any growth costs in order to prevent the killer of startups; premature scaling
Although there are many potential obstacles that first-time founders will face when trying to raise funding for their startup, following some a step-by-step approach and preparing in the right way will ensure the difference between success and failure.
I know a lot of you will be starting your venture for the first time, leave a comment to let me know if you found this useful. Alternatively, if you’re startup has been through a fundraising process recently, leave a comment to let me know your experience.