Fundraising 101 – Strategy
Finding funding is typically one of the most challenging parts of starting a new business. The startup world is competitive and saturated, so a great idea and a perfect pitch simply won’t be enough to get your company off the ground. You need a fantastic idea that is unique in your specific industry, and a business and marketing plan to execute it. It’s also about gathering knowledge on fundraising mandates, how to raise capital, and how to find eligible investors. It’s essential to understand that there is a strategy behind the fundraising.
Raising is a numbers game
Your company won’t be a fit for everybody, and it’s important to accept this. Many founders don’t see this and instead lose confidence in the earliest parts of the process. It’s important not to take every rejection to heart; you might not be right for one investor’s portfolio but could fit perfectly into another’s.
In essence, raising money is a sale – and selling requires appropriate persistence, with the correct investors and follow up.
Successfully raising capital is a result of strategic positioning, targeting, mandates, and timing. It’s why having business leadership experience is critical. Without a capable and dynamic management team, the best science or technology in the world will not be enough to convince the right investors to go ahead.
Institutional investors are more likely to invest in companies with management teams who have prior success and know how to bring a reasonable rate of return within a reasonable and defined timeframe. If raising capital is the next goal for your company’s growth, then you need to accept that you might need a CEO or CFO to effectively communicate your value proposition. To be successful in raising institutional capital requires a professional strategy.
Smart founders have a strategy for their fundraising and will build a plan which they execute with discipline. They know who their targets are, which investors best suit their company and vision, and they make sure that they have enough names in their pipeline.
When to start fundraising & why timing is so important
There are many misconceptions about raising capital, and one of the most common is around the length of time it takes to complete a funding round. It is very often underestimated and therefore miscalculated in terms of resources and commitment. Unfortunately, it is very rare for a startup to land the first investor they come across after going to market.
The capital-raising process typically takes much longer than anticipated, so entrepreneurs need to plan for this. Investors want to see dedication and probability of success. Forming relationships with potential investors and players in the industry is key before you start any fundraising attempts. This allows you to build up positive associations and a demonstrated track record over time.
Ideally, you should begin to develop funding relationships when you start developing your business idea, so that they can grow together. Based on your company stage, you might have a good sense of what kind of investment to seek. But finding potential investors might still seem impossible. By adopting the strategy of building relationships with investors before you start preparing for a fundraising round, you can consciously create connections from the early stages of your startup growth. You will have to create a list of possible relevant investors, figure out how to get their attention, and then learn how to nurture these connections over time.
Timing is important when it comes to fundraising. Consider the state of the market, the economy, and your own company’s growth trajectory. You may want to avoid fundraising during times of economic uncertainty or when your company is experiencing a lull in growth. Conversely, a good time to fundraise is when you’ve recently achieved a major milestone, such as securing a large customer or launching a new product.
Before you begin fundraising, make sure you do the following:
- Establish what stage your company is at. Funding rounds or stages are broken down into different categories. Although these categories are constantly changing as the industry evolves, they are generally classified as pre-seed, seed, growth (series A onwards) and IPO. This is where institutional investor mandates come into play.
- Create a pitch deck. Your pitch deck should showcase your business, explain your unique value proposition, and highlight why investors should back your company. Keep it concise and visually appealing.
- Identify your target investors. Research and identify investors who are interested in your industry and stage of development. This will improve your chances of securing funding.
- Build relationships. Reach out to potential investors and start building relationships. Attend networking events and leverage your personal and professional networks.
- Create a data room. A data room is a secure online location where you can share confidential information with potential investors. It can include financial statements, projections, and any other relevant documents. It’s vital that data is up to date, well-presented, and covers all possible due diligence elements that potential investors will want to see when they consider your company for investment.
- Get legal advice: It’s important to have a lawyer review your legal documents and provide guidance throughout the fundraising process. This ensures that you’re complying with relevant laws and regulations. A lawyer can help you draft your term sheet, review your subscription agreement, and advise you on other legal issues related to fundraising. These can be expensive, so you may need to allocate a few thousand pounds for legal fees.
Ultimately, fundraising comes down to networking. If you’re beginning to strategise on how to acquire investors, make sure that you know your industry. When you meet the right people, you open doors to funding possibilities. Network with people in your industry, even if you think you’re underqualified. You may or may not find investors in this way, but you will certainly gain knowledge from fellow startups or business veterans.
Attending startup up events within your community or sector is crucial. There are VC/startup events around the world, such as FinTech week in London and WebSummit in Lisbon. Try to create relationships that may benefit you in the future – you never know when or where you might find investors.
As all founders who have been through a funding round or few know, resource management is vital. You need to be able to simultaneously run a growing business and team while also developing investor relationships and securing funding.
One of the keys to striking that balance is whittling down what can be an incredibly extensive list of investors who are currently seeking investment opportunities. There are numerous extensive lists on the internet or available to founders through publications and networks, but these lists can be lengthy and be a time trap. In our next instalment of Funding 101 (coming soon), you’ll learn more about dicing and slicing prospective investor lists to ensure you are focussing on the right relationships at the right time for your business and your funding needs.
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