We are going to touch on the basics of what you need to increase the likelihood of a successful fundraising round. Keep in mind that you are competing against every other investment opportunity that comes across an investor’s desk. Investors are tight on time and resources, so we want to eliminate reasons for them to say no to investing in your company. Also, be aware that members of the investment community keep tight circles and speak with each other. A bad impression or lack of preparation can have a ripple effect, so you need to come to the meeting prepared to put your best foot forward.
IS YOUR COMPANY ATTRACTIVE?
Remember that investors are looking for opportunities that yield exponential financial returns with minimal costs and resources. So, it is your job to present your company as an attractive opportunity for investors. Below is a list of areas that you will need to flesh out to help attract investors.
- Exit opportunities (i.e. merger, acquisition, IPO, etc.)
- Proven business model (proof of market success)
- Strong management team (expertise in the business, product, and/or industry)
- Scalability/growth potential (how big can the company and product/service verticals get?)
- Size of market (amount of money spent in this area now and for future projections)
- Competition (the competitors, their offerings, your competitive advantage)
- Development stage of product/service (private beta, minimum viable product (MVP), etc.)
- Company costs (expenses of the business: overhead, customer acquisition, etc.)
BASIC STARTER PACKAGE
There are a few basic items that investors expect at the minimum when looking at companies. Without these items, it may seem like you are not ready to fundraise in the minds of investors. They may deem that it will be too costly to get you up to speed, and the cost and time it would take to get you up to speed is not worth their investment. You should have the following items prepared prior to your pitch meeting:
- Solid email introduction. Read this guide to learn more about email intros.
- Executive summary (compressed 1-page business plan). Check out this guide for drafting your executive summary.
- Pitch deck (brief slideshow presentation of the business plan). Here is a primer on building your pitch deck. Caution! be sure to follow these rules for investor pitch decks to comply with securities laws.
- Financial model (overview of company revenue, expenses, and future projections). Read this to learn more about startup economics.
- Deal room (organized digital central location of signed copies of company documents). Here is a guide to building your deal room.
- Referenceable clients or customers who have paid for your product/service and can take calls from investors to speak positively and intelligently on their experience with the company and the product/service.
INVESTOR EXPECTATIONS IN THE EARLY STAGES
As you would imagine, investor expectations of a company looking for pre-seed funding are drastically different from investor expectations of a company looking for series A funding. Below, we will discuss a few initial funding rounds, broad investor expectations, and the type of investor looking to invest in the given round.
In the pre-seed stage, you generally have a basic model of your product/service ready to offer to the market. You have a solidified sales strategy, and you are beginning to implement it. Prior to this point, most of your resources have been focused on developing the product/service. Thus, you have not generated much, if any, revenue. Now that the basic model of your product/service is complete, you likely need funding to pay for the necessary resources for a sale of the product/service, such as a sales team, product/service maintenance, customer servicing, and overhead. At this stage, investors are focusing on growth potential and hoping that the sales strategy and market opportunity can be validated so that revenue generating can begin. Here is a list of items to have before reaching out for funding.
- Validated value of the total addressable market
- Identified target market and plan of action to service target market
- Sales strategy
- Understanding of internal company expenses (customer acquisition costs, operation costs, etc.)
- Articulable vision as to how product will transform industry
- Plans to scale
- Updated financial model
- Product in beta or MVP stage and ready for sale to customers
PRE-SEED FUNDING INVESTORS
The type of investors who participate in pre-seed financings generally fall into the following categories:
- Friends and family
- Angel investors
- Early-stage focused VCs
In the seed stage, the stakes are higher and the expectations are more intense. At this point, you have already tested the market and generated revenue for the company. The test-drive is over and now it is time to really begin to ramp up production. You likely have already established a sales team, have some strategic partnerships, and are generating revenue somewhat consistently. You may have outgrown the basic model of your product/service and are looking to evolve the offering, or you may still be working through feedback that customers have provided to improve the basic model. Either way, you have a product that has been selling. You probably are looking to add a few key pieces to your management and a few new partners to further make your product/service a bigger market splash. Investors are now looking to determine whether your company can scale. To that end, they are much more critical of the company progress. Below is a list of items to have in place during this stage of funding.
- Revenue generation
- Proven sales model with revenue metrics and key performance indicators
- Strategic commercial distribution partnerships
- Proven scalability
- Updated financial model
- Understanding of current and future company expenses
- Solidified version of your product in the market
- Development or completion of a plan to address any IP, regulatory, or other legal concerns
- Referenceable customers that are reputable enough to speak to investors about the superiority of your product/service
SEED FUNDING INVESTORS
The type of investors who participate in seed financings generally fall into the following categories:
- Angel investors
- Early-stage focused VCs
- Corporate strategic investors
For the next funding stages, unsurprisingly, investor demands are even greater. Investors want to understand that you have refined and mastered your sales model and that there is still growth possibility in the company and industry. The proof of scalability will be much more demanding because investors will ask to serve on the company’s board, add key members to the company on the C-suite level, and more closely manage strategic areas of growth within the company, such as sales. Investors will likely be much more inclined to make important introductions on the company’s behalf to help with the growth process as the company and investors come closer to exit. Due diligence in the later rounds becomes much more meticulous, and there will likely be greater oversight and reporting to investors to ensure the company is on an upward trajectory that matches the expectations of investors’ desires for exponential return on their investment. Below is a broad list of items investors would be expecting to see.
- Identified exit opportunities
- Market validated competitive advantage
- Growing market and industry dominance
- Propriety relationships
- Completely addressed legal and operational hurdles
- Validated and continued scalability
- Validated customer value
- Validated operations with minimal expenses
- Updated financial model and key performance indicators
As you can see, there is a lot that goes into company preparation before funds can be raised. Make sure you have the items mentioned above in place to put your company in the best position to be funded. Remember, you are competing against every deal that comes across an investor’s desk. Let’s impress investors from the start!
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