Wondering if your company is OKR ready?
How To Prepare Your Startup For Getting An Investment
When a startup has several teams, products, business models, and a few clients, it is ready for financing. It is not difficult to obtain the initial funding, with the market flooded with accelerators, grants, and startup money. However, there are certain aspects that need to be considered while preparing your startup for investment. Let’s look at them below!
The team – are there all the right ingredients?
A solid team is the most essential for creating a successful business. Your product may change, the market may change, and a pandemic may unexpectedly break out, forcing the team to change the direction of the project’s development – this is why making investment decisions at early-stage companies primarily depends on a strong founding team. An investor would want to meet the team members after getting a pitch deck to understand how they communicate about the product, explain the problem, and plan for the future.
They would want to know whether the team has experience and knowledge in a certain field if they have a network of connections in that sector if they have complementary competencies, any previous achievements, and accomplishments and if they have previously collaborated on other projects. Furthermore, the investors would frequently check to see if the team is creating the product internally or has outsourced it. Having an in-house tech team always gives you an advantage. Still, in the early stages of development and with a restricted budget, entrepreneurs frequently choose to create their products with the assistance of a software company.
A wonderful option for a business looking for funding is to form partnerships with industry experts listed as advisers in the pitch deck. A person from the industry participating in the project from the beginning validates its worth and generates investor trust. Furthermore, a high-ranking individual who initially believed in your proposal might assist you in unlocking the right door later.
You may always combine different tactics to determine what works best for you. Investors want to know that you have the greatest team to execute your company concept—after all, they’re investing in you and your idea, but a great idea is worthless unless a fantastic team supports it.
The traction – is my startup ready? Is it the right moment?
Is your company concept attractive enough to entice venture capitalists? You must determine whether you fit into your market and how you may expand in this sector. Investors want to know if your firm has customers, opinions, references, is doing pilots or demos, or has any strategic collaborations, publications, awards, or other accomplishments. They want to see that the founders proved their idea in the market, undertook specialized research, and so have tests, views, and references. In the beginning, raising a little amount of money from friends and family is a good idea to meet critical milestones that will make your business more appealing to venture companies. The capacity to forecast a sustainable growth path minimizes risk and increases confidence in businesses.
Furthermore, before you begin, you must ask yourself the following questions: Is this the perfect moment for you and your firm to raise capital? What stage of funding is your firm in? It will significantly impact the profile of your next contacts and the sort of fundraising you will pursue. Is this a seed stage? Is this your first fundraising (seed), or have you previously had someone spend modest amounts of money on your business?
Prior Investment – Is having money before a good argument for the VC?
As previously said, gathering a modest amount of money from friends and family is feasible, which may be a good place to start. The fact that there was a previous investment (particularly at the pre-seed stage) is a good indicator since VC funders may form conclusions about the business based on the current investor’s expertise and evaluate how well the founders handled the initial funding. In actuality, it is common for a private investor to be unfamiliar with the VC standard and propose investment terms that will eventually be unacceptable to the funds (for example, they will take too many shares), so keep this in mind. The first investment should provide room for future rounds by not exceeding the cap table.
More significant than how much money you earned in the pre-seed round is how you spent it and what milestones you met. Those are the justifications that will help you raise another round.
Financial valuation and model – what is the valuation?
A well-constructed financial model indicates the amount of cash required to attain profitability (i.e., obtain the so-called break-even point). If the model indicates that the company will be unprofitable for more than 24 months (e.g., due to ongoing R&D, product development, or building coverage for the application – without charging users yet), divide the investment into several rounds and ask investors for funds that will last for the next 12-24 months. A shorter-term is not suggested since you will have to re-engage in locating an investor practically quickly. It is also not advised to raise too much money since they will dilute your shares at a lower price than the valuation in two years.
Assume that the monies collected from investors will raise the worth of your firm till the next round of funding.
At this stage, it is critical to create expectations for the company’s worth. Investors typically inquire, even on the first meeting, how much funding the firm requires and the recommended valuation. The founders frequently state how many percent of the company they are willing to give in exchange for the cash they have raised, not always realizing that this implies the company’s valuation.
It may be beneficial to identify your major rivals and acquire information about them, such as the amount of cash they have raised, revenue, pre-and post-money valuations, financing history, transaction multiples, or series.
Ideal investors – how to select the best investors and approach them?
Once you have compelling arguments for raising the round, a well-thought-out financial model, and an investment offer, you are ready to start looking for investors.
You should avoid submitting your pitch deck to every fund on the market since this is one of the most typical mistakes by fundraising businesses. Because of the send-them-all strategy, you’ll get a lot of bounces straight away, and it’s tempting to take it personally or start feeling something is wrong with the firm. You should know that different VCs have distinct profiles and investment criteria, so double-check before contacting them.
Always look for venture capital companies that best fit your business and your transaction. The more closely your business and you (as the entrepreneur) are aligned with the needs of the venture firm, the more likely you’ll find a VC fund eager to give you a check. Please make a list of possible investors and prioritize it.
After you’ve identified the people most likely to invest in your company, you can start developing the contacts you’ll need to deliver your startup pitch deck. Also, if your list includes crucial prospects you don’t already know, go out to your existing contacts to see if any of them can make an introduction. Use LinkedIn and other social networking sites for professional networking; it’s even better if the fund discovers the business via its investigation. Please read their background and come prepared with strategic questions and thoughts.
Another thing you might do is contact the fund’s portfolio firms. When you ask for smart money, investors will tell you how they can help you apart from the investment. When you truly want to know how they can assist, try to chat with entrepreneurs from their portfolios.
The pitch – how to pitch your startup through a perfect story?
Raising venture funding is simpler with a polished pitch deck, so make an effort. The pitch of a startup should be viewed as the ultimate communication plan, with a clear idea of the problem the company hopes to solve, how they plan to solve it, who will be working on it, what the technological advantage of the solution is, who the main competitors are, how they want to make money, and what their go-to-market strategy is.
Pitching to investors is an ongoing process; you must always enhance your proposal, for example, when new queries occur. Furthermore, when speaking with different funds, you will see that they all ask identical questions, and you will have to repeat yourself several times. Compiling all of the questions into a single location is worthwhile by developing a FAQ – commonly asked questions list. This might be a highly useful document that saves you time and impresses investors.
You should also create due diligence documentation as soon as feasible. We frequently request financial documentation from projects, such as profit and loss accounts, cash flow estimates, a cap table, a product roadmap, planned R&D activities, and a full competitor comparison. Potential financial records tell your investors how you handle money, how you want to build your firm, what your milestones are, and so on. Working with a strategic startup accounting specialist to get your records in order (before investors start looking) might also be a smart option.
The vision – where do you want to go?
When planning the financing round, keep the project’s long-term vision in mind. Consider how you want to build a billion-dollar business. What are the steps to get there, why now, how big is the market you’re addressing, how much of this market do you plan to bite, how do you want to grow and scale outside your country, and what steps will get you there, who is your competition, and how do you want to build a long-term competitive advantage?
These suggestions will help you prepare better for the meeting with the investor and make the entire process more efficient. It is also recommended that you speak to experienced entrepreneurs who have gone through this process to provide you with helpful advice. For more assistance regarding growing your startup, reach out to us today!