The Four Pillars Of Startup Fundraising
Seeking investment capital for a startup can be a difficult task—especially for first-time founders. Asking seasoned investment professionals to believe in your product and trust your business plan can feel like busking for loose change in a subway station outside Carnegie Hall. But there are four foundational steps that will make the fundraising quest easier.
Your business or product idea doesn’t have to be the greatest business idea in the history of the world, but it has to stand out more than tweaking the latest pop culture trend. A niche version of Spotify for stay-at-home dads isn’t likely to get much investment attention, but a streamlined interface or delivery mechanism that improves significantly on an existing app might.
As a founder, it is incumbent on you to clearly define what your product is and what makes it different from others in the same space. Does it solve a unique problem? Is it a revolutionary new concept or invention?
Your business model must answer three questions:
• Why do customers engage with your product?MORE FROMFORBES ADVISOR
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• How does your company monetize this customer engagement?
• What is your company’s competitive advantage?
Once you can define these core components, it’s time to look at your business’s path to profitability.
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Business strategy answers the “How?” of a business. It includes concrete goals, detailed steps and an outline of everything from service delivery to sales strategy and staffing.
The central component of your strategy is the company’s business plan. This plan addresses everything from the macro environment in which your business will be competing to the specific sales channels you will pursue.
Serious investors will expect your business plan to contain detailed financials. Pie-in-the-sky forecasts showing exponential growth to world domination in 18 months are not likely to be given much credence, so it is important to be realistic and show a range of potential forecasts ranging from best- to worst-case scenario. These forecasts must be based on hard data and explainable scenarios.
Finally, your business plan should include an objective analysis of your strengths, weaknesses, opportunities and threats (also called a SWOT analysis) that details your firm’s position in the marketplace.
Beyond the business plan, founders should also make it clear they understand how much money they’re asking for and what that means relative to the estimated business value, equity positions and burn rate. Is this funding round focused on growth, or is there an expectation that it will lead the company to profitability? Investors want an understanding of how long it will take and how much it could potentially cost to reach profitability.
Before investing, private equity firms must have faith that the management team can carry out their plans as described in the business plan. While seasoned founders can cite previous successful ventures, it can be a taller order for first-time entrepreneurs to sell this aspect of their business goals. For this reason, first-time founders may have to delay fundraising on their ventures until later in their own business life cycle. This is why first-time founders frequently use friend and family or angel rounds to get their businesses off the ground. First-timers can show their management effectiveness by effectively navigating the turbulent waters of getting the business off the ground on a shoestring budget.
Beyond prior successes, management teams can also instill confidence in their approach by establishing operational excellence in their firms. Clearly documented processes and procedures that interlink software systems from customer relationship platforms to point-of-sale systems to accounting and project management tools enable management teams to capture and use data to drive their businesses more efficiently.
Establishing an operationally excellent company shows potential investors that the management team not only has expertise in its industry and domain, but also in how to efficiently run their organization, which leads to the final pillar of startup fundraising: stability
On the surface, the words stability and startup may sound as dissimilar as chalk and cheese, but if investors were interested in playing games of chance, they might end up with better returns at the roulette table.
Private placements contain an element of risk, which is why investors seek a premium for their investments. However, unlike in a game of roulette, there are steps investors can take to attempt to mitigate their risk exposure. While venture capital investors may have a larger appetite for a handful of moonshot projects in their portfolio based on the novelty of the idea and/or the strength of the management team, no investor wants to put their money in something as volatile as a casino game.
Investors will look for the management team to minimize volatility and operate at a thoughtful and planned pace. The pace can be fast, but it should not be reckless. Some projects require significant capital spend and resources, but even the most expensive projects can operate under a budget.
Firms with a broad portfolio of companies may take on a small percentage of more volatile companies, but for the most part, their bread and butter will be companies with steady and predictable cash flows or burn rates. And to help provide insight and control over some of that volatility, most investors will require a seat on the board of the company in which they invested. And they will expect a regular view into the company’s performance and spend for the life of their investment.
Most investors would tell you that private equity investment is a mix of art and science. Otherwise, they would just invest in a diversified mutual fund of publicly traded securities. While different firms invest in different industries, business stages or geographies, these basic four pillars will hold true across them all. While their adoption won’t guarantee private equity investment, if any of the four is missing, it is unlikely your business will be funded.
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