Start-up Fundraising, Part 1: Preparing for Fundraising
Fundraising is hard: After years of working on investment transactions with entrepreneurs and high-growth companies, I find too many entrepreneurs who think fundraising is simple. This outlook ignores the preparation required to convince an investor to contribute capital to your business venture. While Shark Tank makes raising capital look quick and easy, the real process is time consuming and extremely competitive.
If you’re starting a high-growth business or considering raising money for your start-up, use the following steps to be fully prepared.
Determine your fundraising goal
I always ask entrepreneurs why they want to raise money. Unfortunately, many reasons will not resonate with investors: cash to pay expenses, salaries, and debt are not valid reasons to raise money. No investor wants to fund your cash burn or individual salary.
Instead, tie your cash needs to a business objective. Whether it’s producing a working prototype, completing a clinical trial, or executing a go-to-market strategy, consider your business trajectory and pin your immediate cash ask to measurable and achievable milestones. As your business grows into a viable company, future cash needs may center on product expansion or sales investments. Give investors a compelling story for the investment.
Create and refine your financial model
After establishing the fundraising goal, some entrepreneurs will immediately contact potential investors and work on the pitch deck. However, without an up-to-date financial model, investors won’t understand key aspects of your fundraising ask, such as the amount needed, the fundraising timeline, and, most importantly, whether the business has enough cash to get through a fundraising event.
Previously, I covered some of the errors that start-ups make in their financial models. While it is important to avoid those mistakes, the key to fundraising success is simple: have a working financial model clearly translate the compelling commercial thesis of the business into a viable and attractive financial investment opportunity. For early-stage companies, investors typically invest in the founder and the idea. As you work with your fractional CFO or finance consultant, be sure your financial model does not contradict that idea.
Finalize your timeline
Once the fundraising goal and financial model are clear, focus on the timeline. This timeline encompasses how long the money will last and when the fundraising is finished. For most start-ups, raise enough money to last 12 to 24 months. While that may seem short, keep in mind investors expect a certain return on their investment and have a duty to their stakeholders. Offering three to five years’ worth of cash could impact their return and alter the financial discipline of the company receiving it. Concurrently, too much cash could result in a highly dilutive funding round, especially early in the process.
The fundraising process can last six to 12 months for the Series A round of funding, while a pre-seed round with friends and family could take only two months. Regardless, entrepreneurs should understand fundraising is a full-time job. Treating it this way will ensure the round stays focused and does not drag out longer than needed.
The classic entrepreneur dilemma is a focus on fundraising leading to declining business results. This, of course, makes it more difficult to raise money on good terms. The best solution is to be deliberate with your timeline and ensure you have the time and team (or co-founder) to handle the business while you take care of the fundraising.
Calibrate your approach with funding sources
While founders have more funding options than ever, competition has never been higher. Only a fraction of start-ups will receive funding, so be ready to accept capital from any source, assuming the terms are palatable. At this stage of fundraising preparation, clarify the type of investors you desire for yourself and your founding team.
For seed or pre-seed rounds, it is likely only angel investors or friends and family will be willing to participate. When headed toward a Series A, though, having a choice between angels and venture capital (VC) firms is more probable. At that point, consider several factors, including (but not limited to) differences with the due diligence process, the return expectation, expectations on exit timing, board involvement, and the non-financial value that the investor can provide. Overlooking any of those factors could leave you in a situation where you receive investment, but subject to terms or a timeline that may stunt growth or harm future fundraising prospects.
Research potential investors
Over the last few years, the ability to research and find potential investors, both angels and VCs, has increased significantly. Websites like Crunchbase and Pitchbook, or even organizations like Angel Capital Association, take much of the guesswork out of finding investors. The amount of available information regarding potential investors can be overwhelming to first-time founders. As you approach this research, consider and document the investor’s investment strategy, their previous investments (i.e., whether they have invested in similar companies or industries to yours), and their process for contacting and pitching them.
Refine your pitch deck and narrative
Use the research and apply it to your pitch deck and narrative. This does not mean changing your story to fit an investor’s strategy, though some investors are specific about the format and type of information they want to receive. Ignoring simple instructions is a good way to get dismissed fairly quickly. Outside of investor preferences, try to keep your pitch deck and overall narrative focused on the following:
- The problem— The world you’re addressing has a problem and it is a big enough problem to matter. It also helps to add how you know about this problem and why the investor should believe you.
- The solution— What is your solution to the problem, and how will you execute that solution?
- Urgency — Why is it the right time for that solution?
- Progress — How are you tracking on verifying the problem and executing the solution?
- Team — Many angel investors and VCs invest in the founder and the team ahead of anything else.
Make first contact to potential investors
After the above steps are complete and you finalize the list of investors for initial outreach, you are ready to begin contacting potential investors. The steps that occur after you contact a potential investor are as variable as the investor community. However, by focusing on fundraising preparation, you will be ahead of the crowd vying for investment.
How we can help
In a time when there are more high-growth start-ups and investment dollars available than ever, it is important to have a support team of lawyers and financial professionals who have experience with high-growth companies and the fundraising process. CLA’s consulting CFOs will work directly with you to understand your business and support you through the fundraising process. Whether you need help preparing the financial model, communicating with investors and potential investors, or establishing the accounting and finance infrastructure after funding, CLA professionals have the experience needed to assist in capitalizing on long-term growth opportunities for entrepreneurial companies.