Building a successful startup isn’t easy, and lack of funding is one of the primary reasons startups fail within the first few years. In fact, a survey by CBInsights of 101 startups found 29% failed due to running out of cash.
This article looks at what startup founders must do, and equally as important, what they must not do, to successfully raise the money needed to get their company off the ground.
Fundraising for Startups: Do’s
Do research potential investors before contacting them
Different types of investors have preferences when it comes to where they invest, such as industry, company size, level of involvement, etc. While a venture capitalist is more likely to invest in a business that is already established to reduce their risk of losing investments, an angel investor is usually willing to provide seed funds for smaller, less proven operations in the early stages.
Researching potential investors before contacting them ensures there is alignment, and ensures you’re not reaching out to an investor who has already invested in a direct competitor.
The best way to do this is to find other companies that they’ve invested in and talk to the startup founders. Remember, determining investor/entrepreneur fit is a two-way street. You could have a long-term business relationship with your chosen investor, so it’s important that they fit with your way of doing business.
Do have a solid business plan before going into a meeting
The success of your fundraising efforts — and therefore the success of your business — will depend heavily on how well you’re prepared for your investor meetings. Investors must believe in your vision almost as strongly as you do. They’re investing in you. It’s up to you to sell your vision, your company story, and your passion for seeing it thrive. Perfecting the pitch deck and getting potential investors emotionally hooked is the key to success, and that takes preparation.
Do get your books in order
Potential investors are going to want to see your books. Unfortunately, many startup founders fail to see the importance of well-maintained, up-to-date bookkeeping and leave preparing their financials for investors to the last minute. Rushing the preparation of your financials for investors leads to mistakes and inaccuracies.
If you struggle to find the time needed for accurate bookkeeping, it might be time to consider outsourcing your books to a professional bookkeeping firm that can manage your finances in a more reliable and efficient manner. Outsourced bookkeepers can also help prepare cash flow projections and other financial reports that potential investors might want to see.
Do know the best startup funding structure for you
Fundraising for startups comes in different formats. Understanding the pros and cons of each will ensure you choose the right type of startup funding for your company.
If you’re comfortable giving investors a stake in your company, equity is probably the best way to raise capital as there is no repayment required. This type of startup funding is particularly attractive to companies who do not anticipate turning a profit for quite some time. However, not all startup founders want to release equity.
If you’re unsure which is the best type of startup funding structure for your company’s goals, consider hiring a fractional controller to help you make these decisions. In addition, a fractional controller can prepare your company for an audit, generate financial statements, support with budgeting, forecasting, scenario planning and more.
Do know what you will be spending the seed funds on
Fundraising is an important step towards your final goal — spending money to build your business! In order to attract potential investors, you should be clear about how much money you need and create a budget outlining how you intend to spend the seed funds in the most efficient manner. You should section your proposed spending into specific categories such as marketing, product development and new hires that will help grow the business.
Fundraising for Startups: Don’ts
Don’t be slow to respond to due diligence requests
Your investors are going to have questions and will want to see specific documents. Anticipating as many of their requests as possible will not only prove you to be organized and prepared but it will also speed up the due diligence process.
Don’t expect the first investor you meet to give you their money
It would be nice if the first investor you met decided to invest! However, it’s very unlikely. Fundraising for startups is time-consuming and it can take months before you find an investor. Including due diligence, it can take anywhere from 3-6 months before you receive the funds. During this time, focus on building a long-term relationship of trust with your investor.
Don’t inflate your numbers
While it can be very tempting to overestimate your financial projections and growth targets to impress potential investors, you shouldn't. Investors will see through unrealistic projections and it will ultimately do more harm than good. You want to start your new relationship by being honest and transparent, presenting a realistic picture of your company's growth potential as well as the valuation of the business and the equity available.
Don’t get greedy
While it’s best practice to ensure that the amount of money you’re raising has a built-in cushion, it should be just that — a cushion. Ideally, you should raise as much money as you need to reach profitability.
Don’t wing it
As Benjamin Franklin famously said, “By failing to prepare, you are preparing to fail.” Without a solid roadmap of where your company is headed and a business plan showcasing how you’ll get there, investors are going to see you as unprepared and a risky investment. Every meeting with an investor is an opportunity to advance your company and should be taken seriously. The key to success is being prepared.
Finding an investor for your startup could be the difference between success and failure. Keeping informed of what to do, and what not to do, when fundraising for startups will increase your chances of finding the right investor for your company.
At Enkel, we’re experienced in helping startups prepare for fundraising by keeping accurate, investor-ready books. Contact us today to learn how we can help manage your books so that you’ll always be ready to raise your next round!