You’ve heard it before: when the majority of startups fail, it’s usually because of funding issues. There are many costs associated with starting a business, such as legal fees, permits and registration, and more. That doesn’t even include the costs for hiring or developing a product.
But acquiring funding is also getting easier as alternatives to traditional loans become more common in the startup space. With the right preparation and strategy, you can avoid being one of the 38% of startups that flop due to cash shortages. The key is knowing how to navigate the space and speak the language of investors.
To that end, we’ll explore some important aspects of startup fundraising etiquette and best practices, broken down into the three phases of the process.
The 3 phases of startup fundraising
Phase 1: Prep
You may not be expecting to cut yourself a proper salary for a couple of years, but you still need a certain amount of working capital to grow your customer base and product offerings. It’s difficult to get any business off the ground without funds for early-stage expenses. Let’s dive in with some preparatory steps you should take before you even approach investors.
The numbers
While there are several things that make a good startup fundraising pitch, you can’t rely on passion or vision alone to sell your business idea to funders. Investors are in it to make money, and you must be prepared to offer concrete evidence of how you can do that for them.
If you have already launched a product, you should come prepared with some metrics that show e-commerce success, such as:
- Revenue—is there evidence of linear growth since you went to market?
- Gross merchandise volume—what is the total value for orders over a given period?
- Customer acquisition cost—how much do you need to spend to get a new customer?
- Average order value—how much money does the average customer spend?
Depending on the stage of your business, you may not have all of this information. But you should still make an effort to quantify your progress thus far. At the very least, you should bring industry research to show how your product can serve a need and information about your customer pipeline; that is, who your target customers are and how you find, convert, and retain them.
If there are numbers you expect to be asked about that you don’t have yet, prepare in advance how you plan to respond. But if this is early-stage funding, funders should understand if you don’t have all the financials yet.
The story
According to recent statistics, about two-thirds of the population would struggle to dig up even $1,000 in an emergency. Unfortunately, telling prospective investors how much you need the money is not going to get you very far. In addition to coming prepared with hard numbers, you need to present to prospective funders what your company is about.
Not unlike a typical job interview, you want to supplement with soft skills to provide a well-rounded picture of who you are. This can include things like the particular skills and expertise of your team and any achievements to date, such as an initial product launch or professional partnerships formed. This is also where you want to lay out a clear vision for your company’s future.
This information should be presented in a concrete but engaging way. Consider laying out a timeline of your past few months’ milestones, and then the next one to two years of anticipated milestones. Be realistic and concise. Consider these pitch decks do’s and don’ts in formulating your story.
Practice, practice, practice
You want to show off how you stand out in a competitive market, and one of the best ways to do this is to present yourself as an expert in your industry. This means once you have a draft pitch deck, start practicing your presentation immediately. If multiple people will be presenting, do dry runs with the whole group so everyone is on the same page.
Familiarize yourself with what venture capitalists and other investors look for so you can present your information in their terms. Speaking the language of your audience is key to appearing professional, so research any finance terms you are unfamiliar with. Consider practicing your pitch to people involved in finance so you can get feedback about how you come off to investors.
Phase 2: Kickoff
Do your research
The first step to getting in contact with potential funders is deciding whom to approach. You should go about this in a methodical way, organizing contacts by characteristics such as geographic location and industry. Look at past companies they’ve funded and see whether your business seems like a good fit.
As you begin reaching out to investors, keep careful notes of points of contact and how receptive they seem to your inquiries.
Prioritize
Once you have a list of prospects, take some time to reflect on who your highest priorities are. Which investors do you identify most with? Which ones do you think seem most likely to work with you?
Keep in mind that different investors have different levels of risk tolerance, so the answers to these questions will somewhat depend on where you are in your business development process. Obviously, you want to present your company as a potential for financial gain, but all startup investments are a risk to some degree. If you are at an earlier stage, certain investors will be more likely to turn you down. Keep this in mind as you weigh your preferences against realistic potential.
Leverage your networks
You may have an easier time landing meetings with investors if you have an introduction from someone they trust. Hopefully, you’ve already been networking in the industry, and this may be the time to cash in on a favor. If you know someone who can act as a facilitator, it will make it easier than cold calling funders.
You can also consider incubators and other programs that introduce startups to prospective investors. Making introductions is a large part of the purpose of such programs, so incubators regularly maintain contact with the finance world.
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Phase 3: Closing
Strike a balance
If you’re fortunate enough to get some meetings and receive some positive feedback, how you handle yourself in those negotiations is important. Experts recognize that striking a balance between telling and asking is key. You should lead with some proposed terms of what you’re asking for, but it can help to propose a range and see how investors respond rather than offering one number.
If you have multiple prospects, feel free to mention this. It helps to show legitimacy and lets investors know that you are an investment they should jump on. But you don’t necessarily want to tell them which companies you’re talking to, and definitely don’t brag about it.
Do your research (again!)
If investors are serious about you, they will likely offer you a term sheet detailing their counteroffer. This is nonbinding, but it will lay out things like valuations of your company, how much they are willing to invest, specific terms, etc.
Take your time to understand each of the items in the term sheet, and don’t be afraid to ask for clarification if something is unclear. If you have a network in the industry, this is a good time to consult with them. You may know someone who has worked with the investor before or has already gone through the startup fundraising process. Also, do some research on the particular investors to make sure they are people you are willing to work with long term.
Don’t wait on logistics
Once you get an offer, you don’t want to wait too long to move. It’s not recommended to try to play investors off of each other or negotiate in real time. If you have issues with the terms, you can bring them up to the investor, but you don’t want to drag your feet or be too indecisive.
Do your best to prepare financial and legal documents in advance. You want to get that money in the bank as soon as possible, and investors need to be confident that you are a good investment. It’s in your best interest to get any paperwork squared away and signed as soon as possible.
Successful startup fundraising takes planning
We know startup fundraising can be daunting, but it’s really all about having a plan. Sticking to these tips when approaching funders will help you position your startup for financial success so you can make those future milestones a reality.
RELATED: 65 Questions Venture Capitalists Will Ask Startups
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