May 14, 2013 | 7-minute read (1402 words)
Originally published on VentureBeat.
The pursuit of funding can start to feel like the startup journey itself—an endless cycle of pitching, relationship building, research, analysis, and proving your business model. If you take a smart approach to the process, however, the exhausting process can be a lot more fruitful.
The key is to frame the funding process as an intensive business development effort: tapping into your ecosystem, staying up to speed on industry happenings, being an advocate for your business model, and doing everything you can to build relationships. Just as business development is about more than drumming up new business by attending a conference here and there and handing out some business cards, the pursuit of funding is equally complex. To succeed you need to be informed, focused, organized, and motivated—with a steady gaze to the long term.
Regardless of the level of funding you are seeking, follow these steps to “biz dev” your funding process:
1. Determine your funding round
First, figure out what size round you need to help determine if you will go after friends and family, bank loans, angel investors, venture capitalists, or private equity shops. Develop your finance roadmap by calculating how much investment you will need to achieve each milestone and then targeting a range of investment rounds. Your financial plan should include a bottom-up projection for cash flow, high-level income statement, and balance sheet.
Don’t stick with the most optimistic plan; play around with your assumptions for different outcomes based on different inputs. And take your desired rate of growth into consideration: If you want to accelerate growth, you’ll need a larger investment. As any entrepreneur knows, you will almost always wind up spending more money than you initially thought you would. So make sure you plan for enough funds to take you at least six to 12 months beyond your current milestone.
2. Choose your business financing type
There are two kinds of business financing: debt and equity. Determine which is the best option based on your current situation and future business goals.
3. Build your value proposition
- Debt financing: If you’re looking for cash for the short term, debt financing may be your best bet. In this scenario, you borrow money and agree to pay it back, with interest, within a given time frame. Debt could be traditional debt, typically tied to an AR line of credit, inventory, or, if it’s a working capital line of credit, to revenue and profit. Or debt may be venture debt—though that more typically comes after you have already raised some venture capital.
- Equity financing: Equity financing is more of a long-term strategy. For equity financing, you sell a part of your company for cash. If your company succeeds, your investor gets a nice return on their investment (much greater than an interest rate would return). If your company fails, the investment is lost. The question is, how much of your company are you willing to trade-in for a cash infusion? Instead of having to pay money back for loan repayments, you can use the extra cash to invest back into your business for accelerated growth.
This is much more than just a biz dev to-do, of course. But, when the time comes to seek funding, you better make sure there is some market problem/pain-point that is crying out for your solution. If you can’t convince an investor that you can solve a problem, how are you going to convince potential customers?
4. Time it right
You can try to fight the market, but you’re going to lose every time. Understanding where the market is in its life cycle will help you figure out how to time your pitch. Admittedly, there is no magical formula for timing your product/concept; there’s a large element of luck (and instinct) at work. But there are actions you can take to improve your timing.
5. Find your fit
- Stay on top of your industry. From this vantage point, you’ll be better positioned to ride the trends. With endless access to social media, there’s no excuse for not being up-to-date. In other words, don’t try to pitch your new big data concept to a VC if the bubble just burst on this sector.
- Calculate and manage TTM (time to market). Even if you can’t control the overall market, you can control your TTM by establishing product development processes. With improved time to market, you’ll be better positioned to take advantage of market opportunities and you’ll earn greater revenue over the product life cycle. Investors will also place more confidence in your company if you demonstrate your awareness of TTM.
Investment firms tend to have a clear focus, either on a given industry, sector, or company stage. When you pitch to a firm with experience in your niche, you don’t need to waste time on education; instead, you can focus on selling, highlighting your business model, and competitive advantage within your industry.
6. Do your due diligence
You want to do your due diligence on your own company to make sure your business is in order. But you also need to do your due diligence on potential investors, prior to reaching out to them. Attend “Meet the VC” events and work your network for insider information about potential investors. What kind of deals is your investor in the market for? What is their funding timeline? What types of companies do they have in their portfolio? How will your company add value to their business? When you know the answers to these questions, it’s time to make contact.
7. Target key players
If you have chosen to go the route of VC or angel investors, identify your key targets. Read VC blogs and follow key targets on Twitter; also check out which boards and panels potential VCs sit on. Based on their blogs and where they are active, you can find out key information: Who are they? What makes them tick? Business is people and investments are about more than money.
8. Tap into the ecosystem
It’s not enough to get a good banker or lawyer or accountant or insurance broker on board. You need to pick service providers who will do more than provide a service. Think of service providers as professional partners.
For example, if your sector is clean tech, are there specific lawyers with a list of clean tech clients? Funded clean tech clients? If so, they can help provide more than legal support. Anyone you work with or who works for you should live and breathe within your ecosystem—and if they have key connections to VCs and angel investors, all the better!
9. Work your network
Business development is all about connections. Work your existing network and continually seek out ways to expand it. Identify key connectors within your community. Reach out to other CEOs and executives at companies that have already been funded. Then ask for introductions.
The last step to getting funded is also the first: Persistence. We’ve all heard the myth of the startup that laid the golden egg, but getting funded requires more than luck. It requires research, hard work, and tenacity. Rinse, repeat.
Business development is a way to step outside of your business to further it. So too is the pursuit of funding.
Are you having trouble raising funds—or have a great tip for fundraising that worked for you? Tell us about it in comments below or contact Early Growth Financial Services.
David Ehrenberg is the founder and CEO of Early Growth Financial Services, a financial services firm providing a complete suite of financial and accounting services to companies at every stage of the development process. He's a financial expert and startup mentor, whose passion is helping businesses focus on what they do best. Follow David @EarlyGrowthFS.
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