Posted by Early Growth
August 7, 2014 | 5-minute read (986 words)
This might be a hard pill to swallow, but less than 1% of entrepreneurs succeed in raising funding. Female founders fare even worse: with new research from HBS, MIT’s Sloan School, and Wharton quantifying “a profound and consistent gender gap in entrepreneurship.”
Want to know how to set yourself up to beat the odds? Angela Lee of 37 Angels and Sirk Roh, EGFS’ Chief Operating Officer kicked off our recent webinar on raising capital. It was a great presentation, full of lots of useful advice and tips to help you nail your next raise.
Start with your pitch deck — Know who you’re pitching and target accordingly. You wouldn’t send the same version of your resume for every career opportunity you pursue. So why use the same deck?
Your presentation should be 8-10 easy to read slides max! Whatever can’t fit into that framework can go in the appendix. The point is to distill your business to its essence. Graphics are a really powerful and simple way to communicate key concepts. To frame your message and build mindshare create a tagline that explains your reason for being in 10 words or less. For inspiration think of companies whose business you can sum up in one crisp, memorable sentence.
Once you’ve got a good working draft, practice pitching until you know it backwards and forwards and get feedback from mock audiences.
At the meeting, have your best player make the pitch. First define the problem...then give your proposed solution.
Know that as you go through the deck, investors will be scrutinizing your team, looking to discern your credibility and whether they can trust you with their money. You need to nail this by going over your track record and demonstrating relevant team expertise. Notice that I’ve mentioned team twice. Yes, single founders can and do get funded but it’s significantly harder for solo entrepreneurs than it is for teams.
Pitch your company, not the product. Why would that make a difference? You’d be surprised how often VCs get pitched the same product. Seriously, if your idea is truly unique, there’s probably a good reason, maybe even a dozen, why it hasn’t already been done. Successfully executing and building traction are what separates a good idea from a great business that could eventually be monetized. So focus on what differentiates you: your business model and pricing strategy; your management team (again!); IP; any significant business partnerships; etc.
Once you’ve demonstrated a sound business model, working prototype, and a strong management team that makes sense for the business problem you're trying to address, investors will look at key metrics to gauge your traction. These might be sales, number of users/transactions, or other barometers of customer engagement. Keep in mind that identifying metrics, or key indicators, isn’t just an exercise you go through to get funding. It’s a vital step in measuring the health of your startup and the success of your team. Choose ones that are relevant and specific to your business, then regularly track them, recalibrating your direction as need be. For more advice on this topic, check out David’s article in Forbes.
You really need to know your stats inside and out and be able to explain how your business can scale. It’s not enough to point to your financial model, which by the way should include a bottom-up forecast, you also need to test it by developing a sales strategy and getting actual customers.
Understand how much you need to hit your next milestones. And when you calculate funding look out over a 12-18 month horizon, knowing that your raise could take 6 months or more. A longer horizon in terms of your ask will give you more leeway to reach your target.
Last, focus on your call to action. Be really clear on the amount of your raise and how you will use the funds. This means being transparent about how investor funds will enable you to achieve discrete and measurable milestones that are achievable within a short to intermediate term timeframe. Expect to be asked how much you’ve raised to date, whether there are any lead or strategic investors, and who they are.
As you go through the process, make sure you understand the dynamics around valuation.
This can seem like the $64,000 question, since there’s no formula to guide you to your optimal valuation. Granted, you might not have a lot of leverage in your early funding rounds, but there are ways to frame the discussion of what can be a tricky and tense negotiation. Using one or a combination of these 3 approaches can help you get ready:
Some parting shots:
- Berkus Method — come up with a value for the individual pieces of your business
- Dilution Method — plan for each raise to see you through the next 12-18 months; expect to be diluted by 20-25% with each round
- VC Method — back into a valuation figure by calculating VCs’ expected returns (this varies by VC but is expressed a multiple of the initial investment)
What are your tips for getting funded? Share your best advice in the comments section below or contact Early Growth Financial Services for pitching support.
Deborah Adeyanju is Content Strategist & Social Media Manager at Early Growth Financial Services, an outsourced financial services firm that provides small to mid-sized companies with day-to-day accounting, strategic finance, CFO, tax, and valuation services and support. Deborah is a Chartered Financial Analyst (CFA) charterholder with more than a decade of experience as an investment analyst and portfolio manager in New York, London, and Paris.
- Fundraising is a full-time job
- Expect to hear no a lot.
- Try to schedule investor meetings within a short timeframe for maximum leverage and to avoid “exploding offers.”