Your pitch, financial plan, and valuation will all evolve just as quickly as your startup. Luckily, others have gone before you, and what they've learned can hopefully spare you some anxiety in the coming weeks and months of fundraising ahead.
Sirk Roh, COO of Early Growth Financial Services--a San Jose, California-based financial consulting--firm has worked with many of these founders. He shared some of his insights Wednesday during a small lunch time informational session hosted by RocketSpace, an incubator-like innovation campus in San Francisco. Read below for Roh's take on some common early-stage fundraising issues.
On the likelihood that an investor is looking for you to achieve profitability with this next round of funding:
Roh: It depends on the company and the industry. Some [VCs] are going to be looking at companies that are closer to profitability and saying, OK, this next round of financing is going to get me there. Early stage guys, obviously, that's probably not as likely.
What I'll encourage you to do is have that long-term roadmap, that financial roadmap that says this is kind of what we foresee happening--to the extent that you can show that path toward profitability during your financial plan and how the current money that you're asking for is getting you closer.
Then the investor can see OK, this $3 million that I'm being asked for right now is not going to get us to profitability. But, if we hit the financial projections and hit the milestones, I can see how the valuation of this company is going to be so much greater at that next round of financing, which will get us [closer] to profitability.
On whether or not you should begin using raised money to pay yourself:
Roh: Different investors are going to have different inputs, shall we say, as to what they would like to see from you.
But absolutely. As you're getting external investment, you should be saying, look I've already done all of this. By the time I come to you guys for money, I've done it on my dime. I've made this much progress. I've taken on a lot of this risk already, and some of the money that you're giving me is to pay salaries for myself and my other founders.
Obviously, if you put together a financial plan that says you're going to pay yourself $200,000 using seed financing, that's probably not going to go over well. But absolutely, you should be putting something in there.
And how much you put in there is going to be a factor of how much money you're looking for, how comfortable you feel in being able to get that money, how much of your company you think you're going to be giving up to get that money, and whether that jives with the amount of compensation you're looking to get.
On whether it's more important to emphasize your company's future business potential, or your success to date, when pitching to investors:
Roh: At early stages, traction is huge. It's a different environment now than it was even five or 10 years ago. Ten years ago there were bigger companies trying to do bigger things--hardware companies. And now it's about being able to develop software, and a lot of it can be done in the garage.
And a lot of it can be done before you actually go out for seed investment. If you can show traction in terms of customers who are already buying and using your product, that's huge. And I would say that as entrepreneurs you should be striving toward that goal as quickly as possible. If you can do it before asking for money, that is huge.