As the CEO of a startup you need to ensure that you have sufficient capital to grow your business. Raising money can be challenging since you also need to focus on product development, winning customers, driving revenue, assembling a world-class team, and building a company track record. Adequate planning, preparation, and learning to tell your story are essential in increasing the probability of getting your company funded.
Many entrepreneurs want to treat raising money as an event, but it is a process. You should plan for the process of raising outside capital to be about six months. Here four key steps in the process of raising outside capital for your company:
1. Build a Target List of Investors
The first step is to create a list of target investors, focusing on individuals with domain expertise in your target markets, or technical expertise in your product area. Target investors should include corporate strategic investors, as well as Angel investors or venture capital firms. Angel investors will typically be involved in Seed rounds, and some Series A financings. VCs will be involved is some Series A financings, and more typically in growth stage financings: Series B and C.
2. Create the Presentation and Funding Materials
Have an executive summary from your business plan that can be in one page and communicate highlights of your product and business. You also want to have an "elevator pitch"--an overview of what your company does, your customers, the problem you solve, your solution, your unique value proposition, and your competitive advantage. You should be able to deliver this in one or two minutes. The next thing you need to prepare is your investor presentation. This presentation should provide enough information to investors that they will ask for a second meeting to dive deeper into your business and your progress against key milestones. Prepare a set of "Frequently Asked Questions" and your answers to them. Use your team playing Devil's advocates and your key friendly advisers to prepare the FAQs. As you meet with investors, you will continue to add to it. You don't give this directly to investors, but answers to common questions should be addressed proactively in your presentation.
3. Meet with Prospective Investors and Follow-Up
Prior to a meeting with a prospective investor, do your homework on the investor and his or her background. What investments have they have made in the past? What is their technical and domain expertise? Are they a generalist or a specialist? Do they lead financing rounds? Do they co-lead? Whom do they co-invest with? What is their track record? Do they have money or "dry powder" to invest? Are they the lead partner and decision maker at the firm? Be ready to engage in a dialogue and to answer questions. Have a clear objective for the meeting and a clear call to action at the end. If you get a question that you cannot answer, cover what you can and commit to following up, then do that promptly after the meeting.
Most investors will want to see you a few times, meet key people on your team, establish trust, see if you can execute, measure your results, then determine whether you can establish a track record. People want to be courted and pursued by their suitor before they date, and date before they get engaged and eventually married. Investors are no different; they want to put their money into people that they know, like and trust. This takes time. Things that can help in this courting process include:
- Setting milestones that you expect to meet or even beat over the next six months.
- Communicating with potential investors using e-mail, phone calls and face-to-face meetings to let them know when you meet key milestones.
- Getting key decision makers to meet you in a more social setting after the second meeting. Coffee, lunch and dinner are best.
4. Choose and Close Your Investor Group
Valuation is important when negotiating a term sheet - but other deal terms may be even more important. A good attorney will be able to counsel you on what deal terms are standard and non-standard. Ultimately, you want to create scarcity in your deal. Like it or not, most investors are followers. Everyone is looking for you to get that initial term sheet. A key in the process of raising outside capital is to find your lead investor. Once you have a lead and a term sheet, the interest in your deal will usually ignite, as long as the lead investor is respected in the investor community. Keep in mind that it is more important to get the right investors at a fair valuation, then the wrong investors at a high valuation.