Is your new business ready for fundraising? Many entrepreneurs struggle with this question as they develop their products and services.
Pitching your idea to investors must come at just the right time. Try too soon and you may not have all the information you need to answer investors' burning questions. Wait too long and your company may flame out after running out of money.
Try this test to see if it's the right time to pursue investment money. See if you have compelling answers to these top 10 questions asked by investors during fundraising.
- Who cares? This is the most important question, and it demands a well-researched response. Describing your product as "cool, fun or interesting" is not compelling. You must be able to explain what problem you are solving and that this problem is experienced by a large, quantifiable market. Talk to as many potential clients as possible, and conduct surveys and focus groups. Then when you are asked "Who Cares?" you can back your answer up with details about potential user interest and their willingness to pay.
- How big is the market, really? The market for your product or service must be sizable. Find credible market research that proves the pond you are fishing in is big and well-stocked with hungry fish. Put numbers to this. How many users do you need to break even, and how many do you need to hit your annual, three-year and five-year revenue and profitability targets?
- How many paying customers do you have? Your strongest answer to the "who cares" question is having customers who have paid for your product or service and demonstrating there are lots more where they came from. If you haven't landed a paying customer but have someone beta testing, be ready to talk about why they were interested in testing your product/service and any interim data you have to date.
- Who are the bad guys, and how can you vanquish them with your secret weapon? Never say you have no competition. Status quo is the stiffest competition. People are doing something to survive without your product, even if the competition is a poor substitute for your revolutionary idea. Know your direct, indirect and potential future competitors. Map them out according to how their solution compares with yours and be ready to explain how your are differentiated (i.e.better, faster, cheaper). Show a detailed plan to stay ahead of them.
- What milestones have you reached? Are product development and customer acquisition moving forward apace? Your presentation should show the milestones in your business plan from launch,the steps you have completed and your plans for the future. This high-level view showcases your strategic planning, leadership and execution skills.
- How strong is your management team? Investors want a well-rounded executive group with expertise in sales, marketing, early stage business growth, finance, technology and more. Show credibility in your market domain area. Fill holes with expert advisors and board members. In general, show that you are able to attract the talent that can execute on your business plan.
- Is the customer acquisition plan believable? Inexperienced entrepreneurs show a chart with hockey-stick growth. Spend just $100,000 on marketing over three years, and we'll bring in a zillion customers, they claim. Investors know this scenario is rarely achieved. You'll need to prove your customer acquisition trend line can become reality.
- Why are you the right person to lead this company? What are your business successes? You'll get bonus points for fundraising, product launches, attracting great talent and successful exits. Can you demonstrate expertise in this field? For example, do you blog, speak at conferences, or boast a social media following? If so, build on that reputation to impress investors.
- How will you make money for investors? This must come early in your storytelling. Remember, this is why the investor is listening to you: to hear how he or she will make a lot of money. Demonstrate a deep understanding of your financials. Show a believable revenue-to-expense model, as well as initial thoughts on potential exits including when you expect to exit.
- How will you use the money raised? A typical investor prefers that you have finished the product and proven your sales and marketing approach is working. Newly raised funds can then be used to ramp up sales and marketing. Avoid saying that you will spend your money on increased pay for the founders, past debts or unnecessary administrative expenses (i.e. off-site boondoggles). The money you raise needs to fuel achievement of the next growth milestone or you may not be able to raise another round of funding when you need it most.
Bonus question: What have you, your friends and family invested in the company? Investors want to know that you have skin in the game, which is more than the sweat equity you've put in. If the people who know and love you aren't willing to invest their money, that sends a bad signal to investors.
Word to the Wise: Investors are looking for a deal that will provide a very large return on their investment in a product/service that fits their investment portfolio. They view this as a transaction, so don't confuse their enthusiasm with being your friend. They are not. Likely, you will hear many "no" answers before you even get a "maybe." Develop a thick skin and absorb everything you can from every meeting. Investors love when you can demonstrate that you take their input seriously. They value coachability.
Once you can thoroughly answer all these questions confidently, consider two more for yourself. If you had to bootstrap your company to success, what would you change about your plan? And would you still believe in it enough to move forward? If you answered both of these questions in the affirmative, you should start to execute on the plan while you are fundraising. It's time to get your idea ready for the marketplace.
Co-founder of Austin-based Growth Acceleration Partners (GAP), Joyce Durst is driven to help software companies achieve rapid growth through business-focused applications. Joyce has launched startups and led teams at enterprise companies by applying her passion and business knowledge to efficiently create software that solves business problems. Active in the community with Special Olympics and Springboard alumni, she enjoys helping other women in technology to achieve their dreams.