At every point in your startup’s lifecycle, you will need to face some decisions regarding funding. No matter how absolutely groundbreaking and fantastic your ideas are, the implementation requires resources- both financial and material. As a founder, you’ll be faced time and time again with figuring out how and where you can attract capital to fund your startup’s next step.
How to Start Acquiring Financing For Your Startup
If you’re an early-stage startup founder, you could be facing the initial stage- acquiring seed capital. This is often provided by the founders themselves, but you might find yourself in a less than advantageous position to do so- meaning you might have to rely on crowdfunding. Seed capital is important early-on as this is what funds the initial market research, preparation of your business plan and creation of the product prototype. If you try to pitch your startup at this point, you’ll find it difficult to procure investors– seed investments are high-risk and investors loathe risky deals.
Startup founders often find themselves working on their own to get that first investment with their own resources and start looking for investors after they’ve lifted their business off the ground and it begins to take shape. Doing so allows them to have a little weight behind their projections and have proof of concept to show to investors.
Our Organization Is Ready For Investors. Now What?
The majority of startups will procure next-step financing from two major categories of investors– angel investors and venture capital firms. Each have a different approach to funding startups and this can define both your choice of investor type and how you strategize around attracting them. First though, let’s dive into their differences.
Angel Investors are typically wealthy individuals who are investing their personal funds and equity to support startups they find promising. Angel investors prioritize receiving a return on investment (of course), but they’re also interested in keeping pace with current trends so they can share their expertise with the younger entrepreneur community. There are angel investors that found their passion in your industry and want to be a part of it. These are the folks that are more interested in supporting startups at the very beginning of their inception.
Venture capital firms, on the other hand, are companies or mutual funds who have financial assets that belong to other companies or funds. These firms are responsible to their partners for the money that they invest into ideas. This deeply influences their approach to financing startups. VC firms are much more likely to invest in startups that have already reached certain milestones or have demonstrated specific levels of progress in their business.
Keeping this in mind allows you to identify key differences between these two major types of investors. The differences between angel investors and venture capital firms that should be taken into account while looking for investors for your startup are:
- Angel investors manage their own funds, so expect them to propose smaller amounts than a VC firm. If you’re building your fundraising strategy around attracting angel investors for your business, you should keep in mind that most of these investors cap their investments at $100,000-$200,000. Projects that require larger investments- for example: if you need several million dollars, you’re better primed for venture capital firms. VC firms’ average investments in startups are closer to the $5,000,000-$7,000,000 mark.
- Angel investors take on a higher risk, so expect these folks to demand a larger ROI than the venture capital firms that are facing less risk investing in more established companies.
- Angels are more willing to share their expertise and connections but will likely avoid managing the company. VC firms will demand seats on the company’s board and will enforce strict terms that offer them more control.
Before you even start pitching to investors, you need to fully flesh out your project scope and goals so you know exactly who to approach. Determining the assistance you need, how much money you need, and how much equity and control you’re willing to give up will help give you an overall idea of the type of investors you should build your fundraising strategy around.
Attracting Investors to Your Startup
After all the legwork has been completed, it’s time to start executing on your fundraising strategy. Here’s what’s next:
- Start doing research of your own: Find out as much information as you can about your prospects. No matter if they’re angel investors or a venture capital firm, knowledge is power. Learn all about their past investments, try to define where their interests are and try to determine if they’ve invested in similar projects before.
Being prepared to meet your investors will set you apart, give you a competitive edge, and can kick your meeting off on a positive note by demonstrating to your prospective investors that you’re approaching them seriously.
- Pitch realistically: Approach your prospective investors with a clear plan and a well-rounded description of what investments are needed, for how long and with an investor exit plan. Give a transparent and persuasive timeline of your organization’s progression and what you’ve already accomplished with your company. Investors want to gain an objective idea of when their investment can start making a return. Preparing by having your foundational documents in order, forecasting, and a clear path to that return will give you a competitive edge in fundraising meetings.
- Take a deep dive into your target market: To be successful in your efforts to raise funds, you must paint the picture that your organization is solving a real problem and not only that– you have to prove that there is a market for it. Before you even hit the pitch meeting, it’s vital that you invest in market research to lay a solid foundation for your pitch.
- Know your business: Be prepared to answer any question about your organization- even if it doesn’t fit into the scope of your business plan. This is your business that you’re presenting to investors and there should be no question or subject that you project uncertainty about.
Now once you acquire some investors, it’s important to treat this new relationship as the important addition to your business it is. Never underestimate the importance of keeping investors happy. This should be treated as a long-term relationship and you’re going to need to support each other.
One sure fire way to keep investors happy is to give them a great return on their investment, but that might be awhile yet. Until you can give them that, there’s plenty you can and should do to turn existing investors into your greatest supporters. This is a vital part of fundraising efforts– happy, existing investors send a positive signal to prospective investors as well as make introductions or even put in a good word for you. There’s three very easy steps that you can put to use to cultivate good current investor relations:
- Report Regularly and Proactively: Avoid putting investors off by adding a recurring reminder to your calendar to report to existing investors every 3 months. Don’t be hesitant to share bad news and be transparent and honest about when you need more capital. If investors are aware that you’ll have a fundraising round in the next 3 quarters, and then the next 2 and then the next quarter, they will be incredibly happy with the level of transparency and financial control you have over your organization.
Companies who report to their existing investors regularly inspire these investors to heavily follow money in future funding rounds. However, when companies don’t report for months on end and only report when they need more money, it causes existing investors to no longer trust the management team. At this point, they often write off their initial investment and refuse to follow their money in future fundraising rounds- something that will serve as a massiv red flag for prospective new investors.
- Honesty is Important: Investors hate uncertainty and they like surprises even less. Be honest with your existing investors. The vast majority of experienced investors know that very few early-stage startups develop according to plan. Don’t hesitate to let investors know if things go wrong and share your plans on dealing with the issue.
If you aren’t honest with your investors, messaging will be inconsistent. What generally happens is that organizations tell their investors that everything is going according to plan until the moment they need a new round of fundraising because they’re way off target. This sort of uncertainty and surprise is off-putting to investors and the consequences can be dire- current investors could have little to no follow up to initial capital, the end result being organizations struggle to attract new investors.
- Treat All Investors Are the Same: An important rule to carry with you as a startup founder: all investors must have access to the same information at the same time. You can easily execute this by sending regular reports to all investors at the same time. Invite investors to ask questions, but you should only answer them as part of regular reporting so all shareholders can see the answers.
By treating all investors the same, you’re saving yourself future problems and sending a transparent message of fair equity among investors- something they will greatly appreciate.
By approaching communications in your startup openly and honestly, reporting regularly and fairly, you will make huge strides in earning the support and trust of your investors- both in good times and in bad. Investors understand that companies don’t always go according to plan.
Obviously, your investors want to see your company succeed, but until that happens all they really want is evidence that their chosen organizations are deserving of the funding they’ve given and are working hard at growing the company to be successful.Written by
Written by: Kristen Bowie a data journalist at Qwilr.
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