First things first: fundraising is a tool, not a business model. Many great companies have been successful at raising outside funds to finance growth, but it is just one possible step on the journey rather than a destination unto itself.
Capital can help bring your business’s vision to life in a big way. What you do with that capital, not how much you raise, will ultimately determine your business’s short- or long-term success. Whatever your goals may be, if you’re considering raising money to fuel business growth, be sure to consider these six tips.
You might have the best business idea in the world. Unfortunately, that’s not the only thing funders look at when deciding whether to back your company. Investors generally evaluate investments based on a set criteria:
Team: Many investors say they invest in people just as much as they invest in ideas. That's because a team’s ability to successfully take an idea and transform it into a business is critical for an investor to make money. Ask yourself, what makes your team uniquely qualified to go after the opportunity at hand and build a successful business? Prior successes can go a long way in convincing investors to back your team. But in the absence of previously starting a successful business, deep industry or technical experience — in addition to a track record of working closely together — can be great proof points of a team’s ability to take an idea from concept to business.
Market: In order for venture capitalists (VCs) to return capital to their investors, they need to invest in companies that have the potential for big exits. As a result, investors are looking to invest in companies going after large market opportunities. The bigger the market, the bigger the opportunity for your company to achieve success — especially in light of existing and future competitors. However, it's unlikely that your company will own 100% of any market, so in order to be attractive to VCs, you must go after a multi-billion dollar market opportunity.
Product and product-market fit: Investors are trying not only to understand the technical capabilities of your product but also determine if it is solving a valuable problem for consumers or businesses. What makes your offering uniquely qualified to solve a specific consumer or business problem? Will customers be willing to pay for your product (at a price point that is profitable for the business)? Do you have a sustainable competitive advantage — technical or otherwise — that will help create a leadership position for you in the market?
Great ideas are good. Great ideas backed by data that prove product-market fit are even better. Using data to illustrate and quantify the size of the market and key growth drivers of your business — as well as how you plan to measure and maintain steady growth — will instill a great degree of confidence in investors that you and your team understand how to track and grow the business. Key data points to think about tracking and reporting are:
Number of customers
Average contract size
Monthly recurring revenue (MRR) growth
Customer acquisition cost
Customer lifetime value
Customer satisfaction / Net Promoter Score (NPS)
Customer churn rate / retention rate
Length of sales cycle
Number of qualified leads per month]
Cash burn / runway
Balancing short-term pragmatism with a big picture vision can be tricky, but given investors are looking to invest in big market opportunities, it’s important to do both. Investors want to know they’re backing something with a real shot at succeeding in the short-term so that it has the potential to go after a bigger opportunity. Conveying an achievable focused vision that will enable you to bring on customers and grow revenue in the short run is important.
The strategy you craft today should show how you plan to build your business now — even with limited resources — and how these initial phases of the business are the first steps towards something much bigger. It’s your responsibility to convince investors that access to capital is key to achieving your vision and significant business growth. If you can do that, you’ll have a better shot at accessing their capital.
If you think that your relationship with investors ends the minute the funds are wired, you’re in for a surprise. Picking investors is like choosing a spouse; you’ve got to be ready to have a long-term relationship with them. Just because the fundraising portion of the process is over, the relationship is really just beginning. You’ll be talking to your investors a lot, and given they will be partial owners of your business, they have the potential to influence its trajectory both positively and negatively.
Successful investments are rooted in solid founder-funder relationships. As a result, it is important to do your due diligence on potential investors like you would before entering into any other business deal or contract. There are two phases of diligence to do.
First, you need to make sure you are "dating" the right ones. Not all investors are created equal and therefore they may not all be right for you. Each will generally invest at different points in the business lifecycle: seed stage, early growth, late stage, and so on. It is important to make sure you speak with investors appropriate for your company stage otherwise you will likely spend a lot of time hearing your company is “too early” or “too late” for an investor’s strategy. Additionally, many investors have a particular industry or customer focus. Consumer investors likely won’t be interested in enterprise businesses, and security investors likely won’t want to invest in the next marketing platform.
Second, once you have the right stage and sector investors, here are a few things to consider as you make a final decision:
What value, beyond invested capital, can this investor bring to the table? Industry, product, or sales expertise in addition to a network of potential customers and talent are incredibly valuable assets that investors should contribute to help grow your business in addition to their money.
Ask yourself if you can work with this person or investment team for at least 10 years. If you can’t see yourselves working together for the long-term, it might not be the best fit. A great way to evaluate this is by getting a sense of how they react to adversity, unexpected surprises, and even moments of success and celebration.
Try to get an entrepreneur’s perspective on your potential investor by connecting with other companies the investor has previously worked with. This will shed a lot of light into what your day-to-day might look like after the round closes.
Think about why you are raising capital and how much you really need. Many entrepreneurs try to benchmark their round sizes off of what others are raising in the market. A better strategy is to raise the amount of money you need in order to get your business to the next level. That goal may be to show enough traction to raise more capital or it could be achieving profitability. It is better for you and your company if you understand what that goal is and that you are raising only the capital you need to achieve it.
Venture capital is a great fit for certain companies; however, the economics of venture capital are such that venture capitalists are typically seeking as large of an exit as possible in the shortest time possible. That means committing your business to big growth and an exit over a relatively short period of time, which may or may not fit your vision.
Depending on the stage and profitability of your business, there are many alternative funding options that may be worth exploring including crowdfunding, angel investments, a line of credit from a bank, and venture debt.
With so much talk in the business community about funding rounds and valuations, it’s easy to forget that fundamentally you are trying to build a great business. If your revenues are greater than your expenses, you’re profitable and, thus, on your way! You can reinvest those profits in your business to grow with or without external financing.
Certain types of companies need big infusions of capital to grow or innovate (i.e. car or hardware manufacturers). Smaller companies that sell a focused product or service can also try to rely on sales revenue to grow as well. This is very much still a tried and true option for many small businesses.
Your business’s path to success may include working with investors, or it may not. In the wise words of Marc Andreessen, co-founder of the Silicon Valley venture capitalist firm Andreessen Horowitz, “The goal isn’t to fundraise, the goal is to build an amazing business. Focus on customer satisfaction and driving revenue and you can get there, with or without raising outside funds.”
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