By Mohammed El-Sherif
A startup goes through different phases of development until it reaches maturity. Starting from initially an idea intending to solve a hypothesized problem, to developing the solution, whether it be an app or a product, and testing the viability of the solution until reaching product-market fit and starting to commercialize that product/service. After going through all these phases, the founders can now start thinking of how to scale their business and improve their offering.
Revenues do not usually kick in before the commercialization phase and generating revenues does not necessarily equate to cash. During these early stages, most founders are prioritizing things like product development to enhance the user experience, and marketing initiatives to increase their market share over making a profit. In other words, startups by nature are usually cash flow negative during their early stages and in many instances way beyond that point and hence need funding.
Over the years I have met founders of all backgrounds and sophistication levels looking for funding. During that period, I came to realize that the vast majority that was successful in their fund-raising efforts had a few common traits and exhibited behaviors that improved their chances. In the following article, I am going to share my learnings in hopes that it might help you in your next endeavor to fundraise.
- Always Know Your Investor
One common mistake that many founders fall into is skipping the research part before they attempt to reach out to an investor, whether it be a VC or Private Equity firm, a family office, or a private investor. Every investor has a mandate or a set of rules and conditions that must be met in order to be able to invest. Make sure your startup meets these conditions in terms of the stage of development, geographical presence, sector focus, ticket size, etc. Most institutional investors have this information on their websites. A lot can be learned about your potential investors by simply looking into their previous investments and trying to understand what excites them. Spending some time knowing your investor will save you time and effort.
2. Know your Numbers
Most investors are geeks when it comes to numbers. Once we understand whatever it is the startup does and how the business model works the discussion will then shift to a series of questions that are meant to validate the different aspects of the business model and to get a sense of where potential weak points may be. You will be asked a lot of questions and you at the very least should have most (if not all) of the answers ready to fire. Being aware of every aspect of your business and keeping track of relevant metrics is a must to gain an investor’s confidence. The way you do that is by KNOWING YOUR NUMBERS.
3. Be Confident
Do not just act confident, BE confident. Investors are always looking for passionate, self-assured, and capable founders. The way you carry yourself during the initial meetings will play a huge role in gaining their trust, showing that you are the person that could take this to the next stage.
4. Have a Solid Plan
Do not go in asking for any amount of money that you could get. Ask for the figure that will get you from point A to point B (make sure point B is an attractive milestone for next round investors) and back this up with your business model (the excel file that must be prepared). It is never a good sign when a founder is easily convinced that she/he doesn’t need that much or could need more. My experience is that a founder who knows what he’s doing and is confident he could execute will stand his ground when investors try to push him to change his asking. Always listen for advice because being able to listen and be open to ideas are traits that every investor looks for.
5. Leave Room
Do not seek funding when your back is against the wall. Always have at least 8-12months of cash runway. In other words, start fundraising when you have cash that will last you at least 8 or more months. Nobody wants to negotiate to sell part of their business with their back against the wall. It is very important when entering any negotiation that you could at any point get up and leave, otherwise, you would agree to terms that you wouldn’t normally agree to.
6. Have Backups
Always talk to many investors at the same time. The fundraising process is hard and time-consuming and most investors will request a plethora of data before they reach a decision. Also, most institutional investors have governance structures that require them to get approvals (for example from their investment committee) before they can write a cheque. Having multiple potential investors at the same time will give you leverage when negotiating and, in many cases, will imply credibility and get investors excited.
7. Learn The Lingo
By lingo, I do not mean the 3-4 letter abbreviations that are being used, although it is better to know the commonly used ones. I am talking about the terms that you will negotiate. Part of the fundraising process is drafting a term sheet, which is a non-binding document that lays out the terms that will later be in the shareholder’s agreement (the contract between you and the Investors). You need to have at least a basic understanding of the terms before signing in on anything. My advice is to do your homework and research the different terms but also seek legal counseling before signing anything.
Many believe that the CEO’s job is to continuously fundraise, which is partly true. However, the scope of the CEO’s duties extends beyond just fundraising. Keeping in mind the points we discussed can save valuable time and effort.