As a new Founder, finding investment for your start-up will likely be your most important and time-consuming job. Pitching is an art - any good Founder must be able to talk passionately about their idea and back it up with objective information and figures to raise investment.
There’s a lot that needs to be put together before you approach investors, and Founders who haven’t raised capital before or don’t come from a Financial background can find the process pretty daunting. That’s why preparation is so important - the early rounds are often the most expensive ones, and the effects of it will stay with you throughout the rest of your business’s life, so you need to do what you can to get ahead before you start pitching for investment.
You’ll want to go through this process efficiently (spare time being a distant memory to you by now!), drive maximum value from it and avoid making the basic mistakes most Founders regularly make when trying to raise money for their start-ups.
So, when preparing to raise, you need to determine:
Where do you need the most help to raise money?Perhaps preparing your legal documents, expanding your network or improving your pitch?
Where can you drive value from the process?Where can you find ‘smart money’ and what kinds of angels or advisors should you be looking for?
Where do you need to spend more time preparing specifically to raise money?Maybe your deck may need a big overhaul, or you need to practice your presentation skills?
How much of my time will I spend raising money?“Raising money is a full-time job” - the process often takes at least 60% of a Founder’s time, so don’t start half-cocked.
To help you through the process, we’ve outlined six core areas you need to focus on to help you understand how to raise investment for your start-up. This will allow you to plan a structured approach, give you the confidence that you’re on the right track and, most importantly, help you gain much more value than just cash.
The core pillars when raising investment for start-ups are:
1. Raise Strategy
Having a raise strategy helps you describe why you’re raising money and why your business needs to exist. It will clarify your tactics, specify the skills your business requires, and, of course, define what you need, when you need it and who you need it from.
It’s also an important step to build your confidence, as you’ll go over all aspects of your business in such detail that you’ll be prepared to talk about it and show investors that you know the rules of the game. More than finding the funding for your start-up and raising it, a strategy will help you in the long-term and ensure you’re still in business in five years time.
2. Valuation and Raise amount
It all comes down to how much you need to raise. You can’t just make up a number you feel is right - the correct figure is based on your roadmap and valuation - and that will depend on the stage your company is at, your sector, experience and traction.
Raising too much money at the wrong valuation (or even at the right one) will mean you give away too much equity at an early stage when you don’t have to. And, if you consider what your anticipated exit valuation is, the cost of that mistake can easily land in the millions.
Investors will immediately ask why you’re raising and what you’re going to spend the money on. If you have a good financial model, it should be relatively straightforward to provide your answers. You’ll be looking at your cash flow forecast, how much capital you currently have, how much you’ll be spending in the next months and on what. A combination of these assumptions and factors should help you get to the amount of investment you need to grow your business.
To make it simpler, you can break down the investment amount into smaller parts (for example, £25k or £50k) that will be invested into each area of your business. If you're able to fully justify the ROI of each of those chunks, you'll certainly have a good chance.
3. Funding landscape
There are always people out there who will fund your start-up, but finding them is the challenge. It’s helpful to understand the sources of funding you have available, which ones are right for you and when you’ll need them. You’ll most likely raise a few times, little and often is best (see ‘full-time job’ quote above!), so building the right relationships is key.
Whether you find your ideal investor through friends, databases, events or online research, you want people who are genuinely interested in going into business with you. Even on a first contact, expect them to ask questions about the product, the market and your strategy, and keep in mind that your approach will be different depending on the type of investors you’ll reach out to.
You never know: at some point, your investor might mention to someone else they’ve invested in you and that person might want to do the same - it’s about the network and the relationship you build with them. Being able to raise investment for your business will strongly rely on this.
Investors see around a hundred decks every week and the standards are high, as will be their level of expectation on your deck, so you need to make sure it’s great and it stands out - simply downloading an online template won’t do. Make sure your deck explains your value proposition, what problem your business is solving and why this is a good opportunity for the investor. Think about the format and style of the deck and business plan you’ll need for each investor/pitch (more on this below) - and keep it succinct and punchy!
Your financial models must demonstrate how realistic your numbers are, as it’s one of the first things investors will look at. It can be a deal-killer if your valuation or diligence is off, so ensure you get your figures right.
Your commercial model should help investors understand your market fit, analysis, commercials and viability. It’s how you can demonstrate that this investment in your start-up should have a positive return.
You might think you can sell your product all day long and don’t need much preparation on your pitch, but it’s often not the case. It all comes down to 3 parts: formats, style and practice.
It’s very different to talk to one, three or five investors; friends & family or VCs, in a big room or in a conversation over a drink; having 5 minutes or half an hour - so make sure you prepare individual pitches (and decks) for each scenario.
The pitch is your opportunity to bring across your personality, demonstrate your passion for your vision and represent who you are as a Founder. It must be simple for investors to understand why they should believe in your business, so it’s critical that you communicate clearly, show confidence and instil trust.
Finally: practice, practice, practice. Investors expect you to be a little nervous, but don’t let a sudden blank mind ruin your opportunity in the first seconds. Refining your pitch takes time and experience, so start early by rehearsing it in front of the mirror and to your friends - getting feedback from others is essential, and you will want to be ready when the time comes to pitch for investment.
6. Due Diligence
Last but not least, you have to have all your legal documentation in place. That includes financials, forecasts, cap table, contracts with staff and suppliers, copyrights, a 360° view of the business and even the term sheet investors would be signing - in summary, everything they need to make a decision on the deal.
It’s an essential step in raising capital and is demonstrative of how you operate as a Founder, so double check you have it all ready in advance.
Each one of these areas has considerable depth, and you’d expect both some major pitfalls to navigate and some really big opportunities to maximise when raising investment. Stay tuned for the next articles as we explore each step in detail!