Startups Need to Prepare Themselves Before Seeking Funding
Tips for Early Stage Founders Who Seek External Capital
written by Lodewijk Sutorius - Fundie dealflow team
Prepare yourself and the startup physically and mentally before seeking investment
Have a Minimum Viable Product (MVP)
Have proof of concept (traction) in form of small user base or early revenue
Know what path your startup is going on
Think about the future pitfalls and have solutions ready
Create informative and good-looking slide deck by answering specific questions
Create a relationship with investors that is based on trust and honesty
Many startups, that are not bootstrapped, will come to a point where they are in need of external capital. For early stage startups the capital is often used to scale their business into existing or new markets. Seeking external funding can be extremely exciting, yet tremendously frightening, especially for first-time entrepreneurs. Finding an investor for your startup isn’t just about getting money, it is about starting a business relationship with someone. For startups the question often remains: how to start when seeking capital and what is expected from us? I can emphasize with entrepreneurs who are seeking external capital for the first time. Thus, I have decided to share some tips that startups can use to prepare themselves before searching for external capital.
These tips reflect my beliefs for startups which seek early stage funding, they cover merely a minor part of the journey to external capital. Though I have tried to cover a few important topics for early stage investment, they are mostly guidelines to create the mindset for a (probably) bumpy journey. These guidelines are, nevertheless, used by investors like Fundie, a social investment fund in Madrid who also give consultancy to startups on how to be investment ready.
Prepare Yourself for a Roller-coaster
Searching for external investment can be a time-consuming, frustrating and seemingly a never-ending journey. Therefore, it is important for you to have thought about on what path you are going on, and how this will affect the current day-to-day operations of your start-up. To find the most suited investor you will have to spend countless hours researching and networking with investors and other founders.
Simultaneously, there is the need to spend nightly hours making a pitch deck, which you will have to revamp a dozen times. Since you will have to dedicate a lot of time for this extra work, which wasn’t part of your agenda before, you have to make sure that you are able to spend less hours a day on your day-to-day operations. Make sure someone on your team can take over certain operational aspects to allow to distance yourself from them. This will make your life easier, allowing you to focus on finding the right investor.
After you have made sure you are ready to ride the roller-coaster, and before you start to talk to investors, you have to make sure that your startup is ready. To do so, there are some important issues that should be thought of.
Have a Minimum Viable Product (MVP) with Traction Ready
If you are seeking investment, most investors, that aren’t part of the two F’s (friends and family), have as a minimum requirement that there is a Minimum Viable Product (MVP) that has proven traction in the market. The MVP isn’t something that will bring you near the big shots, however, it will show the investors that the team is able to make significant progress bootstrapping a startup.
In the first place the MVP should cater to the core pain of the consumers that you are targeting. The company should have generated some proof of concept (traction) in the form of a small user base or early revenues. This traction will show investors that you are serving a solution to a problem which people have. Then further building on your MVP, the more the solution is tailored to the needs of your customers, the more your user base will grow. Being able to create a bootstrapped MVP and generate traction it shows investors that you are fully committed and you are backing your vision.
Know Your Path and Potential Pitfalls on Along the Way
It is important to have a short- to medium-term path for the startup. This doesn’t mean that there will not be any changes in direction along the way. However, without any clear path the startup is a ship without a captain, which is always a bad sign. Having thought out the future path of the startup, shows that you are in it for the long haul and you can steer the company into a specified direction.
Hereafter, it becomes easier to think about the potential pitfalls that could come across during the journey. Every startup in every industry has certain risks. By classifying the pitfalls into low to high potential risk, you create a good overview of future obstacles, therefore you can make a plan on how to mitigate these risks. Going through the potential pitfalls and how you are planning on mitigating them shows investors that you are thoughtful and are prepared for uncertainties.
Don’t fall into the risk where you let the thought-out path control your complete journey. It is key that you constantly ask yourself questions that make you rethink the status quo, such as: Is our business model still sustainable? Does our product (or MVP) still serve the pain of the customers? What is our competition doing differently than us, and what is the effect? Answering these questions periodically makes you aware of the constantly changing market conditions, and shows you possible growth opportunities in the market.
Lastly, it is essential to be flexible and have the ability to react to the vastly changing environment. Only this way you are able to survive the high competitiveness of the startup landscape.
Create a Simple and Good Looking, but Informative Slide Deck
Many founders have troubles when it comes to creating slide decks that are attractive to investors. A frequent common mistake made by founders is creating slide decks which are incredibly long and packed with lines of text. Investors receive endless slide decks every day and, therefore they don’t have the time to go through your 30-pager text document. Slide decks are mostly to show the ride you have taken with your startup and should arouse curiosity, making them want to know more.
The best slide decks I have seen are between 10 to 12 main slides with up to 10 supplementary slides. They answer all the same major questions about their business which initiate curiosity:
Once you have answered these questions you can then build your slide deck. You don’t need to be a Picasso to create a stunning slide deck. There are many different ways to create slide decks, for instance the traditional way with MS PowerPoint or Google Slides, or you can use Software-as-a-Services such as Canva or Genia.ly. If you are not totally tech savvy or have no artistic side, don’t worry. For a small amount of money, you can have your slide deck designed by freelancers. The best websites to find freelancers for this job are fiverr and Upwork. I imagine some of you asking yourself, ‘why spend all this time making the slide deck slick?’. A slick and well-cared slide deck can make a first good impression to convince the investor.
Last but not least, try to have something unique in your slide deck that will function as a memory point for the investor. A year after sending your deck to the investor he should be able to say one of its characteristic to his colleague, where after he instantaneously remembers the slide deck.
Honesty is Better Than Sugar Coated Bullshit
Raising capital for your startup is about creating long lasting relationships with possible investors. The same rules which apply to relationships with friends and family, apply to relationships with investors, it is mostly based on trust. My experience is that investors try to be as honest as possible, with disclosing any portfolio investments which could form any kind of conflict of interest. Understandably it is therefore asked of the founders to be honest as well. One of the first things to be honest about is the validity of your given data. Most investors have incredible research skills, and will find gaps in your data. Often after finding significant gaps, the rest of the data is queried. Of course, this isn’t beneficial for the further relationship between founder and investor. Trying to resurrect a broken relationship is more difficult than being honest from the beginning.
In conclusion, a sustainable business is built together with multiple stakeholders, as one cannot do everything themselves. Thus, it is always advised to ask from external advice if you are not completely familiar with certain topics.
Recapitulating the tips for founders that are seeking early stage capital, we can see that it all starts by preparing yourself and the business to be investment ready. The search for external investment is a bumpy and time-consuming process, where you don’t want to deal with minor details. Furthermore, you need to have a Minimum Viable Product (MVP) ready which already has traction (proof of concept), such as small user base or early revenues. In addition to a MVP with traction, you should think about the future path and its risks. Try to think about solutions for the major risks that could come across your path. By constantly asking yourself questions about the business model, MVP, and market fit, you keep the startup flexible and ready to adapt to fast changes. Before going to investors, it is important to have an informative, but slick, slide deck to present.
The proposed questions should help you cover the most important topics to arouse curiosity from investors. Finally, searching for investors is like searching for a relationship, honesty and trust are worth millions. Therefore, make sure you build up a long lasting relationship with possible investors.
I hope you have enjoyed reading this article. I look forward to your comments and your thoughts on this subject. Don’t hesitate to reach out to me and have a chat about the article. Email: Lodewijk@Sutorius.nl
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