Every entrepreneur knows that raising capital can be the toughest part of starting a company. Fundraising can be especially challenging for CEOs also focused on building a compelling product, hiring a team and maximizing sales.
In order to ease the process, here are 5 tips that will help entrepreneurs optimize their fundraising efforts:
#1. Have a Beta Version Ready
Unless you have a solid pitch deck, it's much more effective to show venture capitalists and investors a product's value rather than telling them about it through a presentation.
Having a beta version of your product is key for raising money in the B2C sector, especially as consumer products become more digitalized and on-demand. Plus, cloud computing and distributed workforces have enabled entrepreneurs to build early versions of their products for much less of a cost.
Being able to provide investors and VCs with a beta version of your product is also a good way to show traction. Showing investors customer growth and product progression will help convince them to participate in your round.
#2. Do Research Before Investor Meetings
It's important to be selective when seeking out capital. Finding the right investor for your company should be an entrepreneur's main goal. CEOs must research and know their target investors before reaching out. If research isn't done beforehand, entrepreneurs risk wasting their time, along with the investor's time.
"It is a good practice to research anyone before a meeting. As an investor, I like to ask about 'founder-market fit.' For example, I like to know why the founders started this particular business versus all the other ideas they could have focused on. I also like to know about how their past experience provides a sustainable competitive advantage. For market size, I ask founders to walk me through how solving a customer need, which is critical, also leads to a large and defensible business," said Steven Lurie, Founder of Team Venture Builders.
Once target investors are known, entrepreneurs should then start reaching out to their personal contacts to ask about introductions. Sending cold emails to investors is never recommended and is considered an unprofessional practice. It's best to utilize your personal network to get a direct introduction to an investor or venture capitalist.
It's also important for entrepreneurs to understand that it's bad form to attend networking events purely to seek out investors whom you can pitch to. While social gatherings are a good place to network, they are not the place for pitching your startup. Entrepreneurs should only give their elevator pitch during social gatherings if asked to do so.
#3. Build Relationships with Investors
Entrepreneurs should also focus on building productive relationships with their investors. An investor who thinks highly of a CEO can provide guidance, mentorship, introductions and capital for the future.
In order to build lasting relationships with investors, it's important to recognize an investor's values beyond finances. If an investor is genuinely interested in your startup, they can also be a source for providing valuable feedback and interest in using your product. Remember, investors aren't just investing in your ideas, but they are also investing in you. It's important to communicate your passions to your investors so they can truly understand your company and goals.
"More often than not, savvy investors invest in the founder and team, not just an idea, product or service. Fostering strong relationships with your investors is key and can prove to be invaluable when it comes time for fundraising or when you're facing tough times and need support," said Charles Michael Yim, Founder and CEO of Breathometer.
It's also helpful for entrepreneurs to seek out seed investors who have enough capital to bridge a startup to Series A. Having a firm lead in place makes raising additional capital easier for the future and building a strong relationship with these individuals can go a long way when it comes to fundraising.
#4. Focus on The Rolling Close
While Founders typically like to focus on one round of closing at a time, a rolling close can actually be a better option for raising funds when building out a product. A rolling close is when a team raises money within a certain time period, without a predetermined size for the "round."
Investors also don't have to put their money in or commit at the same time during a rolling close. Every amount invested is closed immediately at a set valuation, versus traditional funding where a round isn't closed until a predetermined minimum is raised. The rolling close model can be extremely effective for B2C startups.
#5. Make Changes Based on Rejection
Rejection from investors and venture capitalists is common in the startup world. Nine out of ten startups will fail, and not raising enough capital is a big factor for failure. However, embracing failure can actually lead to future success.
Entrepreneurs must adopt the mindset that they can learn from their mistakes. Listening to feedback from investors whom initially reject your ideas can help you bounce back next time. Fixing your product based on investor feedback is a best practice when it comes to fundraising. Once changes are made, an entrepreneur can go back to these investors and show them the improvements.
When The Going Gets Tough...
"When the going gets tough, the tough get going," is a popular proverb meaning, when a situation becomes difficult, the strong becomes engaged. In this case, entrepreneurs who wish to succeed need to continue pushing through the tough times. Raising capital for your startup is challenging, but success will be achieved once the right measures are executed.