Perhaps the most critical and challenging
element in building a startup company is securing its funding. The number one
cause of premature death of startup companies is running out of money.
Therefore, startups CEOs spend a big chunk of
their time on fundraising. It is their highest priority, and seems like a never
ending task.
So far, I’ve been on the
leadership teams of six technology startup companies, two of them as CEO. I’ve
experienced firsthand the challenges and difficulties of raising money. I’ve
also met many other CEOs and founders, and learned of their struggles to raise
funding for their companies.
Also, in the last three
years, I’ve been a part in a great program called A3I. This is the world’s first startup accelerator that is
solely dedicated to improving the lives of people with disabilities.
I serve this program as a
member of its steering committee, as well as a mentor and advisor to the
entrepreneurs. These so-called social businesses have an even harder time when
it comes to attracting investors and raising money for their ventures.
The above experiences have taught me much
about raising money, and have provided me with great lessons on how a company
can increase its chances to get funded. I want to share with you a few valuable
tips that I think you’ll find useful.
- Before you even start.
To attract the right investors you need to have the three pillars of a great startup: a compelling value proposition (idea), a solid business model, and above all, a strong team. Unless you’re an entrepreneur that has already had several significant exits, trying to raise money before you have all three will be extremely difficult. - Identify the right investors.
By now you’ve all heard the term “product-market fit”, and how critical it is for a startup to achieve it. I would like to introduce a new term: “venture-investor fit”. It is equally critical for you to find the right investors for your company.
Investors can generally be segmented according to three factors: stage of investment, areas of focus (i.e. markets, industries, technologies), and amount of investment. That is true for VCs, as well as private investors, or corporate venture funds. Based on your company’s target market (or core technology), stage of life (round of investment), and required amount of investment, you need to identify the investors that best fit these criteria (i.e. your target investors).
There is no point in running after every investor you know, or have been referred to. It would be a major waste of your time and theirs. Moreover, you might come across as been unprofessional and unprepared.
The best approach is to create a list of investors that fit your company’s current status (market, stage, amount), and go only after them. This is more effective, and far more efficient in terms of energy and time. - Raise only what you need to get you to your next milestone.
Raising $100K is easier and takes less time than raising $500K. The same is true for raising $2M vs. $10M. Therefore, prepare a detailed work plan of what you need to do to get your company to its next major milestone (e.g. PoC, first MVP, Beta release, sales growth, etc.). Calculate the amount of money you’ll need to execute this plan. Now multiply that by 1.5, since we’re all too optimistic in our planning, and experience has taught us that many things can go wrong. The result is the amount you should aim to raise. - Be open to feedback and changes.
I found that from every meeting with an investor you can learn something. You can receive valuable feedback about your value proposition, business model, or presentation. You can learn which messages are effective, and which are not. Therefore, listen actively, and be open to make changes to your idea, plan, and presentation material.
And yet, changing your idea or business model after every meeting is also not a good approach. My suggestion is to use the following 1-2-3 method. When you hear a certain feedback once you simply register it (write it down on your feedback list). When you hear it a second time (from a different source), move it to a short list of higher priority feedback items. When it comes up a third time, you should take action. That typically means you should investigate further the feedback’s subject matter, and decide if and what changes are required. Don’t ignore it. - Remember, time is of the essence.
While it’s important to raise enough money to reach your next milestone, it’s also critical to move your venture forward in a timely manner. Your window of opportunity is not endless.
Therefore, at times it’s better to raise less money and move forward faster, than to wait until you’re able to raise the entire amount you think you need. If you wait too long you’re actually reducing your chances to raise money. Investors will start questioning why it’s been taking you so long to raise funding; perhaps there are issues that they are not aware of. Also, while you may not be aware of them, competitors are not sitting idle while you are raising money. Being first to market has many advantages.
Even if you raise less money than you would have liked, there is always a way to make real progress towards your next milestone. You can change your plan to adjust to the actual funding you’ve raised. You can look for bootstrapping opportunities to generate some of the funds that your company needs. There are always other options.
Lastly, you should expect your fundraising
to take several months, and to hear more “no’s” than “yes’s”, so be prepared
and don’t despair. You’ll come out of it wiser, with a better plan, and better conditioned
to lead your company forward.
All the best!
