As a startup founder, passionate about your company idea, it’s easy to assume that investors will be eager to invest in your company. It can be a painful reality check to learn that investors may not be so quick to put their money where your enthusiasm lies. Here, experts share some key tips on how to improve the odds of raising capital.
“Too many entrepreneurs hoping to raise money look at it from their perspective rather than an investor’s perspective,” says Gabriel Shaoolian, CEO and Founder of DesignRush, a Miami, Florida-based B2B marketplace connects brands with agencies.
Venture capitalists (VC) are usually looking for companies that make significant income already every month, and Shaoolian says, “Angel investors and venture capitalists are going to evaluate your company at a lower value than you will. Plus they will want more equity for their money.”
That doesn’t mean you should not seek funds, but, “Be prepared for hard negotiations and know that you’re going to be offered less than what you want.”
Moreover, it can take 3 to 4 months to actually secure the money you’ve been promised, so have a backup plan or realistic expectations.
CREATE AN MVP
There are, however, some key steps you can take to package yourself properly to tantalize VCs says Theo Lee, co-founder and CEO of KPOP Foods. The Los Angeles, California-based food brand invites people to discover Korean food. First, Lee says, you must have a minimum viable product (MVP).
“Any potential investor is going to want to see an MVP, or if a technology, some sense of traction toward a finished product,” Lee says. "This gives an investor a strong sense of where you are in the product development stage.”
KPOP Foods rolled out an initial KPOP sauce that allowed investors to try the product before final recipe formulation.
Second, Lee says, an investor is going to want to see traction on your MVP, which means potential business contracts or partnerships, pre-revenue. “Prior to raising our initial investment round of $100,000, we successfully completed a Kickstarted campaign, raising nearly $40,000 fro over 1200 backers,” he says.
This demonstrated demand for their product, and an existing customer base.
When founders go in to raise funds, you’ll need to have a pitch deck that paints a story, Lee says, “the problem you’re trying to solve, the solution and a product, a development timeline, a business model, unit economics, financial projections and a plan for how you intend to use the investor’s money."
Lee adds that a pitch deck should be brief and consistent. “At the end of the day most VCs will be investing in the founding members and their ability to tell their story and engage the investors emotionally.”
Raising funds can also depend upon when you enter the market, says Matthew Meehan, CEO of the Shield Advisory Group, a full-service consulting agency that specializes in alternative finance in Orlando, Florida.
“Entering a market too early there is a very high chance that you’ll be waiting around and feel stuck,” he says. On the flip side, entering too late, when competition is fierce, can also hamstring the chance of raising capital.
Startups should keep their fingers on the pulse of their market and try to determine that sweet spot of interest.
Most importantly, Meehan says, raising capital is about relationship building. “Developing a relationship long before you’re looking for capital is key. Build a list of potential investors and get to know them before asking them to invest.” And then follow up with your list regularly. “Be patient. Relationships and trust take time to build."
Lee echoes this truth. “An entrepreneur should be prepared for the fundraising process to take anywhere from 3 to 9 months,” Lee says. “It takes time for an investor to trust you.”