In the last decade, startups have grown at an unprecedented rate. An essential part of any startup’s growth is its ability to raise funds. When an entrepreneur fails to achieve the fundraising goals for a startup, it may run out of money and effectively cease its operations. The process of setting up a new venture is in itself a daunting task.
To add to it the task of pitching to investors makes it an even more challenging task. However, raising funds is necessary for startup growth, not just to start it but to also take it to its next phases of growth.
The question is how should one treat the process of fundraising? And what would be an ideal fundraising strategy?
Optimising A Startup’s Fundraising Strategy
A good fundraising strategy helps a startup raise funds across various stages of its growth. It also manages to sync the company’s fundraising schedule according to the company needs. This is critical because if fundraising is done too late, the company may run out of money. Therefore, it is imperative for a startup to learn to optimise its fundraising strategy in a way that best fits its requirements.
In order to optimise a fundraising strategy, a startup must also consider what stage of growth they are in and what is their financial requirements in the long-run. They can then find out and explore where their current strategy is failing and how to overcome it. This helps them plan their fundraising better.
Sometimes, a startup struggles with ineffective fundraising strategies. In such a case, the entrepreneur may unearth the issues behind it. The most common issue that a struggling startup can face may be in the form of a lack of clarity in pitching communication.
The pitch can also suffer from exaggeration. An outright fabrication of facts is different from an optimistic exaggeration. The startup should avoid this at any cost and work on creating a credible pitch. Such a pitch will be based on a well-developed and sound financial projection that is rooted in verifiable assumptions.
They can also explore what efforts have borne fruit for them. They can then go back to the drawing board and choose their objectives. This can be followed by a detailed list of metrics that they should analyse before starting on a new fundraising pitch.
A method of checking the effectiveness of a proposed pitch is to understand its feasibility. This can be done with the core team of the startup and improvements to the pitch can be made before starting on the fundraising activity.
The Whole Fundraising Process And What To Expect
The first and foremost thing to do is to know one’s product and core offering very well. This includes a deep understanding of the competition, the market scenario, the avenues for growth and expansion viability for the future, among other things.
A thorough understanding puts the startup in a good stand in front of potential investors. The next step is to reach out to the right investors. An entrepreneur should know the extent to which he plans to limit the contribution of the investor.
A potential investor can come with a strong network to support the startup. He can act as a mentor too. He may have the right expertise to help improve the product offering.
A startup may also take the alternative route to fundraising and go to family and friends, banks, angel investors, crowdfunding, microfinance, government-backed capital or can invest his own funds, also known as bootstrapping.
An entrepreneur must try to dilute 10-20% of the company when raising money. Anything more than that will result in too little of the company left in the hands of the entrepreneur. Also, he must raise enough money for 12-18 months. If it is anywhere less than that then he will be up for another round of raising money soon. And if he raises more than that, it means he raised that money when his company was worth a lot less.
He must also start early before there is too little cash in the bank. They must also keep their burn rate in control or at least keep the investors comfortable with it. A conversation in time will help an entrepreneur in a tough time when he needs support from the investors.
An entrepreneur needs to spend time researching the investors and meet them in person. He has to build a relationship for long-lasting efficacy. Also, it is important to keep a back-up list of investors to approach in case it doesn’t work out with the early pitches. A test-drive with some existing investors will also help in bringing your ‘A-game’ to the front when pitching to new investors.
Entrepreneur must remember that funding is an in-person job. After the first meeting, the entrepreneur has to keep the momentum going with the investors. Persistence and follow-up will support the funding journey as the best entrepreneurs are those who keep the communication channels open.
Also, do not fall prey to depending too much into sharing your proprietary information with investors. An entrepreneur must always check if the investors are really evaluating or merely digging into sensitive information.
Successful startups and their entrepreneurs work continually on their fundraising strategy. Even when they exaggerate the potential of their startup, it is based on pure hard work and smart ideas. Fundraising does not rely solely on quantitative reasons but also on many critical qualitative aspects. The entrepreneur must give answers to why the investors must invest in them at that very moment.