The Subtle Art of Startup Fundraising
You may have spent hundreds of hours watching Shark Tank, trying to understand what convinces an investor to back a startup. Investors have deep pockets and connections that can help your startup scale. They aren’t just the money bank you need; they are also great for PR, like a step ladder.
After all, “What do investors want?” is a question that keeps entrepreneurs up into the wee hours of the morning.
The answer is not as elusive as some would have you believe. A startup investor is a simple specimen. Like anyone betting their money, they want to seize a winning opportunity. In other words, they want the most bang for their buck. Profit. Money. Moolah.
But in a world where about 20% of new ventures fail in the first year, 30% fail in the second year, and about 50% shut shop by the fifth year, how do you induce confidence that your startup is here for the long haul?
Get Inside the Mind of an Investor
Investors will have different expectations from a business, but the underlying requirement is the same. Whether venture capitalists or angel investors, they want to know that your business will succeed and eventually make their money.
To assure your investor about your startup, you need to convince them of a few fundamental things.
The first is the viability of your product or service. Here, size does matter! We are talking about your market size. Once you set boundary conditions for the ideation process, you can look for target markets in earnest. A common mistake at this step is that the calculation of market sizing is often based on a Top-Down approach. What’s wrong with Top-Down? This approach hides the difficulties in reaching various segments of customers. Customer personas, paying capacities, etc., are not considered.
While it may seem obvious, you must demonstrate to investors that what you’re selling is really what the market wants. Whether a home pedicure set or a SaaS solution, show your investors that there’s demand in the market and you can bridge the gap. Once your investors are comfortable with the market potential for your product, it will be easier to take them along for the ride.
Next comes a stage that will involve making a pitch deck. You want to keep it short and crisp with your product information, market size (be cautious), and team details. Always be ready with your financial forecast and a functional product prototype. This is important to note because founders often need to be aware of the metrics VCs generally track. Apart from the usual numbers like gross sales and net revenue, we have noted down a few important metrics for you:
· MRR: measures the predictable and recurring revenue generated naturally and does not include any other one-shot fees. Simply put, it’s how much money your product brings in per month.
· ARR: measures the predictable and recurring revenue your product brings in annually.
· LTV: revenue your customer will generate over the course of their relationship
· CAC: the cost of acquiring a new customer.
· Burn Rate: This indicates how quickly your startup is spending money.
· AOV: average order value of your customers when they make a purchase.
Another challenge is that some founders need to learn how to calculate the right metrics correctly. So, if you have a SaaS model, relevant metrics could be MRR, Churn Rate (Revenue), CAC, etc., or say you have a Payment Model, appropriate metrics to look at are Total Payments Volume (TPV), Retention Rate, Retained Margin, etc. These numbers are imperative, as they allow investors to track the soundness and health of your business.
Alongside the financials, another thing that investors often look for is a solid team. In a blog, venture capitalist Mark Suster wrote about how much he values the management team - “I’m personally 70 per cent management, 30 per cent product […] If I feel a priority that the CEO can’t cut it, I’m doubtful about invest. Because management is so important, I tell people to make the bio slide the first in their deck. If you have a good experience, the VC will be leaning forward for the rest of the presentation.” The right people can instill confidence that even if something goes wrong, they have the expertise to pivot and do whatever it takes to succeed.
It’s also important to show your investors proof of concept. They are far less likely to invest if you go with a business idea rather than a functional business. If you can show investors what you have achieved with limited capital, they will be willing to imagine how you intend to put the capital to use. It will also help your case if you show how you intend to use the capital they give you to grow the business. Nothing speaks greater than numbers to investors.
Finally, you can seal the deal if you can exhibit the X-factor. That could be anything – from your business plan to a trusted connection you may have forged with the investor. The idea is to connect with them and make them believe that your business will come through in tough times.
Put the Right Foot Forward
If you can win on these grounds, you will stand a higher chance of securing funding for your business. Investors are looking to make the right choice to increase their net worth, and as a business founder, you need to put yourself in their shoes to see what they want. Crack the psyche of your investor, and you can master the art of fundraising.