Approximately a year ago, Nathan Bashaw, founder of app Hardbound based in New York, decided that it was time investors fund his startup. Hardbound had two tailwinds going for itself: its app received rave reviews from users and the team was passionate about the product; Hardbound needed more money to fuel its expansion and finance its operations. Determined to raise money, Nathan talked to 72 investors. Yet he could not raise money from any. He had to help employees start looking for work elsewhere because he was running out of money to pay them.
On the other hand, we are constantly bombarded with news about Uber’s or Grab’s most recent 8-figure or 9-figure financing round at tens of billions of dollars in valuation. It seems as if all the venture money is pooling into these handful unicorn startups. To a certain extent, the unicorn startups do attract a lot of venture capital money, which begs the question: how can other smaller, earlier, lesser known startups compete for investors’ money? How can your startup maximize its chance of securing investors’ money? The answer lies in the preparation before you even contact your first investor: it is not Nathan’s fault that he was unable to secure funding – he was in for an arduous and incredibly competitive process with little to no help.
Common Reasons of failing to raise funds from investors:
At Fast Forward Advisors, we help companies in preparing for their next funding round. Having worked with 150+ companies in the last 7 years, we developed a well-tested investment readiness methodology, which we call “FFA Investment-Readiness Methodology”. Before we dive deep into the methodology itself, it is critical to understand why fundraising can be so frustratingly difficult. The reasons can be categorized into two main buckets: external factors and internal factors.
First, external factors, namely investor’s mandate and other startups pitching for the same investors, have a significant effect on your fundraising success. Most investors have a specific set of criteria, or mandate, to guide their investments – they pick which startups to invest in based on geography, stage, business model, the number of investments they can make per year, etc. The reason is that investors want to choose startups with characteristics most familiar to them and therefore reduce the risk of losing their money in a failing business. Investors can choose the cream of the crop and decide not to invest in opportunities they consider second best. Because investors are most concerned with potential return on investment, they always look for startups with the best growth rate or profitability, even if they are comparing startups of different industries. This greatly broadens the actual competition space that startups must face when they approach investors for money; entrepreneurs often fall into the myth that “as long as my business performs well or better than my competitors, I will get funded”. For example, if a venture fund is presented with a shoe ecommerce startup with a 50% monthly growth rate and a logistics startup with a 30% monthly growth rate, the investment fund can decide to invest in just the shoe startup and ignore the logistics startup because the shoe startup has greater potential return, even though the logistics startup’s 30% growth may be impressive compared to that of its competitors and within its industry. As a result, fundraising is incredibly competitive and to successfully secure funding, your startup has to be the most appealing candidate among all that get pitched to the investor and fit into the investor’s mandate.
The situation is only exacerbated with herd mentality – investors follow other investors. This is why the unicorn startups such as Uber get showered with money and the lesser known startups, the ones pushing the boundaries of innovation and bringing new values to society, have a much harder time getting financed. These external elements are truly out of the entrepreneur’s control; however, all hope is not lost.
Internal factors: As we have just understood, fundraising is a race between companies of all types. When trying to win a race, a key winning factor is training (ie preparation). Internal factors are all elements that can be improved / strengthen by you and your team. From our experience working with various startups, the typical internal elements that prevent startups from successfully fundraising from investors are (ranging from most common to least): partial/undocumented growth strategy, unclear competitive advantages, absence of a proper plan to expand or spend raised capital (which shall justify the funding needed in the first place), and lack of explanatory fundraising material. These elements can have various causes but most of the time, they have one common cause: entrepreneurs have a vague idea that they need to raise funds but lack the expertise or resources (time and personnel) to get sufficiently prepared to discuss with investors and actually raise money. This can result in a good business not getting financed even though it is hardly the entrepreneur’s fault; the entrepreneur should really focus his or her time on what matters most – running the business. However, unlike the external factors, the internal factors are still within the entrepreneur’s control. If he/she does everything in their control right, the odds of winning against other startups for investors’ attention will increase. There is no guarantee funding will be secured but it is never a bad idea to stack the odds in your favor.
Introducing an investor readiness methodology
At FFA we have been working with entrepreneurs for the past 7 years in preparing their investment rounds. This enabled us to develop a well tested FFA investor readiness methodology that can be applied to assess investor readiness level of the startup and identify strengths/weaknesses of the business.
The investor readiness methodology covers the 8 most critical areas of the business:
- Problem/opportunity: What problem you are solving for the market and how your potential solution stacks up. The importance of identifying the right problem to solve cannot be understated
- Market size: how big your market is – we help you quantify the most reasonable figures to present to investors: total obtainable market, serviceable accessible market, and serviceable obtainable market. The nuances of these different concepts can be tricky; however, they must be distinguished. If you are selling a robot that makes fish feed, simply throwing a figure of the total fish feed market is not going to cut the mustard with investors. Investors want to know which market segments you are going for and how much you can potentially capture
- Products/services: how products/services are solving the problems of your target customers
- Competition and competitive advantages: how the competitors look like, what makes you special compared to other players. Competition is alway top of mind for investors
- Team: team background, profile, skills and experience combination of management team
- Growth & business model: revenue streams, CLV, CAC, cost structure, scalability
- Marketing & sales: marketing/customer acquisition channels, sales models/processes and cycles. KPI & growth: key metrics, growth drivers, traction. As with other elements, the importance of KPIs cannot be understated
- Financial: past and actual financial data and financial performance. Calculations on how much to raise, valuation, how much equity to offer, expansion plans, and investor exit opportunities.
Having a good understanding of your business’s strengths and weaknesses before actually raising money from investors can ease a lot of stress and prevent wasted resources in an unsuccessful fundraising round. This is why getting ready and working on those 8 areas are always a good idea, whether or not you will undertake a fundraising process and independently from its outcome.
When assessing your business readiness on the 8 mentioned areas , there will be certain elements where the startup lacks information or can improve on – addressing the gaps is the next step to get investor ready. The gaps can be categorized into 2 types: short-term gaps and long-term gaps.
- Short-term gaps: gaps that the company can readily address within 3-6 months. While it is difficult to make an exhaustive list of short-term gaps that startups usually run into because the gaps are usually very specific to each startup, typical short-term gaps can vary from lack of market quantification to lack of understanding of the competitive space, to a missing comprehensive fundraising strategy.
- Long-term gaps: gaps that take longer to address. It is also difficult to pinpoint an exhaustive list for long-term gaps as they can range from unclear growth strategy (or lack thereof) to lack of defined and monitored KPIs, etc. Long-term gaps require mid-long term efforts to address – these typically include establishing, collecting, and analyzing KPIs, defining strategy/expansion plan, identifying and building competitive advantages, etc.
Preparing Investor Readiness Toolkit:
This is the very final step of your fundraising activity: you sum up all the work you have done at the previous steps and finalize the investor material – namely a pitch deck, a financial scenario model, an executive summary and deployment. The material is a summary of the preparation done prior so if the preparation is poor, the material will be poor and if the preparation is comprehensive, the material will be strong. The most common mistake for this phase is prioritizing making the material look good over focusing on strong content. This will not push the needle with investors.
Fundraising can be an arduous and uncertain process for entrepreneurs while inability to raise funds can have detrimental effects on the startup’s survival. There are many factors that are outside of an entrepreneur’s control when it comes to fundraising; however, getting investor-ready is completely within the entrepreneur’s control and can maximize odds of fundraising success if done right. Our methodology described above can help you achieve that investor-readiness level, an example of which is our work with Blinkist in raising a 7-figure bridge seed round. Do you have unsolved fundraising issues? We would love to hear more at [email protected].
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