AdvertisementFew entrepreneurs enjoy fundraising. They started businesses to bring great ideas to market, and taking time away from that endeavor is tough, especially in the early stages of the company where it seems they have to do everything themselves. In addition, fundraising is not an activity designed to boost the ego. You’re likely to get dozens of no’s before you hear one yes. “Fundraising. It definitely has a ‘d’ in it, as in it’s really not fun, raising,” writes VC and entrepreneur Mark Suster. “But it’s critical for your business, for you as a leader who is exceptionally good at fundraising have great advantage over those who do not.
For the majority of startups, fundraising is necessary because they need more capital than founders can provide or than first revenues can support. So the goal should be to make fundraising as efficient and effective as possible. You can do this in four ways.
1. you must get yourself ready by knowing your numbers—meaning your cash burn rate, capital structure, and capitalization table.
Every entrepreneur who faces the sharks on Shark Tank has heard the commandment, “Know your numbers.” Before you can ask an investor for funding, you need to be completely clear as to the amount of money you need to take your product from idea to demo (in the case of preseed funding) or to keep your business growing until it is acquired or goes public (in the case of later rounds). That requires you to have a clear picture of where you are today, before any additional funding. You must know (1) your current cash burn rate, and (2) your startup’s capital structure, which lays out the equity and debt you have used to build and run the business so far. You also should have (3) a capitalization table, or cap table, so you can see everyone who currently owns the equity in your startup. Your cash burn rate is the amount of money you “burn” through each month to run the
2. you’ll need to set your funding goals based on where you are, where you want to be, what stage you consider your company to be in, the period of time you want investor funding to cover, and what milestones that funding will allow you to reach. You’ll have to determine what you believe the company valuation is today and how much debt or equity you’re willing to give in exchange for investor capital.
Armed with your cash burn rate, capital structure, and cap table, you’re ready to establish specific goals as to (1) what you want to do next to make your business grow, (2) how long you think it will take you to do those things, and (3) how much money you will you need to keep going during that time. These funding goals are not based upon a particular dollar figure but driven by what you need to accomplish to reach the next stage of business growth.
For example, are there key hires you need to make? Do you need to build a product prototype, or begin to manufacture? Is it time to bring in a marketing firm to run a campaign to reach more users, or to prove there is a significant market for your product or service? Set your goals for the next twelve to eighteen months and put in timelines for the specific milestones you wish to reach, and then calculate how much money you will need (on top of your current monthly cash burn) to accomplish those milestones. Augment this number by at least 10 to 40 percent to cover unexpected costs as your company grows. This will be the starting number for your request for investor capital.
It’s better to ask for too much than too little: Not being able to reach a milestone because you ran out of cash makes you appear less than impressive to an investor. Asking for a specific amount that is clearly linked to the accomplishment of specific milestones will make you seem a more credible risk than simply asking for a round sum like $500,000 or $1 million. Investors will find it easier to judge your progress, and see it as an incentive to continue investing in your business. That said, especially in the seed stage it’s important for you and your investors to allow for pivots and drastic changes to necessary milestones. Using milestones as a gauge for the funding you need gives you the opportunity to
3. you must target the investors you wish to reach, researching their needs to determine how you can position your startup to gain their interest and eventually their capital. Finally, you must understand the funding process—seed rounds, preseed rounds, early-stage rounds, series A, B, and so on—and create a roadmap that will help you maximize the time you spend in the actual fundraise itself.
the best capital you can receive comes from customers paying for your product or service, as that revenue validates your business model. At the same time it doesn’t dilute your share of the business, or put you under obligation to banks or investors. Therefore, the worst thing you can do is to let fundraising distract you from building your business. But in the same way you should create and follow a business plan to be more effective as an entrepreneur, you should build a plan to make your funding campaign more efficient and effective.