This article is divided into a simple 5 part series as a fundraising guide for founders who are currently raising capital for their startup. 1. Are we investor ready? Start by asking yourself, “What do I have to offer a potential investor?” You might feel that your story is inspiring and your product or service is worthy, but investors will make their decision based on financial information and the potential of good returns. There are three things that investors primarily look for when making a decision. A. ) First, they want a strong market demand. Most companies fail due to a poor product-market fit, so make sure you’ve done your research and proved that your market is compelling. B.) Next, your team needs to be strong. Investors understand that the team will make or break a business, even if there’s strong demand for a good product. Think about the qualities your team has that will help you succeed and put your best foot forward. C.) Finally, you need a strong product. If your product isn’t unique and doesn’t solve a clear problem, you’re in trouble. Once these are in place, you are in a much better position to seek funding. 2. How much can we raise? Almost every founder dreams of unicorn valuation, but there’s a reason it’s called unicorn — it’s rare! Being realistic about what money you need and how much your business is currently worth is vital for successful fundraising. There are two primary sources of funding for new startups. These are Venture Capitalists and Angel Investors. Both will assess whether your funding request is reasonable and sufficient for the stage you’re at. A venture capitalist is running a fund, and they will look for a fit between the investment strategy they have and your startup. The investment will need to satisfy not just the VC themselves but their entire investment group. As a result, they are looking to make substantial investments — $1 million or more. If that’s not where your need is, you’ll want to look at an angel investor. An angel investor is investing their own money. They will give you time for a much smaller investment than a VC would consider, and they have many motivations beyond cash alone and may make a riskier investment than a VC would. Angel investors are more likely to want to become a mentor, for example. How much you can raise depends on your company’s stage and needs, and who you reach out to will shift accordingly. 3. What is my startup’s valuation? What is your company worth? One of the biggest mistakes founders make is to overvalue their business. Yes, it’s your sweat and tears, but an investor is looking to make sure you have your feet on the ground before they risk their money. How do you come up with a number for investors? Here are a few strategies. First, there’s the market multiple approach. Venture capitalists like this because it gives them a good idea of what your company is worth in today’s market. You value your company against recent acquisitions of similar companies on the market. If a comparable company is selling for four-times sales, you can use that as a starting point and adjust for growth and risk. Next is the scorecard method. Angel investors generally use this to weigh up your measures of success, like your team experience, product strength, competition, and more. If your startup has above-average qualities compared to others, you’ll get a higher valuation. When you have cash flow, you can use the discounted cash flow method to value the business. Forecast future cash flows and calculate the expected rate of return. This isn’t perfect, but it does help give you a forecast of your value. Finally, you can look at the cost of duplicating your company from scratch. The cost and time to develop your product, research and development, and assets all come into play. This is a very conservative value since it doesn’t take into account growth potential. By working with all four of these strategies, even the earliest stage startup can find an estimate of their company value.

This article is divided into a simple 5 part series as a fundraising guide for founders who are currently raising capital for their startup.

1. Are we investor ready?

Start by asking yourself, “What do I have to offer a potential investor?” 

You might feel that your story is inspiring and your product or service is worthy, but investors will make their decision based on financial information and the potential of good returns.

There are three things that investors primarily look for when making a decision.

A. ) First, they want a strong market demand. Most companies fail due to a poor product-market fit, so make sure you’ve done your research and proved that your market is compelling.

B.) Next, your team needs to be strong. Investors understand that the team will make or break a business, even if there’s strong demand for a good product. Think about the qualities your team has that will help you succeed and put your best foot forward.

C.) Finally, you need a strong product. If your product isn’t unique and doesn’t solve a clear problem, you’re in trouble.

Once these are in place, you are in a much better position to seek funding.

2. How much can we raise?

Almost every founder dreams of unicorn valuation, but there’s a reason it’s called unicorn — it’s rare! Being realistic about what money you need and how much your business is currently worth is vital for successful fundraising.

There are two primary sources of funding for new startups. These are Venture Capitalists and Angel Investors. Both will assess whether your funding request is reasonable and sufficient for the stage you’re at.

A venture capitalist is running a fund, and they will look for a fit between the investment strategy they have and your startup. The investment will need to satisfy not just the VC themselves but their entire investment group. As a result, they are looking to make substantial investments — $1 million or more. If that’s not where your need is, you’ll want to look at an angel investor.

An angel investor is investing their own money. They will give you time for a much smaller investment than a VC would consider, and they have many motivations beyond cash alone and may make a riskier investment than a VC would. Angel investors are more likely to want to become a mentor, for example.

How much you can raise depends on your company’s stage and needs, and who you reach out to will shift accordingly.

3. What is my startup’s valuation?

What is your company worth? One of the biggest mistakes founders make is to overvalue their business. Yes, it’s your sweat and tears, but an investor is looking to make sure you have your feet on the ground before they risk their money.

How do you come up with a number for investors? Here are a few strategies.

First, there’s the market multiple approach. Venture capitalists like this because it gives them a good idea of what your company is worth in today’s market. You value your company against recent acquisitions of similar companies on the market. If a comparable company is selling for four-times sales, you can use that as a starting point and adjust for growth and risk.

Next is the scorecard method. Angel investors generally use this to weigh up your measures of success, like your team experience, product strength, competition, and more. If your startup has above-average qualities compared to others, you’ll get a higher valuation.

When you have cash flow, you can use the discounted cash flow method to value the business. Forecast future cash flows and calculate the expected rate of return. This isn’t perfect, but it does help give you a forecast of your value.

Finally, you can look at the cost of duplicating your company from scratch. The cost and time to develop your product, research and development, and assets all come into play. This is a very conservative value since it doesn’t take into account growth potential.

By working with all four of these strategies, even the earliest stage startup can find an estimate of their company value.

Venture fundraising guide 2

4. How to target investors?

Now that you know you’re ready for investors and have an idea of your valuation and funding needs, it’s time to connect with investors. How do you find them?

To find venture capital investors, go where they are. In many cases, that means major cities, but some industries have VC hubs in other areas.

Try to match with venture firms that know your business because they can not only invest but also help you grow. You’ll also want to look at whether the firm works with companies long-term, want to bring in their own management, and more.

If you’re more interested in an Angel Investor, you’ll need to put the word out to everyone you know. Ask if they know anyone who invests in companies in your industry.

You can also use online platforms to connect with angel investors. For example the DueDash Investor Relations Platform. Sign-up now. 

Once you’ve connected with an investor, it’s time to make your pitch.

5. How to pitch to investors

One of the best ways to pitch to investors is to have a real conversation, not just a presentation. It’s too easy for a VC or angel to tune out if you ramble on for 15 or 20 minutes. Spend a couple of minutes describing what you do, and then ask for a reaction.

This will tell you immediately if the investor is interested or turned off. Perhaps you can clarify something so that they don’t walk out, or maybe it’s just not a good match. Sometimes when an investor gives feedback, they’ll start to convince themselves that they’re interested — which is perfect for you!

Create a persuasive leave-behind package as well that includes key points and additional details. This will help the investor remember you and not make wrong assumptions about your company.

Make sure you end your meeting with an agreement about the next follow-up. That way, the door stays open over time.

A great pitch isn’t a one-time event. Prepare to share about your vision and company more than once before an investor pulls the trigger.

Also, if you want to learn more about how to pitch, we have two video courses, one on pitch basics and one specifically on investor pitching. Check them here.

Write in the comments section for any clarifications. We are here to help!