It’s frustrating as an investor every time a team of enthusiastic and energetic entrepreneurs are ill-prepared when raising startup money. The idea they have may be great, the team may rock but it’s disappointing to see teams who haven’t prepared for the most basic of questions on their startup.
Putting in so much effort on the tech product or service, the team-build and the networking all gets compromised when poor planning is evident at a fundraising meeting. As such, I have outlined what I believe as being the five key areas entrepreneurs need to have a key grasp of before setting up meetings with VCs.
1. Explain your team
When raising startup money one of the most important things any type of investor will be interested in will be understanding the team. It really is about the team more than your business idea or the fancy suit you wear to the meeting (!) that will help you clinch the funding you want.
Ideally a VC needs to understand why the team is made up with who is in it and what contribution to the growth of the business each individual will have. Individually, all of you should be able to demonstrate why you want to be part of the journey of a start-up and explain any relevant experience you have of the role you are being asked to carry out in the team. Any previous experiences of working in start-ups and with investors is also useful. Principally, I would expect Chief Executive Officer (CEO) and Chief Technical Officer (CTO) roles to be determined with explanations for why the candidates are right to hold those roles. Increasingly (though dependent on the type of business) a Chief Marketing Officer (CMO) may also be identified although this and other roles will probably be appointed later.
It is important to be aware of the number of founders you have for your business. One founder is not likely to inspire confidence of investors as there is a lot to do and cannot (usually) be done by one individual. Even two is less common now and three founders (or senior team members) is what an investor will typically expect to ensure there is enough bandwidth and variety of skill-set to get a tech start-up off the ground.
As a team, you all should be able to explain how you work and what team strengths are. A toolkit of complimentary and balanced skills is what an investor is keen to see. You should be able to explain what you are looking to achieve in the business and what your personal aims are. Show ambition. Show confidence. Show assurity that you have confidence in the product or service you are building and in its near-term market potential.
2. Know your tech service (or product)
Not knowing your tech service or product is a carnal sin as far as talking to anyone about your business is concerned, especially when you are raising start-up money. Investors see ten or more businesses like yours every week, operating in the same sub-sector and trying to solve similar problems. Hence, they have already done their homework and have probably taken their thinking down avenues you haven’t even considered yet.
It will be impossible to cover all angles of course, but you should have considered a lot of the basics such as what problem your company will solve and what the key differentiator is that makes your business special. Why can no-one else can replicate your model, how you will price and why people will be willing to pay, and what are the key milestones on the horizon?
3. Know the market you operate in
Having an understanding of the market you operate in is essential to demonstrate your credibility to any investor when raising start-up money. This not only shows preparedness, but also highlights your seriousness and passion for what you are building.
Being aloof to any new regulations does not look well. Also, being unfamiliar with any key competitors in your market will not go down well with an investor either. The investor may well have spoken to many other teams who are building something similar to you or have built it and so will know those businesses very well and the challenges they have faced. Research them. Talk to people in the sector. Understand who is up to what. Rumour is important. Demonstrate to the investor that you know your competitor better than anyone else. This will give them confidence that you are aware of, and building something better than, everything else on the market.
You need to have done at least some high-level calculations to size the market opportunity you are addressing. What is the $ spend in your sub-sector? Is it a growing or a shrinking market? Is it a big enough market for you to continue growing your market-share of? Important questions that you should have naturally addressed earlier through your natural curiosity and interest when sizing up your business idea.
4. Know your key financials
Investors are money people (although you will also come across a lot of ex-entrepreneurs) and love to understand the numbers. That is the one tangible thing they can use to argue for or against investing at their investment committee (the group in their company who will decide whether or not you get funding). Like it or not, you will have to prepare yourselves for presenting your story with numbers as well as words. At a high-level the investor will be trying to gauge how much thought you have put into the commercials of building your business. It will help them size up whether or not the $1 billion valuation (!) you have on your company at the end of year 2 in the plan is plausible through the assumptions you are making now!
Largely at early-stage discussions many of the financials discussions focus on forward projections unless you have had significant trading to date. Assuming you don’t have much current trading, having projections that are built bottom-up and are based on sensible assumptions for sales growth and profit margins are a good start for you to have a sensible discussion with any VC. Be conservative. Don’t be brash. Don’t worry if you don’t end up with year 3 sales of $50m for example, but equally, if after 5 years you are still struggling to project sales of £100k then clearly there is something wrong with your business model.
5. Explain your strategy
A clear, simple strategy needs to be outlined during discussions around raising startup money to give comfort to the investor that you know which direction you are headed. This strategy may well change as time goes by as things change but having an initial plan of how you want to progress things is no bad thing. This would typically include who the first group of customers you will approach are and why? Who you will approach next? What will be your pricing strategy? Geographical presence? Product development road map? Funding profile? Team development? Be sensible. Investors are not looking for a team who are looking to take over the world. They are looking for a genuine team that demonstrate how the VC can make money, and hopefully not lose money.
Having these areas prepared and discussed as a team will advance you ahead of the queue as far as standing you out from the crowd is concerned when raising startup money. In an environment where supply of entrepreneurs seeking investment outstrips demand, being prepared in this way is essential for you to getting funded.
Tallat Mahmood, founder at Funding Your Tech Startup
Tallat has worked in the venture capital, private equity and mergers and acquisitions area for over 10 years. He has worked internationally advising and investing in businesses of all stages. He has focused on funding for startups and is also a founding director/shareholder in a tech startup which has received a seven-figure investment from a corporate investor.