Fundraising is a crucial & often an essential step to collect the much-needed capital or funds for growing your business. These fundraising rounds are often the key steps towards converting your business idea or prototype to a tangible & fully functional business venture. This is the means by which you can take care of most of the business operations & scaling-up costs (costs for marketing, operations, salaries of employees & other running expenses) & often run into millions of dollars for high growth companies.
Hence, it is not easy to convince the investors, be it the angels, venture capitalists, banks, government organisations or your own aunt to hand over the funds to you & empower you to run your own show on their funds. While the variety & intensity of challenges in fundraising can be different & that you may have to figure out on the way, here are a list of 6 mistakes to avoid on this journey of fundraising, inspired as shared Meredith Finn Vice President at Salesforce, who leads their investments into other companies.
Failure to adequately touch upon 3 key items in your pitch: Team, Product and Market
Investors generally evaluate these three things (Team, Product and Market) when they take a look into a business idea for investment:
TEAM – Investors consider the Team to be of utmost importance when funding a business because they believe that the Right Team can champion a business to success whereas the Wrong Team can spell disaster! It is extremely important for them to have an idea about “Who is Who” on the team & where each of the team member has his/her expertise on. The team that runs the show is a very important asset for the investors to build trust and hand over their funds to you for running your business. For example, if the team members have awesome industry, technical or domain experience relevant to the business, its easier for the investor to trust that team. Also, whether the team members are collaborative enough and have spent considerable time with each other is an important consideration for the investor to evaluate the investment proposition. For the investors, a strong team is equivalent to a strong business. So, the team composition is crucial to the success of your fundraising efforts.
MARKET – The market that your business will cater to is another HUGE consideration for the investors for evaluating investment options. As a rule of thumb, a multi-billion-dollar market is always the safest bet to net an investment. The benefits of addressing a big market (Read Billion-Dollar) is pretty straightforward: the bigger the market, the bigger is the playing field for you and share with your competitors since monopolies (e.g. Google’s global share of search) are incredibly rare. As a result, everyone gets a pretty good share of the entire pie (market) and be satisfied. If you are able to earn a good revenue and mark up your profits, it will not only benefit you but your investors as well. Remember, the investors need to make money off your business and relish the Return on Investment (ROI) as much as you do.
PRODUCT – The PRODUCT or SOLUTION that you are offering is expected to solve a PROBLEM that your customers are facing. Your solution must provide a unique solution to the problem & therein lies the value of your innovation. Ask yourself the following questions to evaluate your Solution:
- Does your solution have a unique technical or competitive advantage with a clear differentiation from other similar solutions in the market?
- Will your solution place you in a dominant position in the target market segment so that you can command a favourable price from the customers?
- Do you have any viable evidence to prove the above mentioned technical or competitive advantage?
NOT KNOWING YOUR DATA
Apart from the core revenue and profitability metrics that are absolutely a must to know, it is advisable to stay abreast of the core metrics that drive your business. The investors are experienced in running & overseeing different types of business ventures & so have an all-round exposure to business environment. While they are still deciding whether or not to get into the battle field alongside you, you have an opportunity to impress them by proving that you have a great working knowledge and control of your business. Use a data-driven approach to explain the business proposal to your investors. This will help them to build confidence in you and your business so that they can quickly reach to that important decision of writing THAT cheque for you.
Here is a list of key metrics that you must have a hang on:
- Number of Customers: How many customers have you been able to impress currently?
- Customer Churn: Percentage of customers who discontinue using your solution within a given time period. For a business to perform well, the New Customer Acquisition Rate must be greater than the Churn Rate.
- Average Contract Values: Average Annualised Revenue per Customer Contract
- Average upsells: Average annualised value of add-on purchases
- Length of Sales Cycle: The process of selling your solution to the customers encompassing all activities associated with closing sales
- Quota Achievement of Your Sales Team: Dollar figures (monetary) or number of units (volumetric) actually sold to customers
- Customer Satisfaction: Last but not the least, this is a metric that determines the success of any particular product/solution & thereby any business. A quantitative representation of whether your solution was able to exceed your target customers’ expectation can be used to address this key business metric. It can be estimated in terms of “Net Promoter Score”: an index that ranges from -100 to +100 that measures the customers’ willingness to recommend a particular solution to others.
NOT SHARING A BIG ENOUGH VISION
This is an important strategy that you must design in order to communicate well to the investors about your current area of focus as well as your vision to scale up your business in the near future. Investors are interested in the ROI & so before they put their money in your business, they will be curious to know about your future plans so that they can envision their exit from the business & make quick cash. You have to balance your sales pitch to the investors in such a way that it caters to both the points of interest: the short-term goals in which you will be expected to share how you are taking steps to achieve success in the present times as well as how you are preparing to go all out & scale big in the near future. It is important to remember that if the investors are able to believe in your short & long-term goals, they will not hesitate to write that big fat cheque for you.
NOT UNDERSTANDING THE TYPE OF CAPITAL YOU NEED TO RAISE
Although Venture Equity is one of the most celebrated options of fundraising, it usually come with a lot of conditions – equity dilution of the founders and quick and large exits that you are expected to satisfy. So, it is extremely important to understand how & in what way you are going to use the funds that you are raising and accordingly work out a specific estimate for the amount of funds that you will be asking for. If you are not in for these conditions that Venture Capitalists will channelize you towards, then it is wise to consider other forms of funds that you can raise for growing your business. Some of the top alternate options are venture debts, bank loans, crowd funding. As long as you can manage, bootstrapping is the best option that you need to consider in order to retain 100% equity & control of your business with yourself.
NOT DOING YOUR DUE DILIGENCE ON INVESTORS
You need to carry out the due diligence on the investors that you are planning to approach for fundraising purposes because not all VCs are created equal:
- There are investors investing at different points in the lifecycle of businesses – Seed stage, early growth, late stage growth etc.
- There are investors with considerable experience in a particular niche & prefer sticking to it: B to B, B to C etc.
Think of investors as partners & not as guys who offer funds for your business. You have to carefully select the investors whom you would like to work with for at least the next 10 years of your business partnership knowing well that they will have a significant amount of influence & control on your business since they will be holding significant proportion of stakes in your business. It is somewhat like “dating before marriage” as Meredith puts it. A right match will go a long way. So, in addition to estimating how much funds you will be raising from a potential investor, you will also have to think about how much value the investor will bring to the table in terms of access to industry know-how, talent & network of key resources. After evaluating all of the investors on your radar individually on all these above terms, select the right candidate for an awesome business exposure & experience.
NOT ALLOCATING ENOUGH TIME OR NOT HAVING A PLAN B / C AND D!
Expect fundraising to be a long process & not an instant fixing hack. You need to give sufficient time to the investors to evaluate not just your business proposition but also yourself. The best way is to keep the channels of communication wide open & keep interacting with them in order to build relationships even in between rounds so that you aren’t crunched with introducing yourself and trying to convince them to give you money in a few weeks. Manage investor relationships like customer relationships – stay in touch and build them over time.
Last, but not the least, it is important to bear in mind that in spite of doing all the homework in preparing an attractive business proposal to woo the investors, all efforts may fail if the investors are not convinced about the value of your business. Be prepared to fall back on a few backup options under such scenarios. Keep your spirits high!
Keep this list within reach & pull it out every time you need to go for a fundraising round & face the investors & their barrage of questions. Don’t make these 6 mistakes, believe in yourself, prepare in advance & enjoy the fundraising process.