VCs see lots of deals and invest in very few. To help your startup stand out from the crowd, we’ve pulled together a list of things you should do before you line up those pitch meetings and raise a round of funding.
Take some time to work through this list and you’ll be in a much better position to secure the funding and the investors you need to turn your startup into a rocket.
Create (or update) your business plan
Research shows that a well-written business plan can improve a company’s growth by an average of 30%. But investors can’t seem to agree on whether business plans are helpful or unnecessary. Some VCs don’t even bother to read them, while other investors say it’s a red flag when a business plan is not available.
Long story short: you’ll need to have a business plan before you raise a round of funding. Just be prepared for some VCs to not request it.
Your business plan will need to include:
- Executive summary
- Company description
- An identified (and promising) target market
- Competitor analysis
- Description of your products or services
- Management and operational structure
- Marketing and sales strategy
- Financial projections for 3-5 years
Even if you have a business plan on hand, spend some time updating it. If your company went through a big re-org, you tweaked your business model, or your financial expectations have changed, investors will want to know.
The hidden advantage of putting your plan down on paper is that your business’s mission, vision, and growth strategy will all be top of mind. This will put you in a better position to pitch investors; when a founder can’t speak confidently about every projection, assumption, and conclusion included their startup’s business strategy, that’s a big red flag. (If you’ve ever seen investors grill a flustered business owner on Shark Tank, you’ll know what we’re talking about.)
Prepare your current and projected financials
Does your startup have “10x return” potential”? Meaning: can your business turn $1m into $10m?
Return potential is just one of the many financial metrics that Parul Singh, a VC investor at Founder Collective, says she looks for when assessing startups as candidates for investment.
Investors like Singh will use your current and projected financials to:
- Determine if and when your startup will be profitable
- See your startup’s cash burn rate (this will offer clues on how much startup capital you need)
- Assess your key financial assumptions (price per product, cost of development, marketing costs, employee expenses, operational costs, gross margins, etc.)
So, before you start talking to VCs and Angel Investors, you’ll need to prepare:
- Profit and loss statement
- Cash flow statement
- Detailed categories of income and expenses
- Balance sheet
- Underlying assumptions
Make sure your financial projections range from 3-5 years. Include detailed assumptions about expenses, margins, overhead costs, and product development costs. And don’t worry too much if you can’t show profitability in the first year or two; this isn’t going to scare investors as much as NOT having comprehensive financials in the first place.
If you’re not sure how to prepare your financials, hire a CPA to help. Some VCs suggest that your financial projections are more important than your business plan. So it’s crucial that you get this right.
Prepare and understand your capitalisation table
We cannot stress this enough: do not start looking for investors until you have a capitalisation table and know exactly how to read it.
A detailed cap table tells you ‘who owns what’ in your company. It’s a must-have tool when you raise funding, because it tracks critical ownership insights like:
- Ownership stakes: who owns what amount of your company, and who needs to sign off on major company decisions (e.g. company sale, reorganization)
- Types of shares: who has common shares, preferred stock, etc.
- Paid-up capital: the amount of money your startup has received from shareholders in exchange for shares of stock.
When you start pitching investors, a well-maintained cap table will help you understand whether you can meet the terms of an offer. For example, if a new investor requests options that cover a percentage of company ownership, a cap table can help you answer the following questions:
- Do you have enough shares available in your option pool to meet the offer?
- How many shares are required to cover the requested percentage?
- How dilutive will this grant be to other holders in your company?
Some founders regret taking on investment due to how much company ownership they have to give away. A cap table can help you avoid making this mistake.
If your corporate secretary uses cloud-based corporate governance software like Zave, you’ll be able to access your cap table online and share it securely with other stakeholders.
Learn how to create a cap table and download a free cap table template if you’d prefer to take a DIY approach.
“VCs see LOTS of deals and invest in very few, so you will have to stand out from a crowd.”
Geoff Ralston, Y Combinator
Build a strong core team
Investors aren’t just putting money into a business. They’re betting on the people at the helm of that business. In this case, that’s you and your startup’s leadership team.
Although your core team structure and leadership member profiles will be outlined in your business plan, make sure you’re able to articulate them well in conversation, too. When investors start asking questions like ‘Who’s in charge of what?’ and ‘Does that team member have the experience to achieve X?’, you don’t want to sound unsure.
Here are some of the things investors will be quietly assessing when they’re sizing up your core team:
- Who’s on the team? Who’ll be joining the team in the future?
- Individually, does each team member have the right background and domain expertise to achieve your company’s vision?
- Collectively, does your team have the experience it needs to achieve 10x returns?
- What’s the workplace culture like? Is your team willing to take direction and suggestions from investors? Is everyone working together well, or is there unresolved friction?
If you’re still building a core leadership team, or if your existing team needs some refinement, make this a priority before you start pitching VCs. If you’re not confident in your core team, investors won’t be either.
“Investors write checks when the idea they hear is compelling, when they are persuaded that the team of founders can realise its vision, and that the opportunity described is real and sufficiently large.”
Geoff Ralston, Y Combinator
Build a target list of pre-qualified investors
Working with an investor is a two-way deal. Just because someone wants to invest, it doesn’t mean they’re the right investor for your startup.
You’ll save a lot of time if you get clear on the type of investor you want to attract before you start your outreach. This step is just like pulling together a customer persona—only this persona has the potential to put serious funding into your startup.
1. Angel Investor or Venture Capitalist: Which investor do you want?
You’ve probably heard these terms used interchangeably. But there are big differences in the way angel investors and VCs will invest in—and work with—your startup.
Angel Investors
More often than not, angel investors are former entrepreneurs themselves, which means they’re more likely to be genuinely interested in the growth of your company. If you pair up with the right angel investor, they’ll have direct experience in growing a company in your industry, which can help you accelerate your own startup’s growth.
Unlike VCs, angel investors are more likely to invest when a startup is still in its early stages. This usually means they’ll get involved in Seed Funding and Series A rounds. Although angel investors will take an equity share of your startup in exchange for investment, their funding can also be exchanged for convertible debt.
Because they are investing their own money, their decision-making process is usually much faster than VCs. But those decisions can be fuelled by emotion. Compared to VCs, Angel Investors are often seen as amateurs.
Venture Capitalists (VCs)
VCs want to invest in startups that exhibit massive high-growth potential. VCs will typically only invest once a company is ready to commercialise its idea. And they usually seek a large ownership stake in order to have more influence over the company’s direction.
If you want to attract VC funding, make sure you can demonstrate a strong management team, a huge potential market, a unique product or service, and a strong competitive advantage.
While VCs are likely to invest exclusively in industries that they’re familiar with, they won’t always have direct experience working in (and growing) a startup from the ground up.
Whereas a solo angel investor can make quick decisions on their own, a VC firm might have to run everything via a committee or several advisors. If you take on VC funding, make sure you understand how the nuances of your VC’s decision-making process will influence your day-to-day.
“The difference between an angel and a VC is that angels are amateurs and VCs are pros. VCs invest other people’s money and angels invest their own on their own terms.”
Geoff Ralston, Y Combinator
2. Build a target list and pre-qualify investors
Mark Suster, VC and Managing Partner at Upfront Ventures, says pre-qualifying investors saves you and your target investors a bunch of time. Here’s how Suster suggests you go about it.
First, use Google Sheets to create an outreach list of potential investors
Create a basic spreadsheet to track the following info:
- Firm
- Investor (person)
- Geographical location
- Typical size of investment
- Status (contacted, need to email, etc)
- Notes
- Next steps
Then, qualify those investors and prioritise your outreach
To make your outreach as efficient as possible, you’ll want to disqualify or de-prioritise investors that don’t match with your startup.
You can assess whether a VC firm is a good fit for your startup based on the following criteria:
- Stage: at what stage does the VC firm typically invest?
- Industry focus: do they invest in companies in your niche?
- Geography focus: are their investments exclusively focused on a single region (e.g. Silicon Valley)?
If you’re attempting this process for the first time, check out Suster’s guide Raising Money for Your Startup for pro advice on researching and connecting with VCs.
“As an investor, I can tell you that when I meet an entrepreneur who knows very little about our fund or me as an individual, it’s a huge turn-off. It’s not about my ego; it’s more that if an entrepreneur can’t bother to spend a few minutes even reading our website then I know they aren’t pursuing us as a firm with intent, and I know that when they do business more broadly they’ll likely “wing it” on important things when five minutes’ prep would at least have covered the basics.”
Richard Harroch, Vantage Point Capital Partners
Prepare a pitch deck that stands out from the pack
It’s hard to impress investors during an in-person meeting. That’s why your pitch deck needs to articulate a compelling story in a short amount of time.
Aim for 15-20 slides, max, and avoid wordy, overcrowded slides. The more concise and impactful you can make your presentation, the better.
According to Richard Harroch, a VC at Vantage Point Capital Partners, here’s what a good pitch deck needs to include:
- Company overview: concise summary overview of your startup.
- Mission/vision: what’s driving your team?
- Core team: who’s your core team? What’s their relevant background?
- The problem: what are you trying to solve?
- The solution: why is your proposed solution better than other solutions or products?
- The market opportunity: how big is the addressable market?
- The product: specifics on your product or service.
- Your customers: who’s your target customer and what’s their level of demand?
- The technology: what is the underlying technology and how is it differentiated from your competitors?
- The competition: who are they, what’s their market share?
- Traction: have you acquired early customers, early adopters, partnerships?
- Business model: what is the business model? How to users translate to revenue?
- Marketing: how do you plan to market? what do you anticipate for customer acquisition costs vs. the lifetime value of the customer?
- Financials: actual and projected for 3-5 years
- Your ask: how much capital you are trying to raise?
Before you share your pitch deck with the world, present your pitch your core team and trusted advisors. Use the constructive feedback from these test runs to improve your deck before you put it in front of a potential investor.
Finally: hang in there
The road to funding can be long. And President of Y Combinator Geoff Ralston is quick to admit that raising funds is far from easy. “When (the fundraising process) is complete, it will feel as though you have climbed a very steep mountain.”
Although setbacks will happen, making sure your startup is fully prepared before you start the climb should make your fundraising journey as quick and painless as possible.