Every week expert mentors are taking sessions for the top 5 startups of GP Accelerator (GPA) which is operated by SD ASIA. The sessions effectively guide the startups for success in the long run.
Tanveer Ali, Executive Director of Olympic Industries Ltd. came in as a mentor recently. His session was on fundraising tips for the startups. He talked about the different phases of fundraising. Here are few key points from the session-
Before looking for fundraising what are the crucial topics to keep in mind?
Fundraising is often a very sensitive issue. There is a lot of negotiation. It’s not only just between the investor and you but also between you and your co-founders and team members. All the members need to agree on how much to raise and how much of equity are you willing to give up. Lots of things should be well considered before making the decision of fundraising. The must ones are-
- Where are you today and where do you want to be next?
- How much your business is spending today?
- How much you need to get where you want to be in next 15-18 months?
- How much money do you need to get there?
- How much of your business are you willing to give away to get that funding?
- If you don’t raise money, where will you be?
Why do we take money from external investors?
There could be different reasons for each company to raise money. But typically 2 primary reasons are critical-
- Diversifying economic risks by involving more people. If you acquire shareholders you spread the chances of risk.
- Accelerating your growth should be the primary reason of why you want to raise money. Focusing on the growth of your business should be your key planning.
By taking investors’ money, you plan the road map of how quickly to accelerate the growth or reach your goals. If you have certain goals that you know you can reach in 3 years, would getting external capital cut the time to one and a half year? If the answer to this question is yes, then comes a more critical one. How much of your business do you have to give away to meet your revenue goals in 1 and a half year?
What do investors look for in a business before deciding whether to invest or not?
These are the three most important things that any investor would review:
- Product market fit
- Market size
Every venture capital investor looks at different things in business. But the general number one item that any investor would look for is the Team. Typically while assessing different criteria in investment assessment, the investor put 70% of the valuation in Teams. Whether the team is confident, compatible and has the ability to execute the plan has a great impact on investing decision.
Typically it takes an average startup 7 years to reach a level of liquidity events. Investors look for a team that can iterate through this time. The role of each member of the team might overlap and they need to carry along. Also, it’s important to figure out how the members will react if they fail.
The team is valued so high because you invest in people and you do that so that they can salvage the business. The team needs to truly understand the product market fit and the market landscape. Their confidence and commitment need to be high to carry the startup for 7 years. So while trying to get investment, focus on the strength and dynamics of your team.
Once you have figured these out, you need to think about your fundraising ask.
- How much you want from investors?
- What right and privilege will you give them?
Fundraising is not a fun thing to do, you need to negotiate and meet investors many times. Also when you do fundraising, you are not building your business which is a pretty big opportunity cost. So, you need to decide how much you are asking for and what will you be offering them in return.
How much do you need to fundraise? How much is too less or too much?
You must have a financial model. Ideally, you need to know how much money you will need in next 15-18 months.
Risk of raising too little fund
- You may not be able to spend money for acceleration of growth
- You may not see the expected results
- Competition catches up
- You have to start fundraising again and thus loose focus on building your business
Risk of raising too much
- You raise expectation of investor and if you fail to deliver them they will not give further funding and might even ask back the amount they gave
- If they don’t give more funding, you will have to raise at a lower valuation which will bring down the value of business and give the wrong signal to the market.
- Idle hand makes a poor decision. You take more aggressive chances and make wrong decisions.
How you going to spend your money matters to investors
Investors don’t just want to throw their money arbitrarily. They analyze 3 different major component of how you going to spend your money
- Your product roadmap is very important. Investors like to know where you will take your company’s technology next and it matters a lot in their investment decision.
- How much of your expenses are going to be over your revenues is also very important. Investors focus on the optimization of cash flow.
- You need to point out where you are going to spend the money specifically. Marketing, advertising, product development, hiring, etc. budget needs to be specified over a period of time.
What does a perfect investor look like?
- Has experience in similar field
- Has time to guide you
- Can add value and strategize
How do you fundraise?
- Investor pitch.
What should be in the investor pitch?
- Dynamic team
- execution strategy
- what you will do and what you did so far
- market problem and solution
- market landscape
A typical investment pitching process might take some 30-90 days. You need to be patient and plan ahead about the amount you need to raise. If you raise less, you will again have to spend up to 90 days in pitching and your business performance will eventually fall behind.
Funding is just one piece of the entire puzzle, it helps you to accelerate your growth. It should never be seen as an achievement or goal, rather as a mean to achieve your objectives.