Raising the first round of funding for any business is undoubtedly one of the biggest challenges facing entrepreneurs, in any sector. Convincing investors that your fledgling business is worth their hard-earned cash is a skill that even some of the most seasoned business owners struggle with. You are quite literally trying to impress upon them your vision and dream, whilst convincing them that this dream has real world, monetary value. Raising investment is also a long-winded process, which business owners need to be prepared for, as for most ventures, the more money, the longer the potential investment process will take.
So where does this process start? One of the most important aspects that business owners need to consider is the relationship-building part of raising first round funding. Whilst many would feel that there is a formal process in raising capital – pitching, waiting for a decision, submitting due diligence – it is rare, almost unheard of, for investors to make a decision based on one meeting. Most will want to build a relationship over a period of time, see how the company operates, and understand the founders to an extent before signing on the dotted line.
For business owners who are feeling stressed and wanting the signature of the investors, it can often test their patience. But this is a critical part of securing investment, and it is important to allow investors the time they need to make a decision. Seasoned venture capitalists might also ask for an experienced CEO to lead the company as part of any deal, especially if you have little experience in running a large company. You may have to relinquish some control in order to grow and strengthen your team and business.
You are the investment
The second key aspect to remember when securing first-round funding is that you, not just your potential business, are the investment. You may have the most exciting idea that the investors have seen in a long time, but one thing they will be looking for is whether you can manage a young, start-up company. Presenting yourself as a confident business owner, who understands both the company and the numbers inside out is crucial to securing first round capital. No savvy investor would put their money in the hands of a person who doesn’t fill them with confidence. It is also important not to give too much away, otherwise you risk toxic investment that will affect your business later on, and reduce your leverage if later funding rounds are needed.
Deciding upon how much capital you’re trying to secure is another, more subtle skill that is influential in securing first round funding. Business owners are obviously keen to get as much financial backing as possible, but it is important to pitch at a level that investors will feel comfortable investing in. Too much, and it will give the impression you don’t understand the value of the business and the marketplace. Too little and you may devalue the business itself, or even put yourself in the perilous situation of running out of capital before completing the targets set by the first-round funding.
This leads me on nicely to my next piece of advice: understanding the value of your company. As your perceived value of the company will influence the amount of capital you are trying to raise, it is important to arrive at an accurate valuation, so that you demonstrate your understanding of the market sector you are targeting. When we were first seeking funding for BaseKit, we spent a great deal of time evaluating the potential of the business. With a business model that wasn’t limited by things such as having to establish ‘bricks and mortar’ locations, our business had the potential to grow rapidly, almost overnight. So when placing a value on your business for first round funding take this into account, so that you can demonstrate to investors the true potential of the company.
Taylor the pitch to the investors
My other piece of advice to business owners looking to raise seed capital is to specify; that is, to make the pitch specific to the investors, who essentially may form part of your management team. Successful businesses are a result of the people running the company, including the investors, not the idea itself. With a pitch that is specific to your investors, who ideally understand and have experience of investing in your sector, you are more likely to secure funding from a team that can add more than just capital to your fledgling business. It is also paramount that you look for an investor who will actively engage in your business. How big is their network? How successful are they? Do they have the right experience to take your business to the next level? These are all questions you should be asking of potential investors.
My final point is an inside tip I was once given from an investor. They look for the ‘holy trinity’ when deciding whether to invest; product, market, and team. If you are confident that all three pillars are strong enough to stand up to being assessed by seasoned VCs, then you will be able to command a greater value on the investment. If your team is strong, your product unique, and the market large enough, then you should be walking into potential investor meetings with the confidence to achieve the best investment in your business.