Entrepreneurs are always anxious to start or grow their company with an infusion of funds. What they don’t realize, and I see this constantly in my classes and coaching sessions are that they have to do a lot of work before they can even approach an investor if they want to be successful. I often see marketing, corporate structure, the team, the product, and market research pushed to the back burner by entrepreneurs who need to raise money first. Unfortunately, they have the order of those activities wrong.
That’s the reason I’ve asked Saul Orbach to write a blog about how to raise capital successfully. Saul is a Venture Partner at Start a Capital and at BrightSky Ventures. He is also a Senior Adjunct Lecturer at the Technion International School. His email is at the bottom of this post.
So whether you are just starting out or growing your company, I’m sure you will find Saul’s advice timely and helpful either as new information or as a review.
I’ve added some of my comments based on years of working with entrepreneurs into his 8 points – they are in italics!
Raising investment capital for your startup is one of the harder things you’ll do as you build your company. Unfortunately, most first time and many second time entrepreneurs don’t really know the ‘rules of the game’ of fundraising. What are the questions you need to answer for investors to convince them that you are that ‘1 out of 100’ companies that they should invest in? In this article, I’ll share the questions most investors want answered, but don’t necessarily share ahead of time, so that you can get a leg up on most of the others you’re competing with for venture capital. Good luck!!
What is the problem in the world you seek to address? What keeps your potential customers up at night? What are they losing sleep over? What is the basic need people have that your product or service will fulfill? Make sure you are a problem seeking a solution instead of a solution seeking a problem.
The reason that the Problem is SO critical is that according to CB Insights [https://www.cbinsights.com/], 42% of startup companies fail due to a lack of market need! In other words, no problem!!
How big is it? How many people have the problem? Can you measure the Total Addressable Market and break out the Serviceable Addressable Market and your Obtainable Market? What are the market dynamics? Is the market small but growing, quickly or slowly?
What does the Customer Landscape look like? How do you define your target customer? Can you demonstrate that you understand the market, the customer, the channels, the dynamics, etc?
Describe how your solution addresses the problem as described above. Don’t just describe your product or service. Do that, but make sure you make clear how that product or service applies to the problem or need you’ve described above.
Some people ask why you need to describe the solution. You’d be surprised how often people come up with a great problem in a big market only to describe a solution that doesn’t solve the problem! So be sure you’re on target here!!
Describe your competitive advantage. How your product or service is better, faster or cheaper. What is defensible? What is unique about it? How is it differentiated from other offerings available? This will bridge from the value proposition described above to the competitive landscape discussed next.
Describe the existing solutions available and the other companies attempting to address the problem described, either as direct competitors or as one offering a substitute product.
Who are you competing against? What are the attributes or features of your solution that make you compellingly different, better, or more attractive to customers?
KNOW the players in your landscape WELL!! it shows that you’ve done your homework, you are aware of what’s going on and you understand the difference between you and them!
A word of advice: Choose your competitors well — as you outline the other players, you are also sending a subliminal message that you belong in this company and should be valued accordingly.
So many entrepreneurs do not do their homework! I have sat in on countless meetings where investors know the entrepreneur’s market better than the entrepreneur. Do your homework! Reference libraries are full of useful information. When I started my last company, I test-pitched an investor who I know doesn’t invest in my category – and received valuable feedback about how to improve my pitch.
Discuss your business model and the marketing plan. Show how your solution penetrates the market, and grows from there. Talk about how you’ll attract and acquire customers. What will your cost of customer acquisition be? How will it change over time as you execute your strategy. What’s your lifetime customer value? How much revenue will you generate? Profit? What will the growth rate be. How will all of that activity return positive financial results to the Company?
The rule is that structure follows strategy. Now that you have a strategy, you can develop a company structure that best matches the needs of the strategy. Once you’ve done that, identify the skill sets you need to execute the strategy. This is the basis for your management team needs!
So, talk primarily about the Management, and show how these people’s skills fit the needs of the strategy you described.
Another great team you need is your advisory board. Talk about influential people serving as Directors or Advisors, and professional service providers if appropriate.
Ask for the money you are trying to raise. You should talk in terms of four things: the Amount-how much money you’re raising; the Duration—how long the money will last; the Purpose—what the money will be used to do [Note: don’t plan on paying your salary with this money – investors do not like that]; and, the Outcome–the results expected [Note: try to quantify the results – many investors are looking for 10x results of their investment – show them how you will deliver it.]
Summarize in three points why your investment is going to be the WINNER that they should invest in.
I’m often asked about how to get a lot of the information you need to answer the questions. And I always say—go out and talk to the market. Talk to the customers. To your potential partners. Even to the competitors. The easiest way to get information is to ask for it. [Note: you can do this cheaply but you must do it.]But it takes work. You have to know or learn how to ask the questions, have an open, inquisitive and non-judgemental mind (otherwise you can bias the conclusions you need to reach). Do all of this, and you’ll be able to decide for yourself first, and for everyone else second, including investors, whether you have a great business opportunity on your hand!
It’s a lot of work, but it’s also the most rewarding of efforts! Good luck!!