Ben Alderson Financial

Fundraising Fundamentals

Whatever your business and whatever you’re raising the money for, the following 9 principles give you a good guide to the most important things to consider before and during talks with investors and lenders:

  1. 1. Focus on the right metrics!

    As early as possible, choose the right metrics to help you validate and track the growth of your business. The best metric you can show to an investor is growth in the number of paying customers and the resulting growth in total revenue (sales income). And be aware that some metrics like user numbers or GTV / GMV (gross transaction value / gross merchandise value) look great at first sight, but don’t necessarily indicate the right kind of growth or financial performance, and investors know this!

  2. 2. Generate as much traction as possible.

    Investors are far more likely to invest in a team with a validated solution for a proven problem – i.e. paying customers! It is usually VERY hard to persuade investors to fund ideas that haven’t yet been developed into a usable product or service. And even if you have secured your first paying Customers, don’t rush to raise funds if you don’t need to! Generating as much traction as possible will help you negotiate better deal terms when you really do need to raise funds.

  3. 3. Build a financial model and pitch deck.

    Investors want to see 3 – 5 years of financial projections in enough detail to show that you have a good understanding of the revenue potential of your business and the associated costs. They also want to see a clear and compelling pitch deck that helps them understand the nature of your business and the terms of the investment. These two documents go hand-in-hand and share some of the same data points, such as your price point, market sizing and investment ask – so make sure they are the same in both documents!

  4. 4. Decide which type of contract and what terms to use to fundraise.

    Conventional SME businesses should most likely be looking to secure loans or credit lines and need to think about the amount they need to raise and the interest rate and repayment period. Early stage startups should be looking to raise money using Convertible Note or SAFE contracts and need to consider the maturity date, interest rate (if applicable) and whether to use a discount rate and/or valuation cap, More mature startups will be looking to raise money by selling equity in their business and need to focus on their valuation.

    Whichever applies to you, be sure not to undervalue your business and give too much away to investors. Accepting high interest rates on a loan will make it difficult to grow profits whilst also meeting the required repayments. And for Startups, giving away too much equity too early on can make it very difficult to raise future rounds later down the line. ALWAYS consult with a mentor or advisor before finalising deal terms with Investors or Lenders, especially if you are inexperienced at fundraising!

  5. 5. Compile your data room!

    A ‘Data Room’ is simply an online shared folder where Investors can go to review your documents. You can use Google Drive or DropBox or any other similar solution. As a minimum you need to have your i.) pitch deck, ii.) financial model, iii.) incorporation documents and iv.) cap table uploaded here. You can also include your AFS (audited financial statements) if you have them, as well as anything else you think will help investors understand your business better, like team structure and profiles or industry analyses.

  6. 6. Determine potential exits for investors.

    An ‘exit’ refers to the point in time in the future that an Investor will sell their stake in your business, at which point they hope they will have made a return on their investment (ROI). For lenders, the exit is easy to understand – it is usually long and drawn out because they receive loan repayments over a lengthy time period. But for equity investors, you need to explain when and how they will be able to sell their stake in your company, usually through a later round of fundraising, the sale of your company or an IPO.

  7. 7. Identify and approach the right investors.

    Try to identify Investors who are interested and experienced in the industry area and business model for your company. Also make sure you are approaching investors who invest the ‘ticket size’ (i.e. the amount of money) that you are looking for. When you have found who you want to pitch to, warm introductions are always better than cold ones. Accelerator programs and startup communities already know most of the investors in the local ecosystem and can often make those introductions for you, so reach out to them first.

  8. 8. Learn from feedback.

    You are going to hear a lot of No’s from Investors before you hear your first Yes. This is inevitable! Don’t panic, carefully consider any feedback you get and keep going! Investors are smart people (mostly!) and can bring a useful new perspective and experience that you don’t have within your Management Team. That’s not to say you should just do everything Investors tell you, but you should certainly listen to them, reflect on their feedback and decide whether you want to act on it and how.

  9. 9. Keep investors updated.

    Some investors will say ‘No… for now’. This means they aren’t yet confident enough to invest, but may be in the future if you continue to show growth. Don’t just move on to new investor discussions and forget to keep those you have already spoken to updated with your progress.

1. Focus on the right metrics

 

2. Generate as much traction as possible.

Investors are far more likely to invest in a team with a validated solution for a proven problem – i.e. paying customers! It is usually VERY hard to persuade investors to fund ideas that haven’t yet been developed into a usable product or service. And even if you have secured your first paying Customers, don’t rush to raise funds if you don’t need to! Generating as much traction as possible will help you negotiate better deal terms when you really do need to raise funds.

3. Build a financial model and pitch deck.

Investors want to see 3 – 5 years of financial projections in enough detail to show that you have a good understanding of the revenue potential of your business and the associated costs. They also want to see a clear and compelling pitch deck that helps them understand the nature of your business and the terms of the investment. These two documents go hand-in-hand and share some of the same data points, such as your price point, market sizing and investment ask – so make sure they are the same in both documents!

4. Decide which type of contract and what terms to use to fundraise.

Conventional SME businesses should most likely be looking to secure loans or credit lines and need to think about the amount they need to raise and the interest rate and repayment period. Early stage startups should be looking to raise money using Convertible Note or SAFE contracts and need to consider the maturity date, interest rate (if applicable) and whether to use a discount rate and/or valuation cap, More mature startups will be looking to raise money by selling equity in their business and need to focus on their valuation.

5. Compile your “Data Room”.

Whichever applies to you, be sure not to undervalue your business and give too much away to investors. Accepting high interest rates on a loan will make it difficult to grow profits whilst also meeting the required repayments. And for Startups, giving away too much equity too early on can make it very difficult to raise future rounds later down the line. ALWAYS consult with a mentor or advisor before finalising deal terms with Investors or Lenders, especially if you are inexperienced at fundraising!

A ‘Data Room’ is simply an online shared folder where Investors can go to review your documents. You can use Google Drive or DropBox or any other similar solution. As a minimum you need to have your i.) pitch deck, ii.) financial model, iii.) incorporation documents and iv.) cap table uploaded here. You can also include your AFS (audited financial statements) if you have them, as well as anything else you think will help investors understand your business better, like team structure and profiles or industry analyses.

6. Determine potential exits for investors.

An ‘exit’ refers to the point in time in the future that an Investor will sell their stake in your business, at which point they hope they will have made a return on their investment (ROI). For lenders, the exit is easy to understand – it is usually long and drawn out because they receive loan repayments over a lengthy time period. But for equity investors, you need to explain when and how they will be able to sell their stake in your company, usually through a later round of fundraising, the sale of your company or an IPO.

7. Identify and approach the right investors.

Try to identify Investors who are interested and experienced in the industry area and business model for your company. Also make sure you are approaching investors who invest the ‘ticket size’ (i.e. the amount of money) that you are looking for. When you have found who you want to pitch to, warm introductions are always better than cold ones. Accelerator programs and startup communities already know most of the investors in the local ecosystem and can often make those introductions for you, so reach out to them first.

8. Learn from feedback.

You are going to hear a lot of No’s from Investors before you hear your first Yes. This is inevitable! Don’t panic, carefully consider any feedback you get and keep going! Investors are smart people (mostly!) and can bring a useful new perspective and experience that you don’t have within your Management Team. That’s not to say you should just do everything Investors tell you, but you should certainly listen to them, reflect on their feedback and decide whether you want to act on it and how.

9. Keep investors updated.

Some investors will say ‘No… for now’. This means they aren’t yet confident enough to invest, but may be in the future if you continue to show growth. Don’t just move on to new investor discussions and forget to keep those you have already spoken to updated with your progress.