Things You Wish You Knew Before Raising Capital for Your Startup
Being an Entrepreneur sounds fun; having a company of your own gives you the liberty to do the work your way. However, founding a company is an uphill task. You need to go through so many challenges before you can see your company as an established entity in the market.
No, we are not talking about having a degree or certification related to business or finance. Having a business degree is not the merit of becoming an entrepreneur. We don't even classify it as a challenge; there are many more to come your way when you start your venture of founding a startup. One significant challenge you will encounter during the process is raising capital for your startup.
Dealing with the challenge of raising capital for your startup needs you to be aware of multiple things. Overlooking such things before raising capital will leave you regretting for the rest of your life, and you may even fail to succeed with your startup.
However, it is often observed that most entrepreneurs are so passionate and involved in founding the startups that they fail to take heed of these things before raising capital. Therefore, we have put together details about these things to help you become a successful entrepreneur without giving the future of your startup into the hands of someone else (say venture capitalists or, in short, VCs).
If you are also stepping into the field of entrepreneurship and need to raise capital for the foundation of your startup, then being aware of these essential things will help you move forward with full confidence. Read on to learn more about these important things if the topic sounds interesting to you.
Proper Homework is the Key
Many entrepreneurs make the mistake of believing that they know their brainchild fully and there is no way they can't satisfy others about it. However, this is not the case, at least for the majority.
There could be some exceptions, but still, there are chances that you will fail to make others (consider VCs) believe that this is the perfect project for them to generate an excellent ROI (Return on Investment). You may know every single bit of your project, but you may need to learn the market's ups and downs where you will step in. Hence, it is necessary to make sure that you go fully prepared with proper homework to a meeting for fundraising, just like you used to prepare for the presentation while you were doing a job.
Additionally, homework is not limited to gathering complete data about your venture, getting the figures right, or digging deep into the market you will step in. It also involves research about the investors you are targeting for fundraising.
Your job is to list your potential investors and analyze them while considering various factors. Doing so will enable you to figure out the most suitable investors for your venture and their likeliness to join hands with you. For instance, you can make a list of potential investors, the capital they manage, and finally, the startup or companies they have funded earlier who work in your targeted market.
Keeping Your Calm Will be the Best Strategy
Another thing that startup founders often overlook is taking the process of raising seed capital as just another challenge, though a significant one, that has come your way. Doing so will help you deal with it calmly.
Some entrepreneurs take their idea as their baby and don't want to hear anything wrong about it. Most probably, the reason behind this attachment is they are proud of their idea and consider it the best of the lot that is supposed to change the landscape of the market after execution.
However, it is worth mentioning that the investors you are consulting with to raise capital for your startup have their own concerns. Simply put, you must be courageous to listen to opposing opinions or 'No'. Here are some situations that require you to keep your calm as a startup founder.
Handle the Criticism Gently
Understandably, investors will only approve capital for your idea once they have performed due diligence. Therefore, the process of raising capital will include critical questions coming from the other side of the table.
Moreover, you are likely to hear about the pros and cons of your idea from various people. Some entrepreneurs may lose their calm in such a situation. However, the best way to deal with such a situation is to analyze the criticism or questions calmly and use logical reasoning and relevant analogies to back your idea.
Don't Become a Victim of the Signaling Effect
Another frustration you will likely experience while raising capital for your startup is the 'Signaling' effect. It is worth mentioning that you will come across various investors who are not suitable for you and vice versa. If you happen to deal with a couple of investors who don't find your idea practical, you are likely to get rejected by various others because of the signaling effect.
Let's understand what actually is the signaling effect; it is quite like the dominoes-effect. Investors keep track of others in the market, and most of them will not take heed to an idea that has already faced rejection from their peers. However, you need to move on until you find an investor who is genuinely interested in your idea and willing to help you execute it. It is only possible when you keep calm and never let the signaling get the best of you.
The Fundraising Process Requires You to Go All In
It goes without saying that managing a startup and putting it on the path to success is a full-time job. Still, when it comes to raising funds for your startup, you need to go all in and put all other tasks on the backlog.
You need to work on multiple things while you are looking to raise funds for your startup and minimize its chances for failure. Here are some tasks that you need to work on during this process.
Tailoring Customized Pitch for Individual Investors
While the job of all investors (VCs) is similar, i.e., funding startups, every investor is not the same. For example, some investors are more into short-term results, while others have a vision for long-term goals.
In addition, some of them want the figures to get an idea about the ROI (Return on Investment) they will be getting. In contrast, others are more interested in figuring out how an idea will change the targeted market's landscape. Simply put, individual investors will have their own way of analyzing a startup idea.
However, as a founder, you must satisfy their requirements by providing them with the necessary information. Hence, a practical approach before consulting any investor to raise capital is to tailor a customized pitch to provide them with all the data they need. Doing so will significantly increase your chances of raising the required capital for your startup.
Get to Know the Industries a Particular VC Has Funded Earlier
Before pitching your idea to any investor, you must conduct due research about the person or firm you are consulting with to raise funds for your startup.
Understandably, some VCs find ideas regarding particular products or industries hotter than others. Hence, if you are looking to pitch your idea to investors and raise capital for your startup, you need to conduct sufficient research first and look for the VCs that are actually interested in your vision.
One way to do this is by going through their portfolio; if you find any logo relevant to the industry or market you are targeting, then such a VC should be preferred over others. Just remember what Abraham Lincoln said, "If I had 6 hours to cut down a tree, I'd spend the first four sharpening the saw", and you will know how important the research part is.
Don't Waste Your Time and Effort
As we mentioned earlier, raising funds for a startup is a full-time job, and you must go all in. However, that doesn't mean that you should waste your time and effort while going behind investors who come late to meetings, give lame excuses regarding due diligence, fail to show up to the meeting, and take weeks to respond to your messages.
It is time to part ways with such a person who is not respectful to you and not serious with your startup. It is better to be in a partnership with investors who value their time and that of others as well.
Only Raising Funds Should Never be an Objective
Finally, if you find an investor who is genuinely interested in your idea and wants to partner with you to fund your startup, you must seek much more than just capital from them. VCs have years of experience in funding startups, and they have a better idea of how things work in business, so as a founder, you can seek their advice for your own good.
When an investor is genuinely interested in a startup and finds it promising, they are more than willing to help startup founders get things straight. This is where they will give you advice regarding the professionals you must hire or how you will build a loyal team willing to do anything for the betterment of your business. Hence, you should seek advice from the VCs in addition to the funds you are getting for your startup. There is also a need to follow some tips to help your startup go viral.
Raising capital for your startup as its founder could be a tough job, especially if you are a first-timer. However, things can work smoothly for you if you know a few essential things before raising capital.
We have put together details about these things in this blog to help people looking to launch their startups. If you consider these things before consulting VCs to raise capital, chances are that you will successfully raise capital for your startup on your terms. Hopefully, this blog will add value to your career as a startup founder.