Several of our clients have come to us with similar problems: they have ironed out the expenses needed to start and maintain their firm through profitability, but do not know how much to ask from investors for the initial round. Should they get enough capital for the following six months? One year? Two to three years?
There are several key factors that come into play when making this decision and we have developed a three stage process to determine this:
Step One: Determine Milestones
Milestones are developments in your company, service or product that show a higher level of value to investors. A healthcare company may have several milestones of funds needed to complete clinical trials, with each milestone showing further chance of the success of the product. A company making consumer products may be able to fulfill an initial milestone of orders, but need funding to ramp up production for larger orders, creating an additional milestone from market traction. Every industry and every company has it’s own success figures that, if achieved, will expand upon the perceived value of the firm.
Step Two: Create a timeline
Plan out what you can accomplish with various levels of funding, how they will be used, and when additional funds will be needed. The timeline should be tied to the milestones created in step one, and used not only to show investors but for the company to plan internally as well. Determine what the valuation of your company should be at each stage of funding under all scenarios and the projections upon exit.
Step Three: Know your Audience
Now that you have determined your timeline for funding, review the network of investors you can connect with or will be speaking with. Find out what size rounds they typically fund, what they look for in terms of growth potential and the valuations similar companies have received with them. This information may be available on their website, Gust, Angellist, Crunchbase, Mattermark or other sources. For an Angel Investors or syndicate may be interested in funding the $500K-$1.5M seed round for your first milestone, while a venture capital firm that invests in you may prefer the $5M initial investment to fund all of the milestones for the first year to year and a half. Pitches and slides should be customized to the investor group you are pitching to.
Step four: Send investors the perfect pitch
The amount of funding you are trying to raise is irrelevant if investors are not impressed enough to keep reading or listening to your pitch. Capture the investors’ attention right away and make them come back to you for more. Perhaps even hire a professional firm like Prepare 4 VC to make sure your pitch is designed to impress investors (note: this can be done at step one for work on the financials as well). This is your first impression with many investors and a great first impression is needed for the chance to have a second impression.
Step five: Raise your funds
Now that you have successfully planned out your fundraising round, start talking to investors. With a well thought out and impressive pitch like you now have, fundraising will be much easier and even enjoyable. You can talk about the startup you worked so hard to build and impress each and every investor. Raise your funds and put them to work as you make your company prosper.