Written by: Magnus Ernegård, Executive Contributor
Executive Contributors at Brainz Magazine are handpicked and invited to contribute because of their knowledge and valuable insight within their area of expertise.
Customers have gradually started to show an interest in your Startup, and you need capital to get the business going and grow further. You have come to the point where you have used most of your savings, perhaps also taken a bank loan, and by, and largely lived frugally with "bootstrapping" as far as possible. Maybe you also got some capital from some well-to-do relatives, friends, and other acquaintances? They may not be so familiar with your business concept and your developed product/service, but they support you because they believe in you as a person with your winning and energetic drive.
But the question you ponder and ask yourself is: Do I really want external financing with all that it entails?
You know that this requires you to give up part of the company and dilute the ownership in exchange for financing. The angel investor will probably want to decide some of the operational issues regarding your Startup and perhaps its vision, which may not be the same as you originally had as an idea with your venture when you founded it.
On the other hand, the business angels are professional, have an extensive and knowledgeable network, industry knowledge, and experience that provides a valuable asset for the Startup. You both work towards the same or similar goal to make the company successful and profitable.
But what you see as the big stumbling block, how will you keep up with all the work it means to get the venture investment-ready. Many of the Startup founders we have been in contact with say that it took about half of their time at the first round of fundraising. If it now takes 6-9 months and maybe even longer to get the money into the venture from the time you pitched, it will be quite a few hours. And this is when it gave a positive response and outcome from the investor and interest to invest! So, raising capital is often an extremely frustrating experience for the new entrepreneur because they have a fundamental disadvantage as the Startup founder knows relatively little about the whole process compared to investors who have much experience. In addition, having external owners usually requires more administration, reporting, and discussions about what the strategic plan should be and how to implement it, which means the founders must also spend their resources and time on this.
But there has never been so much capital to invest in Startup companies as today. However, this does not mean that your Startup will easily, quickly, and smoothly attract investors. So, how can you, as a new entrepreneur, increase the likelihood that your newly started venture will be funded the way you want?
1. Do it "all-in" or not at all.
As I mentioned earlier, it takes a lot of resources, time, and patience to raise capital, and this is what you as a Startup Founder should do a little besides the work to actually starting up the business, develop the product or service, build the team, check out competitors, have control and order of all documentation, legal requirements including any IP, shape the company culture, understand and discuss all the terminology and meaning like term-sheet, cap-tables, company valuation issues, etc.
With the attitude "we take it as it comes," this most likely means that the company will be short-lived if it will even start. If you are a founder of a venture or a new entrepreneur for the first time, you must know your business, the financials, and the entire process like the back of your hand when you have a dialogue with prospective investors.
You are probably entirely new to these business angels and VC companies who naturally are a little unsure of you. If you cannot clearly show that they can believe in you or that you can convey a solid trust, the investor will probably notice this and most likely choose another more prepared entrepreneur and Startup company. Of course, a wholly perfect and robust preparation does not necessarily mean that you as an entrepreneur will succeed with the capital round, but the probability increases considerably.
2. Shape your vision.
Investors always think big. They need to get the impression early in the process that your business can grow at least ten times over the next few years. You must formulate and explain your vision and mission about the company. In preparation for your meeting with investors, first answer the question: What will the company look like in 3, 5, and 10 years?
Your vision must be a mixture of ambition and realism. It should not seem completely impossible, but it should undoubtedly be quite challenging.
Explain how you will scale up and how you will keep your customers and show how other companies have already succeeded with a similar concept. Your big vision will then be more credible.
What will the team look like? What profiles, experiences, and competencies should these people have? Does everyone work full-time at your new company? Should they get paid a monthly salary or an hourly rate, or is a stock option scheme more interesting?
3. Define when and for what you need the capital.
Do not specify the capital requirement you need in intervals, such as:
I need between 5 to 8 million. Instead, show an exact amount and when you need it, and how the money will be used? The capital injection should also align with your financial plan, growth strategy, marketing and selling expenses, and the plan to build your team. Are there certain milestones you must achieve that trigger a need for capital for your company to move on and grow? Present what the risks are of not reaching the milestones in time. Be very transparent and honest.
4. Do due diligence of the investor.
Investigate what their investment focus and portfolio look like. You will probably work closely with each other for 3, 5, or 10 years and in ups and downs, so check and feel. Where has the investor previously invested? Examine which industries, ticket sizes, business models, investment stages, and geographical areas the investor has had. Does the investor have an extensive, competent, and solid network of contacts in your industry and is willing to support and spend much of the time at the company? Does the investor only see this as a purely promising financial investment, or will they contribute more operationally with know-how and a network of contacts? Also, check if your company is potentially competing with something or someone the investor now has shares or engagement with. If the investor is someone you can go out and have a beer with after a long and challenging week and have fun together, the chance increases that it will be a good fit.
5. Prepare the numbers and documentation.
Probably one of the most critical factors for the preparations is calculations and risk analysis. Investors love data, facts, and figures. Develop KPIs and make different scenarios, know the figures, how they are calculated, and the basis for the assumptions and prerequisites.
6. Start building a personal relationship between you and the investors.
Even if you can show all the numbers, calculations, assumptions and that you have "everything under control and that all paperwork is in order," investors want to know you before they open their wallets. This is, of course, especially important when it is your first company for which you are applying for capital.
So, more crucial for the investor is to know more about you, why you are passionate about this, have perseverance, radiate commitment, do not give up so quickly, and what the team behind the company looks like. What are the team's background and strengths? The investor thus wants to understand how you and your co-founders deal with complex issues, crises, how they think and react in different situations, what their leadership style is, their area of expertise, and what personal interests they have.
The team and its composition are usually crucial in the decision-making process of the investors, so it is essential for you also to create a relationship between the team members and the potential investor/-s.
To build this personal relationship and trust, you should provide a due diligence data room in the early stages of the capital rounds and have all the necessary documents prepared so that they can be delivered immediately at the request of the investor. This helps to maintain regular and high interactivity between the entrepreneur and the investor. Several players help with automated due diligence with virtual data space that BridgeToAngels collaborates with and can recommend. High commitment and fast deliveries strengthen confidence and increase the chances of a "term-sheet."
7. Practice your pitch.
When you stand there in front of the investors, in addition to all facts, they want to get to know the founders and the team personally and look at their soft skills and personalities. You can compare it to a crucial meeting with a customer. The investor is interested in your team's sales and presentation skills to understanding how your team interacts and how you handle issues.
As described in the previous point, your team plays a crucial role, which is why this meeting is one of the most critical activities in your funding round. We, therefore, recommend training this meeting both internally and with the help of external parties. You should define a clear division of roles and topics so that the discussion section does not just rest on one person.
Consultants, existing investors, or other entrepreneurs can give you valuable advice and tips on the content or methodological focus during a so-called "dry run." There are also plenty of examples of questions and pitch decks online that you can prepare for and use. As for the actual performance in front of the investor audience, we at BridgeToAngels collaborate with a selected pitch presentation trainer who adapts individually depending on who the audience is. What step in the company's capital journey is in, and whether it is a physical meeting, online meeting, or a video demo like at many Hackathons and Virtual Demo Days.
So now you are finally standing there in front of the investors and have prepared yourself for all possible issues, including similar ones we see on Dragon's Den and similar pitch events. These are questions that we mentioned above, for example, regarding your team, competitors, market segments, financial plans, the vision, the exit strategy, all types of calculations, assumptions and risks, etc.
But in addition, there may be questions and statements that may be a bit odd and may be asked more to see your reaction and that you can then show a sense of security, clarity, and honesty.
What happens, and what do you do if you do not get all the money you ask for?
Why are you the right person to invest in to achieve this?
What mistakes have you made so far in this industry, and what have you learned?
How do you research trends in this market?
How did you arrive at your pre-money valuation?
Why is this the right time for this product or service?
What are your weaknesses or disadvantages compared to your competitors?
Why do you choose this method of raising capital?
What is your plan B?
Can you tell a story about one or more customers who use your product, and how can I get in touch with them?
Which entrepreneurs do you admire and why?
In summary:
So, preparation is (almost) everything! All successful capital rounds have in common that founders and their teams take their time and prepare carefully. Also, make it clear that your problem solving with your Startup is a significant major problem for many potential customers and has very high scalability. Get evidence and some examples.
Suppose you are carefully preparing and perhaps follow some of the lessons above and the experiences we have had or feel that you want support structuring and going through all the steps in the process. In that case, I am sure you will nail your Startup company's first capital round.
Good luck!
Magnus Ernegård, Executive Contributor Brainz Magazine
Magnus Ernegård has over 30 years of senior management experience from different industries in multinational industrial companies in various countries. Background in CEO positions, CFO, management consultant, production, business development, innovation, corporate governance, and entrepreneurship. Further, he has, over the years, gained Board and Chairman experiences from Boards within the Automotive, Logistics, IT Consulting, and Textile industries.
Today, he is the owner and founder of the Startup support provider company BridgeToAngels based in Sweden and Denmark.
Magnus has a proven track record in starting/developing businesses, company split, corporate exits, and organizational effectiveness.
Magnus also serves as Advisory Council Member of Gerson Lehrman Group. He holds an MSc from the University of Lund, Sweden.
