This is the third post of our 10 week “Funding Fit” blog series. Read the first tip and second tip here!
One thing that many entrepreneurs underestimate when they go to raise capital is the amount of preparation, time, and resources that go into the process. A typical equity fundraising drive takes at least 3–6 months (sometimes up to nine) and will be close to a full-time job. If you don’t factor this time suck into your planning, you risk letting your business languish while you shift your focus to chasing money.
To best prepare for this additional full-time job, it helps to understand where your time will go during capital raising and how to prepare yourself and your company for it.
1. Polish your pitch and sharpen your pencil
Before you meet with potential investors, you need to be ready to pitch your company and its value. This typically means creating a pitch deck, as well as thorough documentation of your company’s financials.
Your pitch deck needs to be more than a few PowerPoint slides, and the current standard of excellence is to hire an outside design firm that specializes in designing pitch decks. Here are some tips to create the ultimate pitch deck.
For your financials, be ready to show all of your company’s basic financial information—P&L statements, a balance sheet, a cash flow statement, customer information, and growth projections—along with the financial models used to create those projections. In our experience, a spreadsheet with 10 tabs in Excel is the typical amount of details.
Creating a good pitch, organizing your financials, and making viable projections takes time and resources. While you can often outsource some of this work, you will still need to devote time to deciding who to outsource the work to, and to pulling together all the materials for the team you’re working with.
2. Hire or train your replacement
As the founder and CEO, you’re usually the best salesperson for your early-stage company. But when you have to devote six months to fundraising, your company’s growth trajectory can slow down significantly, which can hinder your fundraising effectiveness.
The time to solve this problem is before you begin your equity drive. No matter how much you try to stay involved in your company’s day-to-day management during your fundraising efforts, it would be foolhardy to rely solely on your personal leadership to keep sales figures up.
The best strategy is to hire or train someone on your management team several months before your capital raising efforts begin. That way, there’s no absence of leadership and management — and no slow-down in your company’s growth rate — while your focus is diverted.
3. The “right fit” is hard to come by
One of the few certainties in courting investors is that finding the right fit is uncertain. That’s because every investor is looking for a very specific profile that matches or complements their existing portfolio. Finding someone who’s seeking exactly what your company offers can be harder than dating and isn’t always dependent on the financials of your company or the viability of your product. That’s why, just like dating, there are so many matchmaking services: investment bankers, brokers, and online services like AngelList and Axial.
Investors determine the right fit for their portfolio by considering the size and stage of their portfolio, their industry focus, their capital availability, and where they are in their fund cycle.
Consider the types of potential mismatches that can occur:
You are trying to raise $5 million but a specific fund only invests $20+ million. You are out of their range.
You are an early-stage company, but the investor doesn’t do seed or series A rounds. You are at the wrong stage.
You are a healthcare technology firm, but the investor has no special knowledge in your industry and isn’t looking to branch out. You are in the wrong industry.
No matter how well you have fine-tuned your elevator pitch and polished up your presentation deck, you are unlikely to be successful if your company’s funding profile doesn’t match with what the investor is looking for, even when you have a successful business model and a proven product. Avoid spending time on chasing financing deals that you are unlikely to complete, and really do your research on your potential investors to determine whether there’s a good fit.