Five Things to Understand About Your Business BEFORE You Start Fundraising
You’ve made the decision to raise outside funds for your business (which means you surely have read “When, Why and How to Raise Outside Capital for Your Business”). Before you go out to actually ask for money, you want to have answers to the questions investors will ask when deciding whether to give their funds to you or to another company. You also want to know ahead of time that the money you raise will be put to good use for your company — that you’ll achieve value creation.
Ultimately, you want to avoid being in a position where either you don’t get money, or you get some amount, but you are left with a company that is only worth half that next year.
According to Crunchbase, North American startup investment fell sharply in the fourth quarter of 2022. It closed out the year with funding in Q4 showing “a whopping 63% decline from a year ago (a remarkably bubbly time for startup funding) and a 10% drop from third quarter 2022.”
Since investment money may be harder to come by these days, you need to be as prepared as possible when you go out to fundraise. To help with that, answer the following five questions before you ask for money:
1. What’s your product–market fit, and where you are on that journey?
Do you have product–market fit? It’s not a one-time thing; it’s a continual journey. To figure out where you are on the path, start by asking yourself who, exactly, is your target market, and how well is your product addressing the needs of this market. By asking these types of questions, you’ll be able to gauge if you’re ramping up in a target market that’s entirely correct for you. Or if you are figuring out changes you need to make to your offering to better fit your target market. Or maybe you’re in the wrong target market altogether, and you are expanding or realigning to a new market. It’s important to understand all this before you fundraise.
2. What’s your five-year vision, and how will you achieve it?
All investors want to know where you are going, and five years is the perfect amount of time for the long-term plan for your business. Is your goal to reach a certain valuation? Is it to be acquired? This is a big-picture question.
3. What’s your one-year vision, and how will you achieve it?
What’s happening in the next year needs a lot more detail. Short-term challenges and opportunities will vary by business, so think about your specific situation.
For example, if you want growth in revenue, then know how much you are going to achieve based on each product. As a related element, know how much you will be spending on marketing or sales commissions or hiring to get to that target. If you’re looking to fund certain product enhancements to get a better product–market fit, then what’s the actual timeline to achieve that? Are there any vendors or team members who will need to be involved to get it done?
Another example: If, in the next year, you are building a process around data collection so you can be compliant with relevant laws, then how will that be achieved, and at what cost? And what are the revenue growth opportunities that will open up as a result?
There’s quite a big level of granularity involved here. Don’t forget that your short-term vision must include your hiring plan. Typically, with a fundraise, you will be hiring, and it’s important to factor in what the current market rate is for a specific role in a specific location. Consider things such as recruiting fees, as well as stock options for key hires, which will help you understand how far any equity you raise will go.
4. What type of investors will be most helpful to achieving your goals?
If you are in a very specific niche, such as health tech, and there are challenges around getting initial contracts with big players in the healthcare market, then that could be a sign to seek an investor that is involved in this space. Fundraising with the right investor within your industry or with expertise in your area can open the door to new markets or partnerships and accelerate growth. That strategic value is important.
5. How will you use your new funds, and what milestones you will reach with them?
Know how you’ll use the money, what you’ll use it on, and what you will achieve. Your plan should increase the value of your company enough to justify the next round of financing — assuming that there will be a next round. It’s really important to say, “OK, with this money, this is what I’m going to spend it on, and it will achieve this certain level of growth in sales or access to a new market.” Make sure it is something that is justifiably linked to an increase in value, so you are setting yourself up now for success in your next fundraise.
If you are having difficulty with any of these questions, let’s sit down and discuss how to best answer them for your specific business, so you’re ready for your raise. Please reach out to me. I’m happy to help.