Overview of how the fundraising process works and what to expect going forward
Steps to Starting a Small BusinessSteps to Starting a Small Business Starting a new business means more than just ownership. Launching your own startup entails dealing with various amounts of paperwork and compliance at the state, federal, and local levels, as well. Additionally, there will come a day when you hope to expand your small business into something much greater. Below are several helpful resources designed to arm entrepreneurs with a wealth of information on building a new business. Tick off items on a small business or startup checklist, browse industry best practices on forming your own business, or determine for yourself what business structure best benefits your enterprise.
How Fundraising WorksThe Short Version The fastest way to explain the fundraising process is this: 1. Get your company started and build some traction to make your deal look interesting (this is all explained later). 2. Find the capital sources that actually make the most amount of sense for your business right now. (hint: it’s not always a traditional investor) 3. Develop an amazing presentation that blows investors away with your idea, team, traction and preparation. Companies that successfully raise capital do so because they convince others that their idea is going to be a winner. They do that by demonstrating traction to the right capital sources and proving they have what it takes to actually make a great company.
The Evolution of InvestmentThe Evolution of Investment While it would be great to launch your new company with a mountain of freshly injected cash, that’s rarely how companies get started. Sure, you read about companies in popular magazines getting millions to launch some newfangled idea, but you rarely read about what it took to get there. From the point at which you wake up at three in the morning with a brilliant idea to the point where you’re building something meaningful, the idea stage is where all your thoughts start to form the foundation of a company. The reality is that most companies go through a basic evolution in both the state of the company and the availability of capital.
Set Reasonable ExpectationsGetting through the fundraising process means knowing what to expect. Chances are, you haven’t done this before and there’s no possible way to know what to expect! Don’t worry, you’re not alone. Most entrepreneurs have never raised capital before and have no clue about how the process works. In many ways, fundraising is a form of speed dating where both parties are not just looking to date; they are looking to get married. Because of this, there are quite a few misconceptions about fundraising and the expectations that go with it. Let’s take some time to dispel some myths and hopefully set more realistic expectations about funding procedures.
How to prepare your company for funding
Budgeting for FundraisingThey say it takes money to make money. Well, it often takes money to raise money. Even small investments in these assets can go a long way toward making your fundraising campaign far more successful. To be fair, it’s entirely possible to raise capital for your business without ever spending a nickel, but if you had to place your bets, you’re probably going to spend at least a little bit of cash on your fundraising campaign. Let’s first assume that if you were industrious enough, you can probably figure out how to do anything on this list for free. What we’ll talk about here is what most people wind up spending if and when they do decide to use paid services. Incorporation ($50 – $500) Setting up an incorporated company is about the easiest thing you can do. While the concept of picking a C-Corp versus a LLC may sound a little bit confusing right now, the amount of time and cost is worth the investment.
FormationGetting your house in order is easier to do than ever. There are now tons of low-cost services you can find online to get you up and running very quickly. The formative pieces of your business aren’t terribly hard to put together and help investors know that you’ve put real time and attention into the identity and background of the business. Pulling all of these items together (and doing them well!) will transform your identity from a great idea into a real, operating company. Aside from things like Web sites, business cards, and business plans, there aren’t that many visual indicators that a company actually exists. So making sure that the few that you can create are well done and easily available will be very important. Incorporation Incorporating is easy to do, although you’ll have to make a few decisions early on about the structure of your company.
TractionTraction is the very heart of a startup. When you’re building from scratch and trying to convince the world that your idea has merit, the proof of your ability as an entrepreneur to be successful is in the traction you generate for your business. The excitement of a deal, particularly to investors, is always around the momentum of a business. There are many types of traction – forming your company, hiring staff, and of course signing up paying customers. All of them are critical to building the business, and by way of that, generating interest from investors. Ideally you want to create traction on as many fronts as possible. The excitement of a deal, particularly to investors, is always around the momentum of a business. It’s one thing to say you have a great idea that may attract customers some day. It’s another thing entirely to say that you are adding customers like crazy and the business is already taking off.
A brief explanation of each of your capital options and how they work
The Funding LandscapeThe Funding Landscape Entrepreneurs have quite a few options available when raising capital that generally fall into three categories – Bootstrapping, Debt and Equity. Investors want to find the right fit. They want the right Location, Market Size, and Traction among other things. Funding your business isn’t as easy as saying “I want to speak to investors who will give me a big check for my great idea!” Even the best ideas often require a long period of proving themselves before any investor is willing to support them with a check. Along the way, there are several forms of capital that entrepreneurs use to address their needs.
BootstrappingContrary to what many believe, most businesses don’t get started by way of a big investment from some deep-pocketed investor. Most businesses get started by an entrepreneur using their own means to launch the company. Finding the capital you need without professional investors is considered Bootstrapping. Bootstrapping involves all sorts of capital – friends and family, your personal savings, crowdfunding, and of course the ever popular “sweat equity” (getting people to work for stock in your company). You may or may not raise outside capital, but you’ll certainly use Bootstrap Capital to get started, so let’s figure out how to make the most of it.
DebtThe most common form of outside capital for new businesses is Debt. Debt is a great tool for a small business if you know where and how to use it. Although Angel Investors and Venture Capitalists get all the big headlines for funding exciting companies, it’s the Debt providers – banks, lenders, and specialty finance companies – that truly power most of the investment dollars that go into companies. Greed is Good. And so is Debt. Entrepreneurs turn to Debt for two reasons: either investors won’t give them capital for equity, or the entrepreneur just doesn’t want to give up equity. Most entrepreneurs are greedy with their equity
EquityEquity investment means you’re trading funding for a stake in your company. Unlike a debt provider like a bank or lender, an equity investor isn’t looking for a simple interest payment on the money they’ve provided you. They are exchanging more risk for more reward – a lot more. The competition for equity capital is fierce, but that shouldn’t stop you. The “more reward” part is what you should be paying attention to. Equity investors aren’t interested in earning 8% on their money with these types of investments. They are looking for 50%, and most likely a lot more. That means you’ll need to prove that your investment can yield a massive return on their capital.
Putting together the right plan of attack to increase your chances of funding
How the Pitch Process WorksLike any other business situation, your first impression with a potential investor goes a long way. There are a few ways to get it right and endless amount of ways to get very wrong! You won’t get a ton of introductions so make the ones that you do get count. In order to understand why your pitch will resonate with investors, you need to understand a little bit about the person you’re contacting. Understanding the Investor Let’s assume you’re an investor. You’ve hung your shingle out to the world that reads “I write checks to people with great ideas.” That’s a sign for every person who has ever sought capital to come seek you out and pitch you.
Key Pitch AssetsOnce you have your Fundraising Plan and your Pitch List together, it’s time to make sure you have all of your key pitch assets in order. Most of these assets are built from the same basic content and are simply reworked to fit different needs and requests. A good fundraising effort requires great supporting documents. Once you have the basics down it’s pretty easy to prepare all of these documents as needed. Here’s a comprehensive list of what you’ll need to prepare when you’re ready to initiate your Fundable Plan. Elevator Pitch Your Elevator Pitch is a short, consistent synopsis of your business, usually in just a few sentences. Surprisingly, getting your pitch to be short and consistent is kind of hard to do.
What Investors are Looking forIt’s the age old question – “What are investors looking for?” Unfortunately there is no universal answer here. The obvious response is “a return on their investment” but that’s just an outcome – it’s not what helps you determine how to pitch your business today. Investors want to find the right fit. They want the right Location, Market Size, and Traction among other things. Every investor has their own criteria, but across the board, there are certainly trends in evaluating new companies that investors share. By understanding each of the key areas that investors react to, you can be better prepared to position your deal to be more attractive. You can also begin to understand why they may not be reacting the way you would expect them to.
Making a Good IntroductionLike any other business situation, your first impression with a potential investor goes a long way. There are a few ways to get it right and endless amount of ways to get very wrong! You won’t get a ton of introductions so make the ones that you do get count. In order to understand why your pitch will resonate with investors, you need to understand a little bit about the person you’re contacting. Understanding the Investor Let’s assume you’re an investor. You’ve hung your shingle out to the world that reads “I write checks to people with great ideas.” That’s a sign for every person who has ever sought capital to come seek you out and pitch you.
The Elevator PitchEntrepreneurs live and die by the quality of their Elevator Pitch. You’ve probably already experienced this fact personally as you’ve watched the reaction from people who’ve heard your business idea. The concept of the Elevator Pitch is borne from the idea that if you met an investor on an elevator and only had 30 seconds to pitch your business, what would it sound like? In fact 30 seconds is about as much attention as you are going to get from an investor to begin with, so thinking in that time frame makes a lot of sense. The formula for the perfect Elevator Pitch involves three ingredients – the Problem, the Solution, and the Market Size.
The Email PitchIn today’s world, you’re likely going to pitch far more investors through an initial email than you will in person. A great Email Pitch won’t necessarily get you a meeting but a bad one will definitely prevent one. Therefore creating the perfect Email Pitch is essential. The perfect Email Pitch is a little longer than a commercial but not nearly as long as an infomercial. Your goal is to pique the investors’ interest by tapping into each of the key areas they are interested in. The perfect Email Pitch is a little longer than a commercial but not nearly as long as an infomercial. Your goal is to pique the investors’ interest by tapping into each of the key areas they are interested in.
Creating a Prospect ListManaging your Fundable Plan will certainly involve keeping track of all your potential investor prospects along the way. The problem you run into as you begin talking to an increasing number of investors is keeping tabs on where you stand with each, where you were supposed to go next, and who you’re starting to lose contact with. The most important aspect of raising capital is remaining incredibly active throughout the process. This can all be addressed by creating a quick spreadsheet detailing your activities. Organizing your Prospects The goal of keeping on top of your capital raise is to continually move your most likely prospects to the
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