Are you a member of a fledgling startup that wants to bring a brilliant business idea into reality? Have you managed to get yourselves some seed funding to get you started?
If these questions strike a chord, then stay with us. We’ll try to demystify the fundraising process for you. And by demystifying we mean focusing on filtering criteria upon which investors decide whether they’ll give your startup the strongly-wished-for check or not.
Before that, let’s get one thing clear; it is one thing to get investors’ attention and quite another to get seed funding. In both cases, any previous entrepreneurial experience plays an important role in how investors will deal with you. But that doesn’t mean that you’re lost if you’re a fresh-comer in the startup world. You just need to gear up for the game. More on that later 😉.
That said, before you start hunting for dollars, make sure you really do need seed funding. There is much to be said for startups that focused on getting funds before they needed them. None of them is pleasant. And, beware, the “zombie startup” state is only around the corner. Proceed with caution.
To elaborate a bit more, consider this: Oftentimes, an investor will be willing to provide you with far more funding than you really need. Of course, they’d be asking for a bigger percentage of your company in return. Accepting any unnecessary (for the moment) funds would put you in a more difficult position than you’d think, much earlier than needed. Make sure to choose wisely and confirm with your team that you’re ready to handle all that comes with said funding.
Alright then! What’s next?
Getting to negotiations and closing the deal: how easy is it?
Good question. Since we don’t want to give you a discouraging answer, let’s just stick to the facts. So, here’s how it goes:
Past experience as a key factor
If you happen to be a serial entrepreneur or you have past experience with at least one startup, you probably know how things work. And you probably have a competitive advantage against newcomers. That is to say, investors prefer experienced entrepreneurs. In Jeffrey Bussgang’s famous book “Mastering the VC Game” he quotes Fred Wilson’s words, as follows:
We, VCs, love to invest in the serial entrepreneur who’s done it before, knows the playbook, and won’t make any of the rookie mistakes.
So, more or less that means that at least you won’t have to struggle to get their attention.
But, what about ‘new entries’?
If you just popped up out of nowhere, then, as mentioned above, you’ll need to try hard to get noticed. Just as it happens with products. When a well-known company introduces a new product, customers are more eager — and invest their money, trusting you — to give it a try. In the same fashion, investors will probably be deeply skeptical as to whether they should invest in your idea or not. No hard feelings, but there’s no benefit of the doubt here; quite the opposite, rather.
Your business idea is considered to be a waste of time and resources, unless you have a “believable plan”. As Geoff Ralston from Y Combinator puts it, this plan will:
[…] buy you the credibility necessary to persuade investors that their money will have a chance to grow.
So, experienced entrepreneur or not, you need to have a believable plan. The closer to reality it lies, the better. That’s what will help you get your seed funding. And that plan needs to be backed up with fundamental fundraising tools. You’ve probably heard of an “elevator pitch” and a “pitch deck” before, right? Let’s have a quick walkthrough of them before we examine the prerequisites to getting seed funding.
‘Tools’ you’ll need to get seed funding
When we say “tools”, we don’t mean it in a literal manner. Both of them, the elevator pitch and the pitch deck, are more like a vessel you’ll be using to convey your ideas to investors.
What is an elevator pitch and why do I need one?
Here’s a definition, as found in Investopedia:
Elevator pitch is a slang term used to describe a brief speech that outlines an idea for a product, service or project. The name comes from the notion that the speech should be delivered in the short time period of an elevator ride, usually 20-60 seconds.
And if you’re wondering where this term came from, here’s the story narrated in The business of Venture Capital by Mahendra Ramsinghani:
“As legend has it”, Sergey Mikhaylovich Brin and Larry Page, Google’s co-founders, some years ago, being young students, bumped into Ram Shriram (Angel investor) on an elevator at Stanford University; and they managed to get him to invest in their idea, before they got off. That’s how the term “elevator pitch” was born.
Do it in a “tweet”
Aspiring — or not — to build the next Google, you need to be able to describe your product and business idea, in a few words. Like the length of a tweet. If you’re not able to do so, it probably means your idea isn’t worth an investor’s time. To put it another way, if you cannot keep your startup narrative short and sweet, that means that you probably won’t get a second shot — or a sporting chance — at thoroughly discussing all about it and getting somewhere with investors.
Short and sweet is your ticket to the next phase, as these few seconds is all the time you’ll probably have their attention for. And, if the problem stems from lack of communication or sufficient presentation skills — and if it’s not a matter of poorly considered business idea — then find yourself and your team members a few opportunities to practice and work on it, till you get the hang of it. All in all, you cannot skip the step of the elevator pitch, so be prepared.
What’s a pitch deck and how can I craft one for my startup?
Now, once you’ve managed to attract an investor’s attention, you’ll probably get another opportunity to present your idea, in a more formal way. And that’s typically done with a pitch deck; another fundraising buzzword you need to pay attention to.
And, in order to be consistent with our habit of quoting definitions, here’s one for a pitch deck, from a relevant article on Forbes:
The pitch deck is a presentation that entrepreneurs put together when seeking a round of financing from investors.
Consolidate your idea
As you have probably guessed already, this whole journey is more a matter of polishing your understanding of what you’ll be doing and how, rather than just putting together a few slides with fancy animation. Consolidating your idea and how to go about it is what will either help or doom your efforts to get seed funding.
You’ll be able to find numerous resources out there that will give you some kind of advice on how to create the best pitch deck for your startup, on your own. Some of them will stress on the number of slides and others on the presentation template. But as you’ll find out, all of them will focus on some fundamental points you need to highlight with it. Let’s have a look:
- What is the problem you aim to solve?
- Where’s the opportunity on this, exactly?
- Can your team work efficiently, with alignment, towards your plan and specific goals?
- Have you made your research in terms of market size & competition?
- Have you drafted a business model?
- What is your marketing plan? Even an overview will help
- What is your financial plan? What do you need, in order to implement all of the above?
- Do you already have any kind of traction?
- What is your endgame?
If you have short and clear answers to all of these questions — perhaps even backed up by compelling visuals — the odds are that you might get the chance to begin negotiations.
Validate first; do later
No fundraising process is easy. Especially for first-time entrepreneurs. It takes a lot of preparation and commitment. You need to dig into the market you’re aiming for and look for answers to fundamental questions; answers that will open the way for you to build your company. And, no matter your investors’ checkboxes and doubts, if you don’t have those answers for yourself, chances are you’re looking in the wrong direction. To put it differently, getting seed funding is sort of your first attempt at validation, indicating that your idea is worth the implementation.
