For a layman like me, this was a helpful ready reckoner covering the ins and outs of how startups work from a financial point of view.
Before trying to get too much money in the door, have a working product that people are paying for. Being able to show you already have revenue is a powerful thing.
Eventually, look to merge your business plan with your fundraising plan and tie this to key milestones that you hope to achieve:
Be sure to know what your potential investors do and don't want. It's important to remember that they are not buying your product or service—they are buying a part of your business.
Make sure there is some way in which you are able to beat the competition, otherwise why would they give their investment to you and not them?
'Note that investors will be more interested in organic growth. This means building channels that give you traffic without having to invest capital in order to acquire users.'
Storytelling is incredibly important and helps evoke the human side of what you are doing. More importantly, it's something you can sell. Stories:
'Many entrepreneurs unfortunately overlook the value and importance of storytelling, and focus on technical info, which investors and consumers simply can't relate to. It doesn't matter how great your invention or innovation is if people can't relate, and if of you can't speak their language.'
It's better to have 2-3 founders than be a lone wolf or a cast of thousands. If you're on your own it suggests that you weren't able to find a co-founder to come along for the ride and, if you have too many, it becomes complex, dilute and opens the door to potential disagreement.
It's important to always be connecting the dots. That is, conversations with investors (or even simply the people that may yet connect you to investors) is about building human capital. If all you want from others is 'just cash' then you won't get very far and people will see your single dimension a mile off. Instead, build connections by following up, nurturing and connecting others together where there is no obvious direct benefit to you. You never know what may follow later.
'Ask for money, get advice. Ask for advice, get money twice.'
Most of the time, investors don't want to invest. They're looking for very particular things and most startups are passed over.
It's not enough to have a great idea, you must combine this with great execution.
You must have a good management team from as early as possible, and this will ideally include legal counsel so that you don't make any serious errors.
Investors will be looking for domain expertise, momentum, press, hype and feel like there is a train leaving the station that they need to board as soon as they can.
Similarly, you should have all your homework ticking away in the background so that, when an investor does show interest, you have the means to back up what you're saying. This should most importantly include a knowledge of what your company is worth, the % you want to sell for what and why.
'There is nothing that turns off investors more than entrepreneurs who say they do not have any competitors. To paraphrase Mark Cuban, at least 100 other people have thought about your idea. The difference is in the execution.'
Your business plan is not your pitch. These are two separate things.
Every pitch will have 1-3 key messages in it. Decide what these are and make sure that everyone in the business is behind this message.
There are three levels of 'pitch':
The pitch deck should include these pages at a minimum:
Absolutely worth investing in good copy and strong design.
The due diligence stage of investment is chiefly about making sure there is clarity in these four areas:
To get to this, a huge number of documentation and evidence is needed and it can take a long time to compile. I won't include the full list here but Cremades recommends you keep on top of collecting these as you go in a clear google drive folder structure.
There are a bunch of different places where you can get money from at every different stage, all with their own pros and cons.
Bootstrapping
Making do with what you have and scraping by. You need to get good at the following things if you want to make it work:
Credit cards
Easy to access, but can screw you long term if you aren't careful to make sure you make repayments or if a recession hits and your capital is cut off. Make sure you do the following:
Business loans
Hard to access but can be useful if they're at all available. Most banks don't lend unless you really don't need the money, ironically.
Friends and family
Can be an easier source than most for getting funds, but comes with very unique risks you won't see elsewhere. Faster and often on better terms, but if things go wrong it will make family functions incredibly awkward.
Crowdfunding
Two types of crowdfunding:
Angel Investment
High net worth individuals looking to make a profit and/or some kind of impact
Can bring a kind of 'personal touch' along with advice, particularly useful if they've been in your shoes before.
Oftentimes club together to form 'angel groups'; reduces the risk for each individual in the group and gives a greater capacity to invest.
Family Offices
$100MM+ high net worth families. Often overlooked as a source of funding, but have a lot of money to splash if they're interested.
Venture Capital
Commonly sought but hard to land. Pooled funds with investment from many sources. Most often looking to make early stage, higher risk but high growth potential investments with an exit in the 8yr+ range.
Venture Debt
Like venture capital, but it's...debt. Often linked against accounts receivable.
People who work in VC firms tend to be one of four grades:
Attracting VC investment:
Preliminary Round
Usually this will be sourcing capital from friends, family, your own capital. There are four key goals at this stage in the life of a startup:
Pre/Micro Seed Round
An alternative to the preliminary round if you are unable to source capital from friends and family (precious few can do that anyway). Capital here will tend to come from angels, incubators or micro venture. Limited time to explore viability in this time, often limited to a handful of months. Key objectives:
Seed Round
Similar role to prelim or micro rounds but for higher sums, at higher risk with greater returns expected later.
This type of round existed before micro did—micro filled a gap.
Can take a startup very close to market but not necessarily all the way. You would expect the core team to be in place, though, and the product near as damn it close to being ready.
Series A
This is the first 'major' round of funding - the big cash. Series A should catapult you to market if you are not already there. Main goals:
Funding here will come more or less entirely from Angel/VC.
Series B, C, D and beyond
Like series A, just more of it.
B tends to be for expanding profits and/or market share.
C tends to be for expansion prior to acquisition or IPO.
D and beyond tends to be rare.
IPO - Initial Public Offering
For late stage, well established startups normally around 6yrs+.
Opens the company up to public investment and is a straight capital for equity swap. Can go well, can go terribly.
Good for generating interest for relatively little cost. Brings in customers and investors if done correctly.
Can also be used to vault through a plateau to reach new levels of growth. Can also enhance major events, key milestones and any other major announcements.
Press releases are a good start. Worth building relationships with journalists, bloggers, influencers if that's helpful.
Key points:
Things you'll want your investor(s) to have:
Things you won't want your investor(s) to have:
Ultimately, they also need to be a human being you can get along with on a personal level. Can you go for a run with them? Get a beer together? If you can't, worry.
These are basically just contracts that you will have with your investors. Simpler sheets are preferred over complex ones, typically 10 pages in length.
'The term sheet is the document that lays out the terms of the investment and collateral. It details what you as the startup are giving, and what you are getting in return. Then it lays out the guidelines of how both parties will act to protect the investment.'
Commonly included in term sheets:
To close the deal you need three main things
Cremades identifies four major mistakes that founders make when raising:
Investors will be looking out for red flags when looking to invest. These are some of them:
I send updates to a few hundred people anytime I've got something worth sharing. New articles, new book notes, new commentary.
