Veronika Korzh is CEO and co-founder of GeekPay, a Board Member at Sigma Software Labs, Partner at SID Venture Partners. Veronika has more than 12 years of experience working with corporate clients around the world, as well as with startups as a mentor, helping them build and implement business strategies.
As an entrepreneur, raising money for your business can be one of the most exciting and challenging experiences you’ll ever face. Even though many startups don’t focus on their consistent fundraising strategies, it’s an essential step before you start approaching investors.
Why is a fundraising strategy so important, you ask? Well, for starters, it can help you avoid major pitfalls down the road like selling too much equity too early can dilute your control and decision-making power. On the other hand, it would make you better equipped to communicate with investors and provide them with the information they need to make decisions on each round. In this article, I will go through the pitfalls of each round, best practices, and personal advice that will help you to create a winning fundraising strategy.
Basically, I’ll reveal 3 secrets:
- The fundamental investor’s needs
- The specifics of each round
- Communication principles.
Let’s start with the Investors. What do they want?
Obviously, Investors typically want to see a return on their investment and are looking for profitable opportunities. So, if they don’t see the prospect of your product such as giving you $100 and getting back $100,000 and in 3 years maybe 10 million, most likely they’re going to be very curious how you’re going to achieve those milestones.
Therefore, at any round, it is crucial to demonstrate the product’s potential to generate significant profits in a reasonable timeframe.
- Dedicated Team
In some cases, I have encountered early-stage startup founders who work part-time jobs, such as with IT service businesses, to earn a market salary and cover their living expenses while working on their startup during nights and weekends. While this may seem like a viable option for some people, it presents a significant risk for investors. As someone who has been on both sides of the table, I would never invest in a startup that does not have a dedicated full-time team. This is because giving money to someone not fully committed to the product can lead to a host of issues, such as taking on extra projects, conflicts with the team, burnout, and other business-related issues.
Another important factor is market. So you definitely need to demonstrate your understanding of the market’s size, peculiarities, and potential for growth. It’s important to show how you plan to build a product that can scale easily on new markets and generate revenue. But you have to understand that the market might be huge, and to get at least 1% of this market might be the whole life because every new product most likely already has a competitor. That’s why clearly estimating project potential without castles in the sky is another important issue.
This is a common question from investors – where do you plan to start and where do you want to expand? So you have to show product exposure. It’s not just about the scalability of the business or the market size, but also the ability to migrate or expose the product to different markets and the rationale behind it. The markets in different countries have their own unique characteristics and should be approached differently. For example, the US market is vastly different from the Portuguese or Ukrainian markets, and it’s like a completely different world compared to the Chinese market.
Knowing your investor’s needs is just the beginning. Let’s delve into the fundamental aspects of each funding round and discover how to talk to your funding sources and investors in a way they understand. So, let’s explore the critical aspects of each funding round in greater depth.
Angel round: idea, team, and market
When it comes to securing funding for your startup, the Angel round can be the perfect place to start. This round is also called 3F round made up of Friends, Family, or Fools. Round of those who believe in your vision, dedication, and motivation to succeed. But don’t think that boring market data is going to impress these folks. No, what you need is an idea that’s so inspiring, it makes their hearts skip a beat. You want them to feel like they’re part of something special, so they’ll be itching to invest.
And don’t forget about the team behind the idea. It’s risky for investors to back a startup with only a solo founder, since burnout and a lack of expertise can be major setbacks. Investors want to see a full-time, dedicated crew behind you, so they know you’re not going to burn out or fall apart at the first sign of trouble.
Finally, market size and target customers. You need to have a clear understanding of which market segment your product or service will appeal to, and how you plan to acquire those customers. Investors want to hear that you have a solid understanding of the challenges ahead and that you have a well-thought-out plan to overcome them.
Pre-seed stage: MVP and financial strategy
Ok, as you can get, pre-seed is a whole different game from angel funding. While angel investors are often willing to invest in an idea or concept, venture capitalists typically want to see more. You need to have a minimum viable product (MVP) or at least something tangible to present to investors. This can be a prototype or a beta version of your product but it needs to be something that shows investors that your idea has potential.
Also, traction is key. You may have a great team, a good idea, and market numbers, but you’re not alone in the market. Show why your product is better than the competition. This is where traction comes in, and you need to have some sort of interest from potential customers, even if it’s just an email saying they would be willing to test your product.
Also, when you’re pitching to investors, it’s essential to be real and honest about your financials and how you plan to use the money you raise. You need to have a clear budget plan for the next 12, 18, or even 24 months especially in times of crises. This shows investors that you have a long-term plan for your business and that you’re not just looking for a quick cash injection.
In addition to having your financials in order, you also need to be strategic about your company structure. Think about how many shares you’re going to give to investors for how much money you’re receiving. It’s important to strike a balance between giving away too much equity and not giving away enough. You don’t want to give away too much and lose control of your company, but you also don’t want to be too stingy and miss out on the opportunity to get the funding you need. One way to ensure that everyone is on the same page is to sign a memorandum of understanding or letter of intent. This can help fix your cap table and make sure that everyone agrees on the company structure. It’s important to have everything in writing from the first stages to avoid any confusion or misunderstandings down the road.
Seed round: growth and traction results
Seed investors are solely interested in generating returns on their investment, so present a product that works, show traction, and provide evidence that you can scale up your business. Unlike pre-seed rounds, you don’t have to prove your dedication to the product or the team, as you have likely overcome conflicts and problems that existed during the earlier stages. Instead, the primary focus is on demonstrating existing traction and growth. You need to provide evidence of revenue streams, such as bank statements, P&L reports, and growth numbers, to persuade investors to put their money into your startup.
One of the key things that investors look for is a well-managed budget. Therefore, you need to show that you are tracking your finances accurately, spending money wisely, and trying to sometimes minimise your expenses. This is particularly important when it comes to demonstrating your P&L, as it shows investors that you are not wasting money and are making informed decisions. Additionally, investors are interested in understanding how you plan to use the money you raise to grow your business. You need to have a solid financial plan that outlines your budget, expenses, and expected ROI. Furthermore, you need to have a strategy for bringing in revenue and achieving growth.
Series A round: where numbers are the kings
Round A is about numbers. Promising numbers that could be demonstrated through continuous revenue growth and a solid P&L statement. But it’s not just about that – investors are also interested in companies that have the potential for a successful exit strategy. This could mean being acquired by a larger company, like GeekPay might be bought by HSBC Bank from the European Union for instance or by Upwork for covering the freelancer’s works based on digital currency payments. In order to achieve this kind of growth, significant investment is often required for marketing, building teams, and starting up new locations.
That’s where scalability comes into play. At that stage, investors want to see a clear plan for how the business will be scaled, including how much money is needed and what kind of results can be expected. Without a solid plan for scalability, even a successful business can hit a limit on growth potential. So when seeking funding, it’s important to not only demonstrate growth and profitability but also have a clear strategy for scaling the business and achieving an exit strategy.
Got investments? Communicate smartly
If you want to take your business to the next level, you need to communicate effectively with your investors. But let’s face it, finding the right approach isn’t always easy, and we talked more deeply about that in our article. But what can you do to establish a strong and productive relationship with your investors? Here are three guiding principles to follow:
- Always be around: Be responsive to your investors, be on chat and always be available for updates. Investors want to know that you are dedicated to your project and working hard towards achieving your goals. Whenever you are on the way to some conference, or having teambuilding with your team – answer fast and honestly.
- Regular reports: Every investor, even angel investors, would like to get regular reports. This is not about controlling you, but ensuring that you are dedicated and making progress towards achieving your goals. Communicate with them daily or weekly and share your challenges and successes. To make communication easier and more efficient, consider automating your updates through software like Notion, Investory, or HubSpot.
- Networking: People who gave you money most likely are interested in your growth, right? Keep in touch with your investors and ask them to involve them in events or sales via their network. They surely invested in your business and are curious in seeing it grow, so make sure you use every single opportunity your investor could give you.
So even if you have a groundbreaking idea that you believe will change the world, you have put all your sweat, tears, and long hours into making it a reality, without funding, it may never see the light of day. That’s where different investment rounds come in – they provide you with the opportunity to secure the resources you need to bring your vision to life.
But it’s not just about securing funding – it’s about standing out from the crowd and capturing the attention of potential investors. This is where a personalized approach comes in. By taking the time to understand the specific needs and concerns of investors in each round, you can tailor your pitch to make it more compelling and increase your chances of securing investment.
And don’t forget, fundraising is an ongoing process. Just because you don’t secure investment in one round, it doesn’t mean it’s the end of the road. Keep refining your pitch, building relationships with investors, and pursuing your dream. With determination, hard work, and a personalized approach, you can secure the funding you need to turn your vision into reality.