As an entrepreneur, you know how important seed money is. The numbers on small business survival aren’t comforting—half will fail within 5 years and two-thirds will crumble within 10 years. Having a good financial cushion gives your business a shot beating the odds. To do that, you need to understand the process of how to raise capital for a startup and the best approach to take in doing it.
The first round of funding is at the grassroots and it’s termed “pre-seed.” This includes your own money and anything that family and friends put in to help get the new business off the ground. Then it’s time for the actual seed funding, when outside investors come in. This comes in a series of rounds, marked by letters in the alphabet.
Round A funding is typically financed by venture capital firms and will focus on those startups that have a solid business model in place. By the time you get to Round B, the company is showing some growth and has a loyal customer base to build on. Round C and beyond are for firms that are considered successful and can raise anywhere from $50 million to $100 million to shoot to another level.
Regardless of where your business is at this process, there are certain principles to keep in mind when talking to venture capital firms and other outside investors. First, remember that while their interests will generally align with yours—more profits—their risk tolerance is likely to be much lower. The issue of control over significant decisions will certainly have to be something that gets worked out to both sides’ satisfaction.
You can maximize your chances of getting funding on the best possible terms by doing the following:
- Have a business plan. Even if you’re at Round C with a thriving business, the very fact you’re raising money indicates a desire to do more. Look at yourself as a startup and develop a thorough plan that identifies your new target markets and the plan for reaching them.
- Know your industry inside and out. This applies more to new businesses moving into Round A. To get people outside of your circle to back you means having to demonstrate real expertise. Know the general economic history of your industry. We’re not saying you need to trace it back to the 19th century, but a good grasp of trends over the last 25 years or so would certainly demonstrate knowledge of your chosen vertical. Talk about what has worked, what hasn’t worked and give your analysis as to why.
- Keep it concise. A sharp presentation will be able to cover this all in 20 minutes or so. It should take no less than 30 seconds to tell investors why they will benefit from putting their money with you. In that way, you take control of the presentation right away, then give good, solid reasons and cut it off before your audience gets too antsy waiting for you to wrap it up.
Then, be ready. Have your financial statements at hand. Be prepared for all questions. Your audience has a lot to gain from investing with you; make sure they know it.