Fundraising Facts - A startup playbook
Fundraising is an incredibly long and arduous journey. You will pitch to many investors, trying to convince them that your startup idea is the next best thing. At least, that is the experience for most entrepreneurs. However, it is not always easy to determine which investors to aim for, especially if you are a first-time entrepreneur.
However, it is incredibly important to know which investors are potentially relevant for you at this stage in your journey, and what to look for in an investor in general. This article will cover just that, helping you cut down your time fundraising, pitching, and worrying; leaving more time for what matters most—running your business.
Before approaching an investor, it is important to look at their investment mandate. What does that mean exactly? Well, investors might only be interested in a particular type of startup. It could be startups that are active in a particular country, stage of funding, or industry, such as FinTech. For a Dubai-based startup that is active in the travel industry, it makes little sense to approach an investor that only invests in FinTech startups in Egypt.
An easy way to determine an investor’s mandate is to look at their website and portfolio companies. Again, if their portfolio companies solely consist of agriculture startups, that is probably something you should keep in mind.
Aside from the investment mandate, it is important to look at investment frequency. When an investor only invests in 1 startup in any given year, it could mean that they have a long due diligence process, which is what you should take into account when deciding on approaching potential investors. By default, investors that are more active will be more likely to invest in your business, if only by a small margin.
Average funding amount
Before even starting the fundraising process, you should be able to clearly articulate how much investment you would need, and what you need it for. Based on that, you should also be able to target certain investors based on their average ticket size.
Investors are usually not willing to be the only investor in a funding round – they are looking for other firms to join the round too. Hence, it makes little sense to approach an investor that invests anywhere from $1 million to $5 million if you are looking for just $500,000, as this will most likely not happen.
Venture capital firms do not have an infinite time horizon. Since they are investing their limited partners’ money, they are usually looking to exit their investment in 5-10 years, in order to provide a return for their investors.
However, other sources of money might have a very different time horizon, such as angel groups, corporate venture capital firms, family offices, or other investors.
Decide upfront which time frame you are comfortable with, and determine which type of investors suit that time frame. You are looking for another party to ‘marry’, better make sure that both your expectations are the same beforehand in order to avoid trouble down the road.
When you listen to investors, they will tell you that fundraising depends on so much more than receiving the money. And that is true! While the money is of course an important aspect, there are many other, often intangible aspects that venture capital investors can offer. This can be in the form of free services for your company, such as MailChimp or Zendesk, help in the form of hiring, or client introductions.
These softer aspects of the investment deal are incredibly important, as they can significantly help grow your business and cut cost. So, if you have the luxury to decide between investors, this is certainly a point to keep in mind – what else, aside from money, are they able to offer you?
Individual partner expertise
Continuing on the same train of thought as above, it is important to determine the expertise of the partner that is investing in you. Do they have experience in the same industry as you do, or have valuable insights from a related industry? If yes, they become much more valuable than a partner who does not know the ins and outs of your business.
Once again, it is not all about the money. The soft skills, expertise and support also play a very important role when shortlisting investors.
Based on the above points, you should be able to make an informed decision when deciding between investors, whether they are venture capitals, angel groups, accelerators, family offices, or other investment entities. Through this focus, you will make a good impression on the investors as well, as you show that you clearly understand what both you and they are looking for. And, before you know it, you will be the next startup that receives funding from them.