Pre-seed and seed, angels and VCs, A rounds and B rounds – it’s a tangled web for rookie entrepreneurs aiming to grow small startups. But unless you’re bootstrapping, you’ve got to keep your two feet in two different worlds every day: business and fundraising.
Chances are you’re more at home leading your company than asking investors for money. True, there are plenty of traps scattered along the road to venture funding. But take heart. It is possible for founders to sidestep the most common hazards and keep their companies moving ahead.
I know this because I’m a founder with my own two feet in those very diverse worlds. And I can tell you what I’ve learned – sometimes the hard way – about raising capital to fund your startup. As I see it, the keys are planning, preparation, and passion.
Planning is everything
In funding mode, planning is crucial. As a founder, you need to make sure you’ve got enough funding to carry you through to the next round. I’ve made the mistake of counting on a round to close in three months, for instance, when in fact it usually takes six months or more.
Think ahead. Ask yourself how you’ll use existing capital – for marketing, product development, R&D? What milestones will you use to mark your progress – customers, revenue, working profit? What’s your burn rate? And when will you have enough assets to raise the next round? (By assets I mean a working prototype, patents you’ve submitted, a growing team of miracle workers, and, yes, commercial agreements with customers.) Answers to questions like these make the beginnings of a plan.
Eisenhower said the Army taught him a valuable adage: “Plans are worthless, but planning is everything.” The act of planning itself is what matters most. “Take all the plans off the top shelf and throw them out the window and start once more,” the general said. “But if you haven’t been planning you can’t start to work, intelligently at least.”
Expect the unexpected
Even between funding rounds, be ready for unexpected opportunities. You never know when you’ll cross paths with an investor. You can’t anticipate what the market will look like the next time you’re ready to raise capital, either. The ecosystem might be transformed by new competition, say, or a dramatic financial event (remember 2008?).
There are a few basic yet vital ways to be prepared:
- Keep your investor presentation up to date
- Always have a budget file ready to go
- Be aware of your company’s value at any given moment
- Cultivate relationships with more investors and other founders
I also dedicate one day out of every month to practice thinking like an investor. If I were looking at my company from the outside, what would I think of it? How is it performing? What are its strengths and weaknesses today? These monthly mini-SWOT exercises help me put myself in the investor’s shoes.
Make friends and influence people
Since the best way to meet new investors is through other investors, good relationships can up your chances of finding out-of-the blue opportunities. If you can inspire investors and your peers to talk up your startup, that will mean more than anything you could say yourself.
Start with your personal ecosystem (partners and customers, family and friends), then widen the circle to network with other startups. Make time to attend conventions and industry events and casual meet-ups. Not too much time, though — remember, you have a company to run, so keep your eyes on your dashboard!
With every interaction, always provide value. Help everyone you can. Share your industry insight with investors, and spread the good word about your fellow entrepreneurs. You’ll become known as a trusted advisor and a mensch.
Build a bridge to equity rounds
One of your toughest challenges as a founder is setting a valuation on your company. In a typical equity investment, the startup and investor exchange shares for capital, which means the deal depends on setting a value on the shares. This can be a long and cumbersome process.
There are ways to ease the pressure. Consider options like a consolidated loan agreement (CLA), or a simple agreement for equity (SAFE). With a CLA, for instance, you’re not giving up shares, so there’s no immediate need to set a value on the company.
So replacing a seed round with a CLA, say, lets you close a capital round much more quickly. (Here three months might actually be realistic.) It can be your bridge to an equity round, and buy you some time before valuation.
Keep your eye on the customer
To investors, your company is a vessel for creating wealth. They’re watching your growth. They expect you to keep expanding your customer base, to continually work toward scaling up. But while you’re sharpening your fundraising skills, don’t lose track of your business.
It’s really important for an entrepreneur to provide value as a person and as a company. Just keep in mind, it all starts with the customer, before investors are even in the picture. Providing meaningful products and services that will attract new customers and keep delighting your existing customers has to be at the heart of your company.
This is a perspective every young entrepreneur must develop. These are the goals worth working toward every day.
Don’t even think about going it alone
Securing funding while running a small startup is not a job for one human being. The time and energy it demands can be dangerously all-consuming. As a founder, managing my bandwidth is an issue I take very seriously.
Luckily for me, I share the funding mission with a talented CBO (Chief Business Officer) grounded in business development. He knows the customer and the market, along with many aspects of the business from the inside. He’s become another face of the company besides my own.
As a founder, I’m always working. Always. In fundraising mode, I work all day, every day, supporting our customers, and talking with VCs. My work/life balance has definitely been thrown off kilter. The funny thing is, all this working never really feels like work. I actually enjoy untangling the web.
That’s because I’m a founder, and my work is my passion. If you’re a founder, you know exactly what I mean.