Funding is one of the biggest challenges in the entrepreneurial journey. Navigating the world of venture capitalists and storytelling is no easy feat, especially when looking for your first seed round or a million-dollar investment.
Not to mention, against the backdrop of COVID-19 and a heavily disrupted investment sphere, early-stage founders now face an even more complex road to securing funding.
The business landscape has no doubt changed for good because of the pandemic; there are more opportunities to respond to new customer needs and get ahead of the curve for future usage trends.
Founders who know there is a clear appetite for their product or service and can showcase early growth may actually find themselves in a more favorable position to ask for more money. That said, much of the process is dependent on reframing the funding process and relationships with individual investors.
In the new conditions, here are my tips on how to reach your first $1 million investment or seed funding, a feat I’ve managed to do multiple times:
Rethink how you approach funding
I know it’s easy to assume that securing a round of funding is a signal that you’re on your path to success, but you may find the reality to be a lot different.
Fundraising should be considered a byproduct of your success — you have to already have a solid reputation and a genuinely valuable product or service to get funding in the first place.
I’ve seen many first-time entrepreneurs fall into the trap of thinking that a funding round is the equivalent of a major milestone. If you consider raising money to be the ultimate solution to your business problems, and funding to be the core metric for your progress, you’ll run out of steam pretty quickly.
My big advice: you have to shake this mentality as soon as possible.
For instance, if you host multiple funding rounds and bring on board a number of investors, you’re probably going to give away a lot of equity in the process. Of course, on the other hand, if you raise no money, you may discover that your runway is not long enough and quickly come into financial difficulties.
If you’re striving for a million-dollar investment, you need to view fundraising as an event to help you break even or be profitable. It should not be a needed lifeline for your venture.
The general rule of thumb is that you should have sufficient money before you start the fundraising process to facilitate getting an early version of your product or service to market.
Position yourself as a gap, not a gamble
Investment isn’t a luck game, it requires hard work. You, as the leader of your startup, have to convince investors that you are filling a real market gap and that your competitive advantage separates you from the thousands of other startups out there.
I’ve managed to make my first impressions impressive by showing my product has demonstrable traction.
That doesn’t necessarily have to be a huge revenue stream, it can be a sizable number of free trials, beta customers actively using the product and seeing value, or a letter of intent from a well-known brand.
These early wins are essentially your evidence that there is a real demand for your product. If you launch into an investment stage prior to having traction, you’re basically asking investors to take a gamble on you, as opposed to getting involved in a product with proven customer success.
So let me be clear: if you don’t have tangible successes (not even small ones), do not look for funding! None of the first $1 million I’ve raised as a founder would’ve been possible if I hadn’t had something to show.
For my current team at GrowthPlug, we were able to generate strong customer traction around the product and had scores of paying customers realizing a tangible ROI with the product. With paying customers and a profitable bootstrapped company, it’s a lot easier to get attention from investors.
Nurture your investor relationship
It’s only natural to put investors in a box; they hold a significant amount of power and can make or break a company. Still, an investor is a human being with the same interests as you — to see a business succeed. Just as you would with any other stakeholder in your business, it’s important to be candid and honest with investors, no matter what stage your relationship is at.
From the get-go, devote a good chunk of time brainstorming your product journey, customer success, and future roadmap with investors. You aren’t selling just what your company looks like now, you’re selling what it will be, and for that to effectively resonate investors need to be informed about the realistic trajectory.
Likewise, your struggles and challenges should be addressed so investors can prepare for the obstacles ahead — even better, they can connect you with people and resources that may be able to smoothen potential roadblocks.
Alternatively, you can utilize your niche communities to target specific investors you’re interested in talking to. Do your due diligence by researching and identifying investors who know the field you’re going after.
The more you have in common with the investor, the more they’ll resonate with your pitch, connect with you on a personal level, and be passionate about the problem you’re countering.
Follow degrees of separation to establish a trail between your network and the right investors. Try to find mutual common connections and request a warm introduction if possible. Chances are, if an investor gets a message from someone they know referring you, you’ll be in a better position to land a meeting.
Make your metrics talk
Similar to customer traction, there are certain metrics you need to present to secure a million-dollar investment. Without these metrics, there’s no real quantitative foundation for investors to believe that your projections are true.
Unlike smaller investment amounts, which may rely more on qualitative data or short sales cycles to generate quick ROI, an injection of $1 million will almost certainly require a detailed breakdown of core metrics.
Those include Total Addressable Market (TAM), Churn (monthly, annually), Annual recurring revenue (ARR), Cost of Goods Sold (COGS), Burn Rate and Gross Margin.
In addition to the above core metrics, here are the metrics that are particularly important for investors:
- Customer acquisition cost (CAC): how much it takes you to win a new customer. CAC can be calculated by dividing the total marketing and sales costs by the number of new customers.
- Lifetime value (LTV): the total net profit brought in by your customers over the full duration of their relationship with your business. LTV is calculated by multiplying the average purchase frequency rate with the average value of a customer’s purchases, then multiplied by the customer’s lifespan.
- Cohort Analysis: great tool to deeply analyze churn/retention data over time. It breaks down the historical performance of related customer cohorts and helps a company to identify patterns across the journey of a customer.
Prepare for a marathon, not a sprint
Getting your first million-dollar investment or seed funding comes from building meaningful relationships with investors, and like any relationship, this process can take a good amount of time.
Most certainly you’ll have to speak with several investors before you find the right match (we’ve had to go through 20-25 investors before finding the right one), and then from that point, it could take months of back and forth to finally seal the deal — and that’s OK!
Putting pressure on an investor is a sure way to see them back out, while being too hands-off can seem unprofessional or disinterested. Keep your preferred investor on your radar, send regular updates about your startup’s journey, and don’t be afraid to share your core challenges and big wins.
Ask what their reservations are, introduce them to your team if asked, and be transparent about the things you’re still learning or consider as big challenges.
The worst-case scenario is that you don’t get the investment you needed this time, but you can still establish a valuable partner who can speak on your behalf with other potential investors or advisors.
Part of being an entrepreneur is being humble and embracing all opportunities to learn. Each investor relationship you form will enable you to uncover key areas of improvement in your pitch deck, rethink your product-market fit or shape the way you communicate your key metrics, and provide you with momentum towards the first one-million goal.
And when you do hit your goal, you’ll be ready to do it again and again.
Published January 28, 2021 — 09:16 UTC