Have you recently launched a business? Are you preparing to?
For many early stage companies, this touchpoint necessitates a capital raise. But raising money is not necessarily formulaic—investors differ, strategies vary, and how you lock in funds might be completely unique to your specific circumstances.
If you are new to this endeavor, the experts here at CFO Hub have you covered. We built this guide to spotlight eight tips to utilize when raising capital.
8 Tips for Raising Startup Capital
#1 Know Your Potential Investors
Not all investors are the same. Some focus on early stage smaller rounds of seed money. Others provide millions of dollars of capital infusion. Where your business is in its growth cycle and what its specific capital needs are have a significant impact on your target investor.
In most cases, there are five primary types of capital investors you should consider:
- Banks – Although they may not be considered traditional capital investors, obtaining a loan from a bank allows you to fund your venture without sacrificing equity. However, to qualify for a loan, you must demonstrate to the bank that your venture is viable and that you will be able to repay the debt.
- Venture capitalists – VCs are often interested in sinking large amounts of money into the earlier stages of a company’s life cycle. VC investments are capital intensive—typically in the millions of dollars—in exchange for interest or a percentage of profits.
- Angel investors – Angel investors are smaller—often individual—investors who contribute to seed funding. But their money isn’t their sole source of value; their connections and business experience are just as important.
- Family and friends – For smaller companies in the earliest stages of growth, family and friends are often the most logical place to source an investment. Ideally, these are people who already know and trust you and care more about investing in you than the project itself.
- P2P lending – Peer-to-peer lenders are individuals or groups of people who offer seed money to startups. This can be done via crowdfunding sites—like Kickstarter or P2P—and are often successful if enough momentum is generated.
#2 Relationship Building and Networking Matters
It can take years before an investor ever sees a return on their investment. Due to this timeline, investors are often leery of taking risks on people they do not know and whose businesses have not yet demonstrated proof of concept.
To counteract this phenomenon, you must focus on building relationships and enlisting the assistance of people who have an established presence in your industry or the investment ether. Search for people who can help you employ the best strategic decisions and open doors toward larger investors.
Small business development centers, alumni networks, and fraternity networks are all useful mines for business relationships.
#3 Demonstrate Your Company’s Value
In most cases, ideas do not sell on their own merit. It is the money that speaks.
Investors want to discern whether you can build an engine that runs at scale. Convincing them to inject capital will require you to first demonstrate the value of your good or service, and then outline an actionable strategy that you will deploy to grow it.
A successful pitch will cover the following:
- How much money you require, and what for
- Your revenue figures
- Your value proposition and unique market differentiators
- How specifically the money can help you scale
#4 Sell Yourself
You may be surprised to learn that your financials or userbase are not the most important thing to investors.
Rather, it is you and your team.
In 2016, a study entitled Attracting Early Stage Investors: Evidence from a Randomized Field Experiment sought to discover the characteristics that were most important to investors in early stage businesses. The findings had shock value:
“The average investor responds strongly to the founding team, but not so much to the startup’s traction (its sales or user base) or existing investors.”
Investors are not always investing in a business—they are investing in a person(s).
According to noted Harvard Business Professor and author William A. Sahlman, “When I receive a business plan, I always read the resume section first. Not because the people part of the new venture is the most important, but because without the right team, none of the other parts really matter.”
#5 Leverage Technology
In the early stages of a business, only a select few entrepreneurs have the opportunity to pitch their startup and fundraising needs to major investors (or a panel of investors). But in a digital world, doors can be opened in a way that rivals traditional methodologies.
To that end, we recommend that you research the following:
- Crunchbase Pro
- Pitch Investor Live App
#6 Contact Hundreds
In all likelihood, you will receive dozens of no’s for every person that is even willing to listen to your pitch. It is all a numbers game. The more people you reach out to, the better your chances are to find someone that is a perfect match.
But you cannot just cast tons of lines haphazardly. You must be strategic. Your lists should be targeted toward investors that actually work in your sector. Crunch Base recommends that for every 100 investors you contact, you will foster five genuine conversations.
#7 Do Not Burn Bridges
There are only so many viable investors out there that may be a proper fit. The venture community is not big enough to create room for burnt bridges. In simpler words—people talk. So, even if you are dealing with rejection or incivility, be courteous and accept it with humility and gratitude.
These are learning experiences, despite how emotional the pursuit and can inevitably become.
#8 Pre-Qualify Your Investor
No one likes to have their time wasted. So, one of the first things you should do from the outset is to confirm that the person you are pitching to checks the following boxes:
- They have the minimum capital you need for an investment
- They invest in your sector
- They are open to investing
There is no point in going through an entire spiel if both parties are unaligned from the beginning. To mitigate the chances of this happening, do your due diligence.
CFO Hub – Helping Your Startup Raise the Capital it Needs
Raising money for a startup can be an arduous, painstaking process. In all likelihood, you will inevitably face rejection and setbacks, especially if you don’t approach fundraising from a strategic position.
To that end, do you need help raising money? How about guidance on different strategies you can deploy?
At CFO Hub, we offer financial consulting and outsourced financial services to help you make the best decisions possible for your growing venture.
Want to learn more? Then contact us today.