Start-ups: How to Raise Funds in the Post-Pandemic Era
Some of the most famous companies, such as WhatsApp, Uber, Slack and Airbnb, were launched right after the 2008 economic crisis. The economic crisis induced by the coronavirus pandemic is challenging and terrifying, but the current environment can be a good time for entrepreneurs to launch the start-up of their dreams.
We caught up with three eminent business leaders of our generation, who were recently asked for ‘Top Tips’ when raising early-stage money. Here Stephen Kelly, Sukhendu Pal and Dr Steve Garnett offer several top tips for early stage fund raising:-
1. Prioritise running the business: Focus primarily always on ‘running the business’ – delighting customers and engaging employees. Don’t let fund raising distract and allow the growth to suffer. So many founders neglect the day-to-day growth challenge of winning customers, delighting customers, innovating product/market fit, hiring rockstars – it is relentless. The fund raise can become a big distraction where the business starts to fall off a cliff. Ideally, it would always be good to have early adopter customers as this validates the product/market fit. Always remember, fund raising is a commodity activity whereas revenue generation for the business is not. Therefore, a founder must focus his attention on finding the business model, distribution method and consumer engagement that creates an ongoing revenue stream. He must also exhibit restraint in how he uses seed money. Great entrepreneurs limit their spending and work creatively within boundaries establishing a strong foundation while exploring opportunities for growth. A good foundation is ‘Make money before you raise money’ as customer obsession must be a permanent feature of your company culture.
2. Plan ahead for 12-18 month cash runway: This underpins the culture. Great companies invest in customers, product and brilliant hires. Therefore, you do not want to raise a 10 year war chest as the more money you have, the more it encourages waste. The mantra of ‘treat the company’s money as your own’ and focus on customer obsession where every investment yields a return. Even language is important – with the team (especially in marketing), ban the word ‘spend’ which implies waste, and replace with ‘invest’ as this implies ‘return’ and ‘value’. Also, the more the raise, the more you dilute – so worth being sensible to raise enough money to balance dilution with the growth funding needs of the business.
3. Don’t create fantasy valuations and risk a future down-round: We see so many pitch-decks especially pre-revenue companies, with fantasy valuation. It’s much better to build a model for forward progression on valuation which is underpinned by the fundamentals of the business – there are robust SaaS models as a reference point.
4. Identify investors who match your needs: Target Angels/VCs that will ‘follow’ their money as you grow and attract other quality investors. Linked with point (2) where you seek funding tranches to maintain a decent cash runway, you don’t want to have to ‘go on the road’ every year. So, it is smart to make the funding process ‘light-touch’, efficient and allow you the time to drive the business. Therefore, select early funders who can follow their money and attract other investors and VCs as you scale. Also, it is smart to keep the cap table relatively small (set a minimum angel investment level of £50,000) – otherwise, downstream, it becomes crazy managing a cap table of small investors.
5. Target investors who bring more than money: Attract ‘smart’ investors who bring experience, domain knowledge, contacts, networks, introductions and time. Who can really help you scale faster? This is key. All three of us have provided great recruits, CEO contacts in prospective customers, partners, playbooks from ‘how to build business plans’ to ‘best in class’ SaaS sales compensation plans. Providing Founders access to tens of person-years of experience is invaluable.
6. Treat fun raising like a sales campaign: Run fund raising like another sales campaign with time-boxing, discipline and ruthless qualification (we hate to use the phrase but ‘expect to kiss 20 ‘frogs’ before a ‘prince/ss’ arrives’). It’s always ideal to gain a ‘pillar’ investor and ideally someone who can help the funding through their network.
7. Prepare the Pitch-deck that tells your story: To capture the attention of investors, make no more than 10 slides that tell the story of your start-up/scale-up, and answer the questions that prospective customers or stakeholders will have. Here’s a draft template to get started:-
Slides 1-4 introduce what your start-up is trying to do:
- Slide 1: Your vision
- Slide 2: The problem you’re solving
- Slide 3: The solution (without too much technical jargon)
- Slide 4: The market
Slides 5-10 address your business model:
- Slide 5: How you’ll make money (cost vs. price)
- Slide 6: Where people will buy your product
- Slide 7: Your Go-To-Market & sales strategy
- Slide 8: How you compare to the competition
- Slide 9: Your team (you need a good team – see below)
- Slide 10: The investment you’re asking for
‘Test drive‘ your pitch-deck to people you respect before you go into formal pitches. You’ll gain insights and feedback that will help you identify areas for improvement and fine-tune each slide and messaging. In your pitch-deck, get customers to tell your story with video clips (iPhone videos are fine, cost nothing and don’t have to be TV quality) and focus on the problem you can uniquely solve in a total available market.
8. Combine fund raising with action: Remember a smart founder finds ways to raise money in ways that also help build the company’s ecosystem. He looks for customers who are willing to invest in the company, whether in the form of partnerships or funding early development. He also looks for suppliers who will give favourable payment terms. In doing so, he raises money that will not only help get the start-up off the ground but also contribute to building the revenue generating growth machine necessary for long-term success.
9. Plan, Prepare, Play: Have all the likely Q&A and due diligence materials ready for rapid response.
10. Thoughts are for fund raising by non-white male founders: Our above list applies to all founders, but as we know just 1% of VC backed founders are black and women and they only receive less than 5% of investments in the UK. It is a sad situation but a reality that there is systemic bias against ‘people who do not look like us’. So, if the fund raiser is a founder of colour, a woman or from a minority, it’s important to understand the challenges one needs to overcome to succeed in this field. For black or women founders seeking funding, focus on finding that first investor who gets you and your vision, and plan to be looking for at least 12 months. Early seed investors are a good option, and are easier to find than you might think. Also remember, your start-up may be solving a problem that impacts your community, but there is a chance that the problem you care deeply about doesn’t impact the daily lives of potential white, male investors. Present data points that highlight the size of the market they’re unfamiliar with, how much that market spends on the competition you’re going to win, and how much they could be spending on your product. There is powerful data that diverse teams produce better performance and returns. However, the tech industry still has a mountain to climb to support underrepresented entrepreneurs more fairly and equally without bias. There are just a few brilliant firms carrying the flag like https://www.impactxcapital.com/ to invest in the underrepresented entrepreneurs.
11. Founding Team: Finally, think about your early culture and building your team. Make sure that your team is a diverse and inclusive one, in as many forms as possible. Beyond race and gender, consider people from different economic and ethnic backgrounds, people with a disability and people who identify as LGBTQ+. Investors and future team members will look for diversity as a signal of your values and your understanding that having multiple perspectives will help you outperform competitors and maximize the value for all stakeholders. Good luck with your adventure.
Pitching an idea and raising capital for your start-up may be harder than before, but understanding the market and the needs of the consumer, as well as your own adaptability during a crisis, can help you stay in the game.