Raising seed investment
Demonstrate proof of concept
Focus on the team
Have clear financials
Select investors with care
Get an introduction
Have your documents ready
Have a clear plan
Handle rejection objectively
1) Demonstrate proof of concept.
The more progress you can make without investment the better. Investment does not create a good business, it scales whatever business you have. If your business is a mess, you will end up with a bigger mess. Therefore, the more progress you can make the easier you will find it to raise money as the less likely you are to place resources in the wrong place. Paying customers create a business, they will use your product when no one else does, give feedback when it’s rubbish and promote it when it’s good. When you've created a good business or at least reasonable proofs of concept, people will invest in it.
2) Focus on the team.
Your team is often seen as the most important thing in raising investment as it’s the cause of the most failures. Startups die when entrepreneurs quit. Interpersonal problems are the most common cause of this and they are often the most difficult to solve. So teams can be doomed before they start. If they do manage to stay together, startups are then characterised by having to make 'steps up' at speed. A likely cause of failure is if the founders have a skills shortage which prevents a step. It is probably safer to assume you do not have the appropriate skills, so do not rush into partnerships and use vesting agreements. Then try to get to know founders who are just one step ahead of you (about 9 to 18 months). They will show the pitfalls and the skill shortages to be aware of.
3) Have clear financials.
Angel rounds can be raised on vision rather than financials. However, over the numbers become much more important. At series A solid business fundamentals and metrics are essential. Good accounting and reporting practices set that up. If your financials aren’t clear and complete, no reputable investor will want to put money into your company. And indeed this will make it much more difficult to create a sustainable company. Therefore it is worth using a good accounting firm to prepare your financials and taxes and make sure everything is accurate and up to date. Then model three scenarios: needed, realistic and ideal.
4) Select appropriate investors.
The more selective you can be the more valuable that investor is likely to be to you. Thinking of the process as a search for advisers, rather than investors can be useful. Indeed asking for advice initially rather than money can be a better approach. This will take the pressure off the dialogue and give them a chance to prove their use. Focus on those relevant to your industry and size of the investment who have experience in the kind of thing you’re trying to do. Put meetings with your least favourite first so you can practice. Bear in mind if hold meaningful stakes you won’t be working for yourself anymore, they will be your bosses. So make sure you would be happy with them as such.
5) Get an introduction.
An introduction from a mutual friend creates comfort which can set you off to a good start. A warm introduction sets the context for the rest of the relationship. Some earlier stage investors, usually seed funds or accelerators have online applications. These are often insisted upon, but knowing someone at the firm is always going to help. Larger VCs also take comfort from knowing your provenance in the industry. These connections are valuable because they are hard to fake and take time. So don't worry if you don't have many to begin with. A career entrepreneur will have no problem forging connections over time. Being transparent and easy going will show you're in the market for the long term.
6) Have your documents ready.
A 10 slide pitch deck, 2-year financial forecast, executive summary, and investment agreement are essential. At the early stage, the most important thing these should demonstrate is that you know your space deeply. Central to this is the problem, existing solutions, and benefits of your product. Then a detailed market size analysis and a complete overview of your competition will hopefully demonstrate that this problem is big enough to warrant investment. Investing in professionals to design your pitch helps a lot. Copywriting, logo, branding etc. deeply affect first impressions. It is the quality, not the quantity of the pitches you send which matter.
7) Set a clear plan.
Plan your fundraising in detail and stick to the timeline. A change to the amount or timescale of the raise sends bad signals. First, spend time talking to people and getting advice. Ideally getting a lead investor in the process. When you start the raise, expect it to take up to six months and set a clear finish date. If you don’t get it, don’t worry, cut costs start again. Once you start raising money, you’re on your investors’ schedules. This means you need to be ready to relinquish control of your own. Investors will expect to be your highest priority. You have to live with this but a clear timeline will make it more manageable. Build momentum by storing up progress to release throughout the timeline.
8) Handle rejection objectively.
Failure is progress. It is when you don't know if you've failed you can end up in trouble. Be resilient, but don't cling to false hope. As tempting as it is to think people are going to invest, until they say yes, they are a firm no. But don't push a maybe too hard, early-stage investing is risky and emotional. You’re unlikely to persuade people if they’re not excited immediately. If you fail, don’t worry, get more information, change your angle and find a way to get deal done. You’ve got to demonstrate passion and energy and the ability to think on the fly.
