A guide to getting startup funding (Part II)
In the last article, we discussed why fundraising is hard, what a typical VC process looks like, and tips to keep in mind before, during and after meeting investors.
The last part of this guide will detail, how to convince an investor and 2 important qualities they look out for before investing in a founder/ startup.
Let's get right into it
- How to convince an investor
During a fundraising process, most founders try to convince with their pitch deck instead of their business- explaining their ‘why’ clearly and explicitly to investors. To sell your business to investors, these 3 attributes are paramount- a strong team, a firm grasp of the market and traction.
Mark Suster once remarked that ..’ everything goes wrong and only great teams can respond to competitors, markets, funding environments, staff departure, PR disasters and the like’. This goes to show that one of the best ways to convince investors is to build a strong, solid and formidable team. A key to building a strong team is to first believe in your business/ ideas. How do you convince investors when you are not sure of your business? How do you get others to believe in something you cannot bet on? It is pertinent to ask yourself some hard questions- is your startup worth investing in? Why should investors fund your business? Do not forget that people do not buy what you do but Why you do it- likewise Investors. Answering these questions sincerely will give you the conviction you need to approach investors.
Moreso, Investors want domain experts, that is, founders who have experience and expertise in the industry they are building in. If you're not a domain expert, get to know your market as should an expert as well as a good grasp of operating policies and procedures needed to steer the business.
In addition to having a formidable team, investors are likely to fund startups that are on the path to owning a large share of the market. In the words of Paul Graham ‘Founders think of startups as ideas, but investors think of them as markets’- your Total Addressable Market (That is x number of customers who will pay an average of $y annually for your product). You are not typically expected to have the entire market to yourself (that will be nearly impossible), but investors are likely to back businesses that are on the path to seizing an enormous share of the market. The target market for your business must be huge and obtainable. Although your target market should be big, it is often advised to begin with a small market that will eventually grow big or one from which you can easily move into a big one.
- Qualities investors look out for
There are lots of great resources on the qualities investors love to see in founders. However, we find these 2 qualities paramount
Building a business is definitely not a walk in the park. It will require a strong desire to succeed regardless of obstacles, changing market conditions etc. Investors want to work with founders who do not get demoralized or discouraged easily. For entrepreneurs who are not first-time founders, their track record will easily show if they possess this quality or not. However, for first-time founders who have not necessarily built multiple businesses, ensure to share scenarios where you demonstrated this quality. How did you grow your business while bootstrapping; when the fund was limited? What made you determined to keep going when you had obstacles; when a core team member left? Share experiences that show your determination to scale the business.
The startup environment is fast-paced and requires the ability to adapt easily. Flexibility requires adapting on the fly’ changing and adjusting to new changes and innovation. It is being open and receptive to feedback and carefully adjusting your plan and model to meet the market's changing needs. This does not imply pivoting every 6 months, but being open-minded to trying new ways of doing things.
The process of fundraising can be long and gruelling, but it is necessary to not let it get you down. Build an MVP, get traction and be absolutely prepared for the entire fundraising process so your business does not suffer during this time. Keep in mind that your investors are going to be a part of your business for a while and so be deliberate about choosing the right one(s) who will not just provide funding but other support needed for the growth of the business.
Be intentional about building a solid team, get your numbers in order and ask for feedback regardless of the response given.