How to get startup business funding?

If you are responsible for marketing , it would be difficult to contribute to successful fundraising without understanding the whole fundra...

If you are responsible for marketing, it would be difficult to contribute to successful fundraising without understanding the whole fundraising process. In order to prepare winning fundraising materials and to become visible for potential investors, you should at least have a clue what to expect.

How to get startup business funding

During the summer of 2016 InnMind, a Swiss – Eurasian startup and investors platform, conducted a study of investors’ behavior and decision-making process. InnMind interviewed hundreds of investors (venture capital firms, institutional investors, and business angels) from the USA, Canada, Europe, Russia, India, etc. in order to learn how they make decisions on investing in startups. The study showed that the majority of the investors don’t insist on a detailed business plan prepared by the startup. Moreover, many of them do not consider the format of the information provided by the startup as important. It could be a presentation, canvas, executive summary, or any other relevant form. The most important information for investors is to get proof that the founders understand their business, know the market and their competitors, have the clear idea on how to bring their product to the market and generate profit, and can clearly explain this to the investor. More than 60% of the investors emphasized that the first sign they look for in the founders is motivation. They want to see very strong motivation to succeed and the deep commitment of the founders: the more a founder invested in the startup (time, money, efforts, etc.) the more likely he is to receive an investment. Before risking their investment in a startup, investors want to see that the founders also take risks.

how to get funding for startup

How to get startup business funding: Be familiar with the different types of investors

Not every investor is equally valuable for you even if they bring the same amount of cash. We’ll talk about different sources of funding for your startup business later but first, it is helpful for you to understand that you will meet different types of investors, including but not limited to the following:
  • Investors who don’t understand what you do at all, but will have their own opinion and assumptions about your product and business. Don’t waste your time. Just talk about facts and the new hypotheses you want to have checked, but not just about their opinions and assumptions.
  • Investors who don’t have the money and don’t intend to invest, but still want to show off as active in the market. Don’t waste your time!
  • These investors want to know every tiny detail about what you will be doing for the next three or five years, even though you both know that you can’t predict the future and make such a forecast. Explain your plan and the conditions under which the plan is built. Don’t get involved in little tiny details, because a startup is not a regular business. You’ll face many pivots in your business.
  • Investors who give you great feedback and would be able to help you, but they want to invest only if someone else invests in you as well. Great! Find out as much as possible about their doubts. Are they related to your startup or is it just some limitation in their policy? Strengthen your efforts to find additional investors and maintain a relationship with these investors.
  • Investors who are extremely helpful and want you to succeed, but yet they want you to achieve greater traction before they invest. That is awesome! You have entered into a good relationship with your future partner and found out that your business has a particular problem. Go and solve it. Listen to investor’s advice and get more traction.
  • Investors who want to invest but don’t agree with your valuation and would like to get more equity than you were ready to propose. Not a problem, but don’t hurry to sign a deal. First of all, ask how they arrived at their valuation. Are there any serious facts or issues? Maybe it would be wise to dig deeper and make some essential changes in your startup to get a higher valuation before fundraising. Secondly, seek outside advice and prepare to defend your offer. Thirdly, don’t close the door for other investors; go to meetings with other investor and listen to their offers.
  • Investors who are interested in your business, but doubt you, as the founder, or your team. … tThis will feel like it’s a little bit personal. Instead of getting angry, ask them to state their perceptions of you or your team. Maybe there are some reasonable concerns and you should make some changes. But, if you don’t get sound arguments, don’t take it personally. Why should you bother with somebody’s opinion who has no arguments to back it up? Seek for other opportunities with other investors.
Once you are in contact with a potential investor, the sooner you identify which type he belongs to, the sooner you’ll be able to reap the benefit of your relationship. During my global research on startups, I met Batukhan Taluy, founder of Uservision in Turkey. He had secured an investment proposal of $1 million in return for 60% of shares in his company. However, after considering his options, Batukhan realized that Uservision doesn’t need that amount of capital. He also realized that they can minimize development and ongoing costs, so he decided not to go through with this option. It was hard to say no, but it was a logical decision. The know-how and the networking with industry professionals were more important than the funding for this startup. Uservision provides advanced user experience testing solutions for mobile applications. Marketers, developers, product managers, and UX designers are the main clients for Uservision, but Turkey may not be the best market for growth selling such a solution. Therefore, the founders had a clear vision, that potential investors should be able to help them to enter the global market.

How to get startup business funding: Turn on fundraising mindset

It’s easy to talk about, but maybe not so simple to get mentally ready for the whole process. The fundraising mindset centers around a few main ideas:
  • Fundraising is a process that takes time and is not as easy as you would like it to be. Therefore, you should start networking and developing relationships even earlier than you start the actual fundraising process. Keep your eyes open and try not to miss opportunities to get in contact with or make connections with potential investors.
  • You will gain experience at every meeting. You will probably be rejected many times. But that’s how you learn. Figure out what mistakes you’re making or why you’re being rejected. Then, update your fundraising material or even the financial model itself if the reasons for the rejections are serious enough and concern the core of your business model. Just remember, ending the meeting with rejection from investor’s side is not the end of your story. It’s just a lesson to be learned and next day you’ll be better at fundraising.
Get used to analyzing what you’ve heard during your meetings. Sometimes you’ll hear very valuable and frank advice, sometimes you’ll get straightforward critics, sometimes you might get personal remarks, and so on. Develop a habit of writing down all the questions you were asked and comments you heard during the meetings. Revisit them the next day and draw some conclusions about HOW TO DO IT better the next time.

How to get startup business funding: Get ready for a continuous fundraising process

For most startups, fundraising is not something that can be done only once and then forgotten. It’s a process which has different stages, strategies, and tactics. Here is the general outline what the fundraising process looks like:
  1. Create your fundraising materials. Basically, this means doing your homework. It doesn’t make sense to go fundraising if you have nothing to show and nothing to prove the potential of your business proposition idea. As we have discussed, you can build a valuable relationship without any fundraising material, but if you want to seek investment in your startup, you must do your homework first.
  2. Set up fundraising milestones. For each milestone, be absolutely sure when you need the money, how much you need, why you need it, and how much time you’ll have to raise this amount.
  3. Network and build relationships. If up until now networking was suggested as a recommendation, now it is an essential activity. Startups will seldom get funded without serious networking, so don’t bet your success on luck. Actively and consistently build valuable relationships.
  4. Collect initial offers and choose with whom to proceed. It’s not a lot of fun to only have one proposal to choose from. So put your efforts into trying to meet as many potential investors as possible and collect their offers. It’s obvious that the more offers you get, the better the odds for you.
  5. Sign a term sheet before drafting and managing the legal process. If you feel confident about one of the offers you received, gain agreement on the term sheet before working on the final offer.
  6. Close the deal and receive funds. It’s probably the most anticipated moment, but fundraising doesn’t end here. By accepting investments, you agreed to follow particular conditions.
  7. Act according to agreed to conditions and report to investors. This step is quite often underestimated as not very important, but that’s not the case. If you don’t act according to the agreement, you might lose the investment you attracted and might not get the next release of funding of cash, in the case of a tranche investment. Investors talk to each other and if you don’t meet your obligations or spoil your relationship with your current investor, it will be much harder for you to succeed in the next round of fundraising.
  8. Know when to start preparing for the next round. Scalable startups don’t limit themselves to a single round of investment. They want to achieve rapid growth and tremendously high valuation. Therefore they go for at least few fundraising rounds which might include: seed round, angel round, series A round, series B round, series X round. The main target of scalable and buyable startups might be the Exit strategy: to sell the company to one of industry giants (M & A strategy, which stands for Merge and Acquisition) or through IPO (Initial Public Offering).
To go for fundraising, you need to achieve particular milestones, otherwise, none of the investors will get interested in your business idea. Seed rounds are easy as you essentially raise money to conduct an experiment. That experiment has to have worked and indicate profitable scalability in order to go to a Series A investment, which is much harder. If you were not able to achieve market validation after consuming your seed investment, your chances of getting to another round are very low. Chances will also be low if you ask for an unrealistic amount of money. Investors will think that you don’t know what it takes to get to the next milestone efficiently.

The story of Tail illustrates the right mindset for fundraising. Tail is an app that, along with a fashionable clip, helps customers take better care of their dog. This startup is addressing a huge market with significant potential. According to the Euromonitor International report, Pet Industry 2016, there are about 86 million dogs in the European Union with a market value that exceeds €32.2 billion with 2.7% annual growth. Tail is targeting not only Europe but also the global market, which is unbelievably huge. Another opportunity indicator is the exploding wearable technology market, including technologies such as GoPro or iWatch among others, with a whopping CARG of 35% through 2020. The Tail commercialization strategy assumes Poland and Slovakia as the testing and initial entry market (testing MVP), followed by entrance into the UK, France, Germany, and Sweden. Once they establish a presence in these markets, the US and other overseas markets will be addressed.

Even though there is no actual income yet, multiple revenue streams are foreseen. For example, sales of Tail hardware and app, a subscription-based service, advertising within the app, sales of accumulated big data to insurance companies, pet supply stores, veterinary service, and more. The main competitor Whistle (GPS and Activity tracker) has raised $21 million in two rounds from nine investors but is still trying to conquer this market. It’s important to note that Tail, even though they are addressing a highly lucrative potential market, were not funded on the spot. They had to achieve multiple milestones in fundraising to develop their startup:
  • Initial investment of founders: €20,000
  • Investment from Deutsche Telekom Venture Fund GmbH: €80,000
  • Investment from Platinum Incubator Seed sp. z.o.o.: €100,000
  • EU subsidy of Horizon 2020 in the topic “Open Disruptive Innovation Scheme” for research and development as well as for commercialization plan: €50,000.
  • Now they are preparing for next investment round size of €500,000 at an expected post-money valuation of €2.5 million.
The Tail founders are not just lucky guys who got the attention of investors. They have worked consistently, step-by-step towards the next development milestone. With this persistent effort, Tail succeeded in overcoming the odds (a 3% success rate!) to secure Phase 1 of a high-profile public funding scheme SME Instrument, part of the European Commission’s Horizon 2020 Program. The SME Instrument is an incentive that seeks to boost the best strategic plans of the most innovative SMEs in the advanced technology sector in Europe. An SMEI phase 1 grant for the project’s comprehensive feasibility analysis is a tremendous investment for this company, but more importantly, it paves the way to much higher odds to secure the second phase of the program with a grant of up to €2.5 million towards commercialization of the Tail platform. So, don’t expect fundraising to be easy and fun! Be ready to work hard and stay persistent if you really believe in your idea.

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