Ready… set… raise!
How to know when it’s time for funding
When you’re running a business, it can be hard to know when it’s time to start fundraising.
Do you have to be pulling in a certain amount of profit? Do you have to be a specific size? Do you have to do it because Steven in finance keeps bugging you for new office furniture?
(Yes, Steven fully recovered from being eaten by an alligator and is now back at work crunching the numbers. Minus several fingers.)
As you can probably guess, there aren’t any hard or fast rules to knowing when you need to start reaching out to all those prospective investors. However, the good news is there are guidelines that can help you determine when you’re ready to go.
Different stages – different things
Investors look for different criteria at the various stages of the fundraising process.
For example, if you’re aiming for Pre-seed or Seed funding, an investor wants to see enthusiasm. If you’re passionate about your idea and have the vision and drive to succeed, that’s probably enough to get the cash (sometimes).
As the capital on offer grows, the demands get higher. Investors want to see what you’re doing, proof of how you’ll scale and the profit you’ll bring them. Not a big ask, I know.
In this playbook, I’ll run through each fundraising stage and the investment criteria that are likely to be in place. That way, you’re in a good position to work out the milestones you need to hit.
Do check out the deck at the top of this page as I go into a lot more detail there. Plus there are lots of nice pictures (as usual).
First investment – I have a dream
At this stage of investment, you’re likely to not have a lot to show. At best, you’ve got a low-fidelity prototype.
Bearing this in mind, the early stages of investment are all about you and your idea. An investor will want to know you’ve researched the market and understand your target audience. Most importantly, they’ll want to know how you plan to make money.
As your product or service is still in its infancy, an investor will be highly interested in you and your team. Does your team have an impressive skillset? Do you have experience in the industry? Do you know where you want to be in five years?
Angel investment – this business idea has wings
You should have refined your ideas substantially when you go for angel investment. You should have a first working prototype in place, as well as a detailed product roadmap. While you’ve not got a market-ready MVP in place, it’s only a matter of time.
Your team should have a clear understanding of what you want to achieve as well as respect in your industry of choice. You might not be a thought leader in your niche just yet, but you’re working on it.
Most importantly, you should have a value proposition in place. Why would a customer choose your product or service over your competitors? And not just ‘cause it’s brilliant.’
Pre-seed/Seed funding – raising on promise
At this stage, you’re still raising on ideas rather than tangible evidence, although you are starting to get the valuable data that will help you in future funding stages. Odds-on are that you’ve launched your MVP and are onboarding your first paid customers.
It’s likely that the money you raise at this stage will go on refining and testing your MVP until you’ve got a solid product.
Your team should be working as one, and you should have a solid culture in place. Everyone should have a clear understanding of how your target market operates, your USP in the industry and what your strategy is.
Series A funding – crossing the chasm
When you get to Series A funding, the money on the table shoots up exponentially. You’re not dealing with hundreds of thousands of dollars anymore, no no. You’re going for multi-million dollar investments.
Hopefully, you’ve got good feedback from customers, and your early adopters are recommending your product to others. You’re also starting to see your first significant sales beyond your initial customer segment – champagne all round.
At this point, you’re moving away from focusing on ideas and moving into raising money on proof. It’s likely that investors want to know about your Product Market Fit, or PMF.
PMF is one of those frustrating business concepts that nobody can define or measure. Different VCs will have different ideas of what it is, which probably doesn’t help your cause.
If it helps – here’s my definition:
‘Product market fit is when a non-custom product solves a meaningful problem better than current solutions. This means it resonates with and is adopted by a large number of paying users – who have a free choice and that you can economically acquire in a growing market.’
Still confused? Let’s break it down a bit more.
‘Better than current’ – the product is an improvement on what is currently available on the market, not just a different price point or packaging
‘Non-custom’ – the product needs to be generic and not a highly customised example
‘Resonates’ – customers are buying your product, actively using it, and engaging with it
‘Large number of paying users’ – customers need to be paying for the product, even if they are doing this at a discount
‘Economically acquire’ – you’re not spending vast amounts of money on gaining new customers or keeping existing ones
‘Growing market’ – the market must be significant and on the grow
You can show your PMF using a range of metrics such as revenue growth, customer satisfaction, churn rate and customer acquisition cost.
The exact metrics you’ll use for Series A funding will vary depending on your industry, but these guidelines will help.
The point is you’re using qualitative and quantitative data rather than sticking your finger in the air and going, ‘yeah, we think our customers like our product.’
Series B funding – the B is for ‘bloody hell’
This level of funding is hard. Everything you do needs to be backed up by cold, hard data from this point on. Not only this, but the investors are a lot tougher – they want to know they’re going to be getting a return on their multi-million dollar investment.
No argument about it, you need to have PMF at this point, or you’re going to get laughed out of every VC office you visit.
Post-PMF, you need to think about building the broader business and scaling up. And believe me, building a business is ten times harder than building a product. Everything you do needs to be futureproofed and designed for scale.
Series C+ funding – pour that gas on the fire
Series C+ funding isn’t as bad as you might think. When you’re already building the business for scalability and have PMF, you’re in a good place.
You should be focusing on your strategy, execution, team, and sales at this point. What are you doing to make sure you can scale as fast as possible without anything going wrong?
Investors basically want to know how you plan on world domination and how you’ll make them lots of money in the process.
In summary: keep checking and testing
Don’t expect to start fundraising and to have the money in your bank account one week later. Even the Musks, Bransons and Bezoses of the world would struggle with that timeframe.
It’s vital to keep checking to see if you’re anywhere near ready for the next stage before starting your fundraising campaign. That way, you can plan ahead and get that all-important capital before you run out of cash.
Well that's it from me here with these free fundraising playbooks. I hope the 1,800 'how to' slides is a help to get you started. What's that you say? You want more help... ok, really then check-out my Fundraise Fast-Forward packages.