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Nearly a decade ago, we saw less than one percent of startups being able to successfully secure VC financing. Flash forward to 2022 and the landscape has dramatically changed. While there are more startups than ever before, there is also more capital available and waiting to be deployed. At the same time, a vast majority of businesses surprisingly still run into difficulties when it comes to raising capital. There is still fierce competition. And effectively discovering and communicating the problem you are solving for consumers and creating value for investors is not always an easy task.
While there is no silver bullet to ensure that you get a Yes and a term sheet back from every investor during your pitch and the due diligence process, here are some Do’s and Don’ts that can help you increase your likelihood of finding the right investment partner.
The Dos for Raising Capital
Involve people from your team in the fundraising process. A founder that tries to answer every question on his or her own can raise red flags with investors. VCs are looking to work with individuals who have the power to lead, leverage the expertise around them and surround themselves with experts. While we don’t expect a founder to know everything, we do expect founders to know how to leverage teams, advisors, consultants and even investors to fill in the gaps. Hearing a founder say, “here is the short answer, but let me get you on a call with our head of operations to walk through this one,” builds trust and confidence.
Admit where you see weaknesses. It is only a sign of fortitude to be able to identify areas for improvement in your team or business. With this said, demonstrating the commitment to address these weaknesses by looking for or identifying partners that can shore up the areas where you may fall short or are not as strong as the others is a sign that you have what it takes to lead the business at every stage of its growth.
Do start the conversation early.
Even if you think your company is too early for a specific investor, it is never too soon to get to know them. This may even work in your favor as funds evolve their strategies and look to deploy capital at new stages, via new structures and across new verticals.
Do ask questions of your prospective investor.
Ask every investor you talk to for their investment philosophy. Not only does it demonstrate you are doing your homework, it shows that you care about more than just capital. Many better-for-you brands can attribute their success to the ability to tap into the resources and expertise of their investors across every aspect of the company’s growth – from recruitment and operations to marketing and the sales process.
The Don’ts for Raising Capital
Don’t let valuation get in the way.
In the initial stages, valuation should rarely be part of the conversation. It is okay to have a low valuation when you are just starting out. You will grow into the valuation you are aiming for when the time is right. While we may be seeing mega-rounds for businesses that have less than $5 million in sales, it is never a good idea to take a larger amount of money than what you really need. A $10 million financing round is unnecessary for a small business – especially one at the earliest stage. Starting too high could also mean you will have to eventually take a step back. This is worse than taking small steps up, one at a time.
Don’t present from a slide deck on an introductory investor call.
Engage in conversation first. Take this important first step to get to know your potential investor and vice versa. Founders who dive right into their pitch deck on the first call often leave me wondering if they even are interested in getting to know me, our fund and how we can help them. They spend the entire time talking about themselves and their company. Instead, it would serve them better if they were able to open the discussion up to a two-way dialogue from the very start.
Don’t go too broad.
Instead, focus on going deep. This means being clear and focused about your growth philosophy. Demonstrating sell-through is much more important with what you are currently bringing to market. Start with one brand, one product category and one target consumer until you have meaningful traction (and sufficient capital) to extend into new categories and new target markets.
Don’t start a company with the idea of selling it in a few years.
Instead, be more purpose-driven. Ask yourself, why do I want to do this? If the answer is ‘Because I want to exit within a few years,’ then there is not enough motivation for you to be successful. When you are meeting with potential investors, they will see through this. VCs typically look to invest in founders that are not afraid of the long haul. Your focus should simply be on gaining significant and sustainable traction, improving the lives of your consumers and thereby naturally driving success for yourself as well as your employees and investors.
Marcel Bens is managing partner and COO of Emil Capital Partners (ECP), an early-stage investment firm focused on companies in the Better-for-You consumer goods and services space.