This article was originally published on 03/18/2019
So you read my first article and decided you do, in fact, want to raise money to scale your startup? Great! Now you’re probably wondering, “What do I do now?” Well, I’m glad you asked. Next up, I will be walking you through the first six steps you should complete if you want to increase your odds of securing the bag. These steps have been proven effective by Founder Gym graduates I have personally trained, and I’m confident they will be helpful guideposts for you too.
1. Consult with founders who’ve already raised money
Remember, you’re a complete newb here. You’ve never done this before, so be humble and seek out founders who have already achieved what you’re aiming to. Read their posts about fundraising, watch their interviews on YouTube, and if you have direct access to them, definitely ask them for advice. One of the biggest mistakes I see time and time again is when a founder tries to raise money without consulting with more experienced people in advance. Don’t set yourself up for failure. Do your homework, learn from those who came before you, and consider joining programs like Founder Gym, so you can digest the rules to the game before you start playing.
2. Decide how much money you want to raise
When raising your first round of capital, you want to secure enough money to last you 12-18 months. How much money that comes out to depends on what milestones you want to hit in that time period. Often times, your biggest expense is headcount (i.e. employees/contractors to carry out the work). Also, you need to factor in how much of your company you’re willing to give up. With a few exceptions (more on that below), this money is not a charitable donation. It is an investment. Meaning that specific people are giving you X dollars for Y percent ownership in your company. If you want to retain a certain amount of ownership in your company, you want to think twice about how much money you take from external sources.
3. Determine the best source(s) to raise money from
Here is a list of some of the most common funding sources that tech startups rely on:
- Family and friends – provide their own money
- Crowdfunding – public supporters donate money, and/or customers buy your product before it’s built
- Angels – invest their own money
- Pitch competitions – distribute prize money to winning pitch(es)
- Accelerators – invest in and coach founders in groups known as “batches”
- Venture Capitalists – invest other people’s money; those people are called limited partners or LPs
- Scouts – invest other people’s money, specifically money that an individual venture capital firm provides them with
- Syndicates – group of angels and/or venture capital firms who come together to invest in individual startups
- Private Equity – invests other people’s money (again LPs) in exchange for significantly larger ownership stakes than any other type of investor on this list
All of these funding sources, except for crowdfunding and pitch competitions, invest money in exchange for equity (ownership) in your company. (Also, sometimes family and friends contribute money without an expectation of equity). They are investing with the hope that they will make a 10x return when your company sells or IPOs in 5-10 years.
4. Construct a plan
The Founder Gym graduates who I’ve seen have the most success raising capital operate their fundraising process like a sales process. They have a clear top of the funnel (i.e. list of prospective investors) prioritized from most desirable to least desirable. They have a predetermined list of actions and assets they use to convert those leads into sales (i.e. how to get investors to invest). They have a strict timeline they stick to, in order to reach their goal (i.e. closing date for their financing round). They delegate their usual responsibilities to other team members, so they can focus on closing the financing round on time and on target. We’ve all heard the quote before: If you fail to plan, you plan to fail…and this definitely applies to fundraising.
5. Execute the plan
Raising money to scale your tech startup is like trying to break into the pros. It’s that hard, and it’s that rare of a feat to achieve. If you want to have any chance at success, you have to show up and show out every single day. It’s not enough to talk about it or event plan for it…you have to take MASSIVE, CONSISTENT ACTION. Let your loved ones and teammates know you’re about to play the game of your life and you will need to be 100% locked in and focused if you want to stand a chance of winning. Make a great music playlist to keep you motivated, and surround yourself with other founders who’ve already gone down this path, so they can keep you encouraged. This isn’t child’s play. Put that “S” on your chest, go out there, and get it done!
6. Iterate as needed
This is Startupland, and if there is one truth about being here it is that things rarely go as planned. This most definitely applies to fundraising. More than likely, there will be hiccups, roadblocks, and challenges along the way. You will get rejected. It will hurt. You will flop. It will sting. You will definitely experience a rollercoaster of emotions. And guess what? All of these things are 100% normal. What you are doing is incredibly challenging; sharing your vision with strangers, and exposing yourself to their critique. Just remember, it’s the investor’s job to poke holes in your story. It’s their job to mitigate risk. Expect it and prepare yourself mentally for it. Use every meeting as a learning experience, and apply those learnings to improve your strategy as you go. And remember…
It’s never about what happens to you; it’s always about how you react to what happens to you that will ultimately determine your outcomes.