Stage 5: How to pay for the things you need to get to market
Our attorney would like me to start this post by reminding everyone that we are not brokers, nor do we give legal advice. The purpose of our advice is simply to get you thinking about the different options available when raising money to get your idea to market. You’re welcome, Tori.
So you have a great idea, it’s got a viable business model, and your implementation and execution plan is set. How do you pay for the things you need to get to market? How much of your company should you expect to give away? Do you have to give away any of your company to get money?
Traditional Investment Capital
We’ll start with the traditional capital raise that most startups go for, which is giving away equity in exchange for cash. There are many different investment vehicles for these types of raises, from early stage startups using SAFEs (Simple Agreement for Future Equity) or Convertible Notes, to late-stage funding rounds with Series A, B, C and on from institutions or private equity firms. If you want a great explanation of what the different vehicles are and how they work, check out Startup Equity Investments published by FundersClub.com. (https://fundersclub.com/learn/guides/understanding-startup-investments/startup-equity-investments/)
If you’re an early stage startup, you need to be prepared to give away more of your company for less money. This is simply because you don’t have proven results yet so you’re a higher risk. At this stage, it’s very important to take as little money as you can because it’s so expensive to raise. The more of your plan you execute on and the better results you can prove, the cheaper your investment raises will be. In other words, you’ll give away less of your company when you have revenue or other tangible results.
That said, this is a great time to revisit your pro forma and make sure that you are only raising capital for things you absolutely cannot get done any other way than to throw money at them. If you’ve got a huge software development staff budget, get creative in finding ways to lower or eliminate that completely by finding great tech co-founders or developers willing to do work in exchange for equity. You have to think outside the box to find new ways of getting done what you need to protect your equity in your company.
To secure investment funding, you need to get good at pitching your idea. Work with a graphic designer to build a pitch deck that is attractive and tells the story about your idea and your journey so far. Make sure you include the data you found during your market research, as well as your “why”. That is, why does this need to exist in the world and why are you the one to do it.
Do not overwhelm your audience with text. They won’t read it anyway, or if they do, then they aren’t listening to what you’re saying. Your pitch deck should be just enough to graphically illustrate the points you’re making when you’re delivering the pitch.
Once you’ve got your pitch designed and built, you need to practice it. A LOT. Practice in front of the mirror. Video yourself giving your pitch, then play it back and give yourself notes. Listen to an audio recording of yourself delivering your pitch anytime you’re in your car. You should be able to deliver all of the pieces of your pitch from memory, without needing a ton of notes. You definitely don’t want your pitch to be you reading your pitch deck to your audience. Be warm, engaging and passionate. Make sure your personality and your why comes through in the way you deliver your pitch. It WILL make a difference in how you get funded.
After any pitch, potential investors may have questions. Be prepared to answer any question that might come at you, even the ones you’ve already answered in your pitch.
Get yourself in a “growth mindset” when answering questions. Some investors will ask questions that are about “risk” instead of growth, which can create a sense of you being on the defensive about your idea and the business model. For example, “How do you plan to acquire new customers?” is a growth-oriented question. “What will you do to increase customer retention?” sounds very similar, but it’s a risk-oriented question. Growth mindsets encourage thinking about the future and what’s possible, while risk mindsets encourage scarcity and fear-based thinking. You definitely want your investors to view you as a growth-mindset-thinker, so even if they ask questions that are risk-oriented, answer them with growth answers.
Again, you should practice the Q&A! Work with a friend, colleague, or helpful spouse and have them grill you. Not sure what questions you’ll get asked? Ask an expert! Go to some investment club meetings, watch others pitch, and get familiar with the common (and not-so-common) questions you think might be applicable to what you’re doing. Then PRACTICE the answers you will give, ensuring that they are concise, complete, and framed in a growth mindset.
Alternative Financing Options
There are often other options to get funds into your company. These can be things like Small Business Administration (SBA) or other small business loans, a line of credit through your bank, personal loans or borrowing against personal assets. You should work with your tax accountant and a good attorney to help you understand the implications of the options available in the marketplace, and ensure you choose alternative financing that fits your acceptable level of risk with terms you understand and can comply with.
Keep in mind that your financing may not come before you start working on executing your plan. You may be able to get enough support that you can start working towards getting to market immediately and be pitching and looking at financing options simultaneously. More on that next week!