Opinions expressed by ukbusinessupdates.com contributors are their own.
Why are you raising money? If you’re a startup, the answer seems obvious: you need money. Aside from the lighthearted response, you need to keep your rockstar employees, acquire clients, pay for services/cloud hosting/whatever – oh, and also pay your founders so you can all live and still run the business.
That said, if you’ve ever raised money before, you know that investors aren’t exactly screaming to invest in your business when you tell them you’re raising money so you can pay yourself and your employees and run your business.
So, what do you say? Maybe: “To grow 5000%?” That’s better, but it’s not particularly believable no matter which number you throw away. At this point, you may think the answer is obvious. Obviously you need to describe how you will grow 5000%. But no, that’s wrong…or at least not quite right.
Related: 6 Tips for Increasing Your First Round of Funding
The goal is to raise the next round
If you’re a true startup striving for rapid growth, you always have a next round – even if that next round is an acquisition or an IPO. That’s the nature of the venture treadmill: taking the equity financing will continue to grow the company’s overall value more than not taking it. If not, you’ve already left, you’re not a “real” startup, and you’re probably a “normal”/lifestyle business (which is fine, but you need to worry less about fundraising), or the company dies.
Needing another round is essentially what defines a startup. There is enough significant growth ahead that investments now almost always make sense. While that’s generally true, it doesn’t answer the question every ukbusinessupdates.com faces during fundraising: “Why now?”
The crux of that question isn’t just a tactic to get more information or slow down the round. In the end it comes down to why an investor should put in money this round. As with “I will grow 5000%”, the answer “because I will be worth a lot more in the future” is not the wrong answer – it is just not specific enough.
What are you going to do with the money? this one round?
Now that we’ve been through that:
You will grow (500% or otherwise).
The next round you are worth much more.
Your goal in fundraising is only to get to the next round, not to “never raise money again” (meaning your growth will stop pretty soon).
This is the roadmap for what you to be should say. But more than that, this also provides information on how to scale your business and what to prioritize. What you really need to answer for investors is: What metrics are you going to achieve by using the money now to fetch the next round?
Related: How My Company Won VCs and Where It Actually Got Us
Why is this the right way to answer and plan your business?
This is concrete, realistic (because a startup has to keep raising money) and gives investors an idea of what they are buying. “A company rocket ship!” is a naive answer. Better investors want to know what measures will be met, ie what valuation will I get on my equity/money if I invest now? What valuation valuation is the investor actually buying with this piece of money? You can’t answer that question unless you record what you’re going to do to advance to the next round.
That specifies how big the round should be (how much money it takes to get the stats) and also provides a basis for evaluating whether the price is reasonable or not (what’s the business worth if the team actually runs these stats and achieves) and finally, an idea if it is realistic (do I think you can actually get these stats, with this amount and in the amount of time you have until the next round?).
Of course, these answers are not only useful for investors. They also become critical for: you as founder. It informs you how to perform and what metrics to prioritize. There is always too little money and too little time in a startup. When a question of prioritization arises later, you’ll know what matters most: those metrics that have the most impact on your next round’s valuation and your ability to get there.
Related: 3 Secret Growth Stats That Matter Most to Investors
This will help clarify your thinking
As an ukbusinessupdates.com and VC, I think too many founders think about fundraising in the wrong way. Newbie founders in particular are baffled about what they should say or show to investors to get them interested. And when they’re actually in meetings, they get endless questions.
It has led certain founders to think that fundraising is purely about presentation skills and charisma. In reality, that’s definitely part of it. However, it is not everything. And as you get past the early stages of your startup, the weight will move more and more towards the “rational” box outlined here of “what is the investor buying this round?”
There’s no reason to keep asking questions and getting frustrated. Tailor your pitch to the answer to this question, how much money you are asking by when and your execution plan for achieving metrics to reduce conflict with your investors, fundraising frustration, and short circuiting a lot of back and forth. Happy fundraising.