HOW TO RAISE FUNDS FOR STARTUP ?
How to raise the first round of funding for your startup ?
If you are an early-stage founder looking to raise capital from early-stage investors, angel investors, then you’ve come to the right place.
In this article, (Affaque Ahmed, Founder & CEO, XIFAQ) outlines the best practices of startup fundraising.
Raising your first round of funding for a new founder is a time consuming process.
However, you can master it with the below approach:
Firstly, you need the following:
1. A strong startup idea (XIFAQ can help you validate the idea)
2. A prototype, a patent, or a proof of concept for the final idea. (XIFAQ can help you in developments, marketing and other resources)
3. A simple and scalable financial model that shows at least $10M in revenue after 3 years. (XIFAQ can help you with business plan and financial projections).
4. A compelling 10 to 15 page pitch deck presentation. (XIFAQ can make a compelling pitch deck for you).
5. An incorporated entity (XIFAQ can help in getting you incorporated out of our network).
6. And, the ability to quit your job and live for six months on savings. (This you have to commit)
At the earliest stages, any investor’s decision to invest is based on people and the team.
The key to securing an investor will center around :
1. Your ability to network and develop relationships.
2. Potential for growth that excites potential investors.
3. Being extremely knowledgeable about your industry and knowing what it will take to succeed.
Your job as a founder is to make investors feel confident that your company is on track to success and that you are the person to lead it.
In order to go fundraising, you will need below materials:
1. A one-pager (Executive Summary) that highlights key facts about your company which will be used to introduce you to potential investors.
2. Pitch deck (10-15 pages) that you will use when presenting to investors.
3. A financial model showing cash needs and your growth expectations.
An advisory board member(s) is most important. It can help fill the expertise and knowledge gap in your team by providing advice, making introductions. So, seek for experts who can be your advisors. You may ask us too.
How much you should raise ?
Your monthly operation cost multiply by number of months and till you reach next level.
Where to ask for money ?
If you are raising your first round of funding, stop trying to pitch venture capitalists.
Ask friends and family first and use your savings too to make a functional prototype or MVP so to show it to angel investors or individual investors to get their attention.
Once you have an angel investor or individual investor, take the startup to the next level with the help of their money, advice, suggestions.
Then comes, venture capitalists.
Do a thorough search first on where and hows and talk to those who are interested in relevant sector/area/geography only, else you will end up with no response and get demotivated.
Understand this, if you will reach out to 100 investors, you will hear from 10 investors and out of those 10 investors, you will find 1 interested investor. So, conversion is 1% most of the time.
We, at XIFAQ, can help you pitch to those investor(s) who invested, or like to invest in your relevant sector. We have that categorized investors with us. So, conversion can be 20% with us.
Don't start meeting investors until you are ready, gain knowledge first, work on your data, gather as much as information you can, before reaching to investors. They don’t have time, keep this in mind always.
Be prepared before pitching. XIFAQ can train you well enough for a productive meeting.
There are two types of early-stage investments:
The simplest option for fast growing technology companies is to take a convertible debt financing, where an investor loans the company money that converts to equity in the next round of financing, usually at a discount to the purchase price for that equity..
2. Debt Convertible Vehicles
Debt is the most senior security in a company, debt holder will take possession of a business if it runs out of money.
SAFE: SAFE stands for “simple agreement for future equity”. Created by Y Combinator as a new financial instrument to simplify seed investment, SAFE is a warrant to purchase stock in a future priced round.
"Timing is important"
The best time for startups to raise debt are:
1. When the company is growing, but not fast enough.
2. When the company is close to profitable and equity is too expensive or taking too long to raise.
4. The company is more than ten years old and equity investors are tapped out in their older funds.
Key negotiating areas of a "convertible deal”:
1. The price. The major negotiating point will be the price, and generally speaking you should be willing to accept any reasonable offer that sells less than 40% of your company after closing.
2. The term before conversion if there is no further financing. Generally speaking, the term is normally 18 to 24 months.
3. The type of stock.
4. The minimum amount to close and the maximum amount allowed.
5. The discount into the next round, and the dividend.
Lot of angel investors will express genuine interest in a deal, making both soft and hard commitments. A quick commitment is actually a tactic by to gain more information and to evaluate the working relationship.
"Any successful founder is always raising money."
The goal of every investor meeting is to get to the next meeting.
The odds of closing an investor increases geometrically with each phone call or face-to-face meeting.
Say or write as little as possible to encourage curiosity and get to another phone call or meeting.
Sending a long email with many files is the wrong approach.
Over informing in the beginning makes it easy for an investor to say "no."
Don’t ask for an investment if the answer is a likely to be "no."
Out of frustration or desperation, many founders push investors to make an investment decision instantly and prematurely, and the investors generally say, "no."
Wait until you are confident that the investor will say, "maybe" or "yes," before you ask.
Take feedbacks and be open to them. Be a great listener. Refine your pitch constantly.
XIFAQ is a startup incubator and startup accelerator.
Since 2017, in 4 years, we have helped over 500 entrepreneurs get the focus and support needed to build a business.
Based in Atlanta, Georgia, USA and New Delhi, India, XIFAQ's mission is to empower communities of talented and motivated people to build impactful companies worldwide.