Dreaming of founding a billion-dollar startup and looking for information on how to raise funding, searching for startup fundraising consulting? You've come to the right place! As experts in startup consulting we'll try to show the intricacies of raising capital, explain what is the most important for investors, reveal what mistakes to avoid and find help, such as professional fundraising services, to gain resources for a dream product.
Global situation and fundraising
Let’s say it without beating about the bush - the previous year (2020) wasn’t kind to startups seeking funding from venture capitals or business angels. The uncertainty in the markets related to COVID-19 made investors even more cautious about investing their money. Now it’s a little calmer, although it should be noted that the pandemic is still undefeated, and in the news every day you can hear predictions about its next phases and possible restrictions. All this makes it necessary to approach the fundraising process even more carefully, or in our words - more pragmatically. And be prepared that it will take some time and treat it like a full-time job.
From the good news, according to AngelList, the second quarter of 2021 was significantly better than previous ones and “represents the new high watermark for positive exits and markups: Close to 90% of events that happened this quarter to early-stage startups (Series A or prior) on AngelList were positive ones.“ In turn, Crunchbase reports that global venture investments reached $125 billion in the first quarter of 2021.
Remember, a pandemic crisis can be turned into an opportunity to create a valuable business. Many of the world's largest technology companies were founded during or shortly after the recession, just to name Uber, AirBnB, Microsoft, or Apple. Others such as Google, Amazon, and eBay established dominant positions in their markets during economic downturns, which they have maintained to this day. You could be next!
What do investors look for?
VCs receive from several hundred to over a thousand projects each year and there is little time to analyze each one. It can be seen in the numbers as well. According to statistics by Kauffman Foundation, only 6% of startups in the United States are funded by VCs. So at the beginning, it’s all about making a good first impression and attracting attention. However, if you manage to achieve this, investors will scrutinize you very carefully. You need to understand that your goals, as well as those of other founders, are achieved in the short term by raising capital to grow the business, whereas investors achieve their goals in the long term. This fact means that the risk of not achieving the expected results is on the investors’ side. For this reason, the assessment of investment profitability is carried out so scrupulously before the capital is invested. What in particular do they look out for?
Due to the multitude of applications, investors certainly pay more attention to projects that have been recommended to them (e.g. from people in the VC community or from startups accelerator programs). So, in general, it’s crucial to build an ecosystem of relationships (that includes business partners, mentors, advisors, promoters, journalists, etc). This’ll give you mutual help opportunities, exchange of knowledge, but also the trust of investors. They will certainly check who you cooperate with. This way you can point out and make them look at you more favorably.
Matching the VC’s investment policy
From the founders’ point of view, anyone who wants to invest in their business is welcome. However, you have to accept that each venture capital has its own investment strategy that determines, among other things, the stage of the business, the sector, the size of the funding round, or the business model. Before you apply to a particular investor, you better check if you fit into their strategy. It's a shame to waste time, both yours and the other party's, on something that certainly won't work out (as a founder of a startup, you know this very well).
And now, we suggest where to look for investors: Crunchbase, Angelist, Techstars open DB, country-specific databases, LinkedIn, and Google.
It is obvious that market opportunities are what interests investors the most. After all, its potential is what can guarantee them a return on their investment and subsequent income. Venture capitalists sometimes independently from startups talk to current or potential customers of a solution, the so-called early adopters, who have a significant impact on the functionality and strategy for positioning the solution. Some of these customers are using another competing solution provided by larger players, so it’s possible to find out what would make them switch or what features or services are critical to them. If you have done market research or have access to analytics or feedback from potential users that are positive for you, be sure to present it to investors.
What’s more? We advise you to add a slide related to coronavirus to your pitch deck. Show what benefits your solution can bring to companies in crisis, or in the opposite direction, why it is immune to it. This way you will show that you are responsible and also take into account unusual circumstances of market entry.
As we mentioned, investors look at hundreds of business ideas, so they often see projects that are similar to each other or that, it might seem, duplicate existing solutions on the market. Meanwhile, startups are increasingly building their advantages on various technological nuances that are invisible at first glance or are not properly highlighted. So when preparing your pitch deck, make these points clear and explain what advantage they give you. As people who have been working with startups for years, we have already seen many stories when companies, for example, decided to introduce blockchain solutions to their product just to make a good impression on investors. Of course, blockchain is a big noise technology right now, but we discourage its use where it has no practical purpose!
The team and its outcomes
This is, of course, if you have a team. Otherwise, they will only check you. Here the purpose is to check people for debt or conflicts with the law. But not only that. Investors want to see who is involved in the startup, in what role, and what experience they have. If the product is developed by a group of old stagers who have already created many successful products, then in their opinion the risk of failure is much, much lower.
During the fundraising process, investors will certainly want to see the results of the ongoing work. And you know what, it will be very good to show them the progress you are making and prove that you can execute. For example, this is where our promise to deliver an MVP version in less than 3 months comes from at Pragmatic Coders.
Due diligence is a comprehensive examination of a startup's financial, legal, and technical condition, which is usually performed with the assistance of outside parties, such as auditors or law firms. The purpose of the investigation is to check whether there are any factors that disqualify the sensibility of the investment or make it necessary to renegotiate the conditions of entering the business, e.g. lowering the valuation. Apart from legal issues, such a factor may be for example a conflict in the team between the founders of a startup, which in the future may be an obstacle for the business.
The most common mistakes startups make when fundraising
The above paragraphs indicate areas of interest to investors you should focus on during your pitch deck, but remember, that the fundraising process is not only a 30-minutes presentation. You need to be transparent and prepared for tough questions anytime, anywhere. Many people are horrified by how many things need to be remembered and how time-consuming it is (this is why we advise founders to focus on strategy and fundraising with technology and product issues left to us). From there, mistakes are born and situations arise that lower the chance of receiving funding. The most common of these are:
- Focusing on fundraising when it’s too early or approaching it from the wrong direction.
- Lack of verification whether the project is already suitable for venture capital financing and whether it is already at such a stage that the fund is able to make money on it.
- Lack of alignment with VC’s investment policy.
- Reaching investors without recommendations - we’ve already told you why referrals are important.
- Failing to present your vision and ideas clearly - many companies focus on technical details instead of what investors are most interested in. Fortunately, you read above what to focus on.
Cheer up! We know that fundraising is not an easy process and that it requires a lot of time and dedication, but hundreds of startups try it every year, which shows that in the end it pays off. Now, we're about to tell you how to deal with it.
How to be prepared? Fundraising services for startups
Fortunately, you are not alone in your funding efforts. Or at least you don't have to be. For one thing, there's already plenty of knowledge written about fundraising for startups on the internet. There are both blog articles and YouTube videos. To get you started, we can recommend our article Tips and tricks on how to fundraise where we advise, among other things, how to attract the attention of investors or what you should include in your pitch deck. You can also watch our recorded webinar about how to prepare for fundraising.
Second, there are sources just waiting to help you. What are they?
The idea of these institutions is to provide substantive and practical assistance to people interested in running their own businesses. The scope of support includes, among others: legal assistance, accounting, making available space for work, lending necessary equipment, or assistance in obtaining financing, if possible. The cost of participation in such an incubator is low, and especially beginning entrepreneurs can gain the necessary help to start.
Few people know that investors are not just people or institutions who put up money and wait for returns. Many of them ask directly during conversations what founders expect from them. Investors can also help with legal services, team building or marketing efforts. And this helps in attracting more interested parties later on.
Fundraising services from the experts
At Pragmatic Coders, we are not just a software house, but we strive to provide full support for startups. We work with founders from the very beginning and advise them on product strategy, business models, and new product development. Our consulting specialists are experienced in founding startups and raising funds to conduct tailored Product Discovery Workshops for startup founders. We use a multitude of exercises such as Lean Product Canvas, Value Proposition Workshop, or Customer Journey Mapping to ensure your product will meet with success. Of course, we also help prepare the pitch deck and make sure that all relevant information is included. We'd love to do full product development down the road, but we're interested in you raising funds first.
Update: Startup fundraising during the recession might be a challenge! Check our thoughts on that topic!