Raising money is tough in good times, let alone when the economic conditions aren’t necessarily ideal.
The path to investment can drain your time and distract you from the reason you are doing this in the first place, running your business.
97% Australian founders surveyed by Herbert Smith Freehills said the current fundraising environment is impacting strategic decision making by Australian start-ups.
Raising money is tough in good times, let alone when the economic conditions aren’t necessarily ideal.
With the constant change and uncertainty, having a deep knowledge of how much investment you need and why you need it is essential.
Andrew Brown, angel investor and La Trobe University Innovation and Entrepreneurship mentor, shares six essential points for any early-stage business preparing for a funding round.
- Laser-sharp vision with a touch of humility
An oxymoron, right?
Not necessarily. Investors want (actually need) to feel that the founder is singularly focused, driven and will take no prisoners when it comes to driving their business forward.
However, the entrepreneur also needs to be seen as coachable and open to ideas.
Dogmatism is not a great attribute when you are asking someone else for money. A little humility and openness can be key.
- Understand your “lights on money”
This extends beyond your burn rate and looks into the bare minimum you need to keep things afloat.
Knowing this is critical for managing your company let alone seeking investment.
This is also critical when considering what happens if you do not raise.
- Do you have market traction?
Having a great product or service which is not proven is like having unlimited travel budget during a lock down.
Market traction, even without revenue (although that is clearly better) is a key validation most investors look to.
If you cannot prove the value proposition in the market, you are expecting the investor to take a huge leap of faith… not ideal in the current economic climate.
- How do you intend to use the money?
It still amazes me how hard many entrepreneurs find it to answer this question. Vague responses or large ranges will raise alarm bells for investors. This equally applies to your view on company valuation… make sure you can back-up your claims.
- Make decisions based on 2 years from now
Many start-ups run that tight-rope between closing the game-changing deal which super charges their growth and paying this month’s rent.
As hard as it sounds (and it is hard) it is critical to make decision based on where you expect the company to be in 2 years time.
This will avoid you making knee jerk decisions which will impact both the company and your control. Equity is the most valuable asset you have so do not be too quick to give it away
- Lastly (and maybe most importantly) is, do you actually need investment?
Being prepared to pause on an investment round is potentially just as important as raising.
A company in the hi-tech made the tough decision to pull back from a term sheet at the 11th hour due to the current economic downturn.
They understand their “lights on” so had confidence that they could work through the current lull and re-engage when the investment environment was more favourable. At the end of the day, the balance of hour is critical in securing an investment.
A seed round, leading to a Series A and Series B seem to be the well-trodden path for companies to follow but a first key point when considering a raise is your own aspirations.
Some founders are happy to make a good living from their company while others are striving for world domination.
Both scenarios, raising capital or bootstrapping, are absolutely fine depending on your grand plan for the company.
Andrew Brown is a Melburnian now based in Brussels helping early-stage companies as a mentor with Innovation and Entrepreneurship at La Trobe University. At the time of publication, Andrew is in Australia speaking at two events in partnership with La Trobe University.
- How to scale you – 5 Dec La Trobe Uni Bendigo Campus
- Raising capital in the current climate – 7 Dec La Trobe University Collins Street Campus