It can be very daunting for startups looking to raise a fund, especially if it’s their first time. We’ve put together a guide of essential tips to help startups get started once they decide that fundraising is the way to go.
Lets start by looking at the different funding stages:
First stages of funding:
Most early stage funding should come from founders, family, and friends. Don’t waste time chasing VCs when the company is not readyOnce ready to raise from ‘Outside Investors’, aim to raise enough to create a 12–18 month runway. This should allow the startup to reach the next phase of the company’s lifecycleFunds raised should be used to finance growth Provide detailed breakdown of planned use of funds How will funds raised help you hit certain milestones?
Next up, startups need to understand how VCs assess their company and what factors can lead to a positive valuation.
How does a VC assess a company’s market value?
For non-listed businesses, especially those without a financial track-record, we look at proxies to assess a company’s market value.
Common proxies used:
Comparable listed companiesComparable transactions (recent financing rounds, acquisitions, etc.)Capital invested by founders to date or cost to duplicate (money and time)Average equity stakes for Seed (15-20%) and Series A (20-30%) investors
The investor’s own rules of thumb
Factors that impact valuation:
Management team with impressive track recordDefendable competitive position (unique IP/ knowledge)Clear path towards recurring revenues
Valuation is more an art than a science and values can differ depending on: geography, financial market trends, negotiation power, etc. – Dennis Plomp, Principal, Nest Ventures
Understanding why the company wants to fundraise and the factors that affect the startup’s valuation is crucial. Our advice? Be realistic and be very critical about the company and be fully prepared before starting fundraising.
When it comes time to fundraise:
Approach the right investors in the right way (networking is so important!) and don’t limit options to the home market
Find a lead investor, especially in Series A and subsequent rounds
Create a reason to close the round: push towards that date and don’t create a reason for investors to wait
Consider consulting and hiring expert legal advice
Be prepared for your investor’s due diligence process
Stay on top of market trends, take feedback and adapt the strategy if necessary
That’s it for our tips! To recap, when a startup decides to fundraise, one of the first things they need to do is identify the funding stage they’re at and understand the factors in which they’ll be evaluated on. With these tips, we hope fundraising just got a little easier!