What can startup founders do to make their companies as attractive as possible to investors in those crucial but sometimes daunting funding rounds?
First and foremost, fundraising is a critical process that requires timely action. The optimal period to commence fundraising activities is when a company has a cash runway of eight to 12 months.
This period provides founders ample time to engage with potential investors, refine their pitch based on investor feedback, and reach a state of ‘deal-readiness.’
Despite the importance of being deal-ready, only 32% of founders are perceived as being at this stage when they make their first outreach to investors, according to our ‘Venture Fundraising Landscape 2023’ report, which gathered insights from interviews with 40 UK-based early-stage investors,
Deal readiness involves maintaining an organised data room and having an engaging company narrative and a strong business model. Meticulous preparation and strategic presentation is crucial. A well-prepared data room and compelling narrative signals a readiness to engage seriously with investors.
The data room should include not only comprehensive financial data and analyses but also evidence of thoughtful strategic planning and readiness to execute. A compelling pitch and a business model that clearly articulates the company’s value proposition, growth plan, and competitive advantage are imperative.
Understand valuation dynamics
Valuation acts as another critical factor that can either attract or repel an investor. A key pitfall is the misalignment of a company’s valuation with investor expectations. In fact, 90% of investors have observed a gap between the founder’s expectations and realistic market valuations.
Aligning these perspectives requires a blend of objective market assessment and persuasive communication. Be realistic in basing your valuation on actual market conditions and support your figures with in-depth market research and concrete data.
Be clear and realistic on when you’ll be profitable
Investment is the catalyst for growth, but the ultimate destination is profitability.
The ideal timeline to profitability for investors differs based on the different stages of funding. Founders at the pre-seed stage should ideally be looking at a 36-54 month path to profitability, while those at seed and Series A stages should be forecasting a 21-39 month and 12-24 month timeframe, respectively.
Startups need to show investors how they’ll meet these projections with clarity and grounding in market realities. Avoid overly optimistic projections. A credible financial forecast and a business model that demonstrates understanding of the market are essential for instilling confidence in potential investors.
Have a strong idea of the type of investor you want
The fundraising cycle isn’t all about an investor choosing to invest in you, you are investing in them as well. Indeed, investment is the beginning of a long-term partnership, not a mere financial transaction.
It’s therefore crucially important to take time to identify investors whose goals and values align with yours, and who can bring more to the table than just money.
Think specifically about how an investor can help you add expertise in your specific niche. Our report highlights how important it is to make sure there’s an alignment between investors and founders, particularly within fast-evolving sectors such as SaaS, health tech, or AI/ML.
An investor who has a deep knowledge of the sector you are in brings more than just funding. They likely have a strong knowledge of the sector, customers and competitive landscape. They are likely to have seen and overcome challenges unique to your sector and are sure to have valuable industry contacts and a readymade network you can tap into.
Stay grounded and build a strong team around you
Venture capital investment is fundamentally an investment in people. A cohesive and capable executive team signifies operational maturity and strategic vision, in turn enhancing a business’ attractiveness to investors.
In fact, a solid team is often a decisive factor for investors, with 95% of the investors we interviewed prioritising the quality of the management team.
It’s not just your team investors are looking at, of course; they are investing in you. So, it’s important to be realistic in terms of your role and expectations – today and post-investment.
Prudent salary levels for founders, ranging from £59,130 at pre-seed to £121,515 at Series A, reflect a balance between motivation and financial sustainability. Think about your desired equity stake as well; the average founder stake at the pre-seed stage is 70%, which highlights the founders’ commitment.
Laws of attraction
The process of engaging investors and securing funding is a nuanced and sometimes frustrating endeavour for startup founders.
To maximise the chances of success, it’s critical that founders meticulously prepare and take considered steps to make their business as attractive as possible in the run-up to and right through the fundraising process.
Adam Baron is director of growth advisory at BDO.