The decision by a startup founder to raise investment is one with a wide range of ramifications. The positive outcomes are cash to build a team, develop product, implement a marketing strategy and introducing some new voices around the founder. There are also potential negative consequences as the founder no longer has 100% ownership, the new voices might not share the vision and cash does not guarantee a great team, product and effective marketing campaign.
It’s therefore crucial to have a clear vision for the business in place before approaching investors and then being selective before accepting investment. Not all investment is good investment. This is a long term relationship and the whole team has to have the same vision for the business and while there will likely be operational debate and disagreements, the over-arching vision has to be shared. Terms have to be accepted and agreed by all parties at the outset. If future funding rounds are planned the investor has to know that they will have to follow on or expect dilution. They will expect the value of startup to increase which should make the dilution acceptable.
Before approaching investors a founder has to have:
- Clearly articulated description of product/ service.
- Good corporate governance.
- Understanding of the market share being targeted.
- If SAAS number of users/ recurring amount of revenue/ month and month on month growth v churn.
- If service or product company sales, pipeline and conversion rate.
- What will the investment be used for?
- Credible team to deliver.
- Term sheet available.
- Clear vision to provide a return for investors.
- At an event in Belfast a visiting VC from New York spoke about the importance of not elevating funding above all other problems a startup encounters.
They also have to be aware that this process will likely take months rather than weeks and it’s fundamental that the startup keeps running and growing during this period. Often an investor’s decision will be swayed by performance during their due diligence period.
There are lots of clichés about startup founders keeping plates spinning while searching for investment and this is true. The best way to ensure the plates don’t come falling down is effective planning and realistic strategy. A founder should also surround themselves with a team of both colleagues and professional service providers who have the businesses best interests at heart and appreciate the long term value of the business, the idea and the people delivering it.