Despite the recent radical economic changes, entrepreneurs have been resilient and adapted their business models to cope and sometimes even go public. However, entrepreneurs often make costly, avoidable errors in their funding strategies. Entrepreneurs can optimize their fundraising strategy by learning to avoid cash management pitfalls and how investors evaluate startups.
Every successful entrepreneur knows the importance of investing in a compelling product, building an excellent team, making their customers feel welcome, and maximizing sales. Unfortunately, most entrepreneurs forget to ensure their firm can continually raise funding at higher valuations.
This post provides ideas on how business owners can optimize their fundraising strategy and avoid cash management disasters.
Keys to a winning fundraising strategy
The fundraising process can be draining and consuming. Still, employees, customers, and everyone else in the firm continue to demand the CEO’s input — the shorter the fundraising process, the better the enterprise performs. Given the opportunity, investors will likely choose to take more time. That means additional proof and data points for investors to make their decision. Tight processes give investors the notion that the firm is time-conscious and confident of its operations.
Providing deadlines and due dates for investors is also great for marketing strategies. Find an appropriate and popular event that can drive the companies involved toward making an ideal decision for the firm. As an early-stage entrepreneur, anchoring the fundraising around a specific time such as Techstars Demo Day or Y Combinator offers a chance to brand the fundraiser and create a lot of buzz around that time. However, you must honor requests from partner firms or investors for additional time to get their work in order. Long-term partnerships are the fuel to success for most startups.
Make clear the solutions your firm offers
Every investor thinks that a successful firm has a valid solution to a problem or one that has high demand in the market. Having excellent branding can offer a firm a great image in the market. However, it is hard to convince investors to offer great deals without a clear definition of the solution being offered to the market.
Entrepreneurs need to be aware of their firm’s vision and motivate others to participate in their business projects when invited.
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Identify the firms or investors you want to work with
Building relationships with firms and people who support the firm’s growth goes a long way in determining how participative they are in fundraising. An investor spreadsheet with priority scores will help you pinpoint the best firms to approach.
Create an investor spreadsheet with priority score, firm, lead, connector, average check size, risk-adjusted check size, notes, last touch, last action, and action item column fields. Though most startups may fail to see the significance of some of these fields, each of them is essential in determining the investors or firms that would be best to work with.
Understanding the investor spreadsheet
Creating a spreadsheet with a priority score for each potential partner allows you to determine the firms you should pay the most attention to when marketing your fundraiser. That way, you can get the attention of the investors who have your firm’s best interests at heart.
- Lead priority scores allow you to determine which firms or investors have the most potential to invest in your business as a lead investor. Creating a record of the firms whose recent relationships with your business signify common interests allows you to optimize your fundraiser marketing efforts to the firms with whom can lead your fundraising round.
- Average check size and risk-adjusted check size offer information on how large of a check size the fund can invest in your business. It allows you to optimize your fundraising efforts to understand how much money you can and cannot pool from those fundraising firms you are engaging.
- Last touch, last action, and action items comprise information about the last communication with the firm, the last to-do from you or the firm, and what needs to be done by you or the firm. This information allows you to keep up to date on your fundraising process.
Put strategies in place to create a FOMO effect among investors
Get your friends or colleagues to backchannel, do more press, and get the word out that your company is the best deal to fundraise at that point in time. The company or CEO’s name should ideally come up a lot while you’re in due diligence with an investor. It is critical to the fundraising that everyone knows about your deal and is compelled to share it with their friends. If one of the high-ranked firms passes on the word to another, others are likely to find out and jump on the bandwagon. People talk, and entrepreneurs need to take advantage of that.
These natural word-of-mouth strategies will work for most CEOs, but minority entrepreneurs may have a significantly harder time optimizing their strategy even after following the procedure offered by other entrepreneurs. Fortunately, by putting themselves within networks or circles that can get them a valuable ear, entrepreneurs have the chance to meet and be funded by potential investors. Fundraising is centered around who you know, and the best way to meet and know CEOs and investors is by joining their networks naturally.
Have a clear estimate of the funds required
While this is part of the business plan, entrepreneurs should pay more attention to it. Quoting and justifying the purpose of the finances required allows investors to know exactly how their money will benefit the company. This earns you more trust, and this information must be shown or read in the most transparent way possible. Gaining the confidence of investors and partner firms could get you excellent results at the end of your fundraising and in the long run.