Opinions expressed by Entrepreneur contributors are their own.
I’ve recently had to stop several founders in the middle of their fundraising pitches. It wasn’t because their idea didn’t have potential. It wasn’t because they weren’t great founders. It was because it was obvious to me that their startup was nowhere near ready for funding.
I find too many entrepreneurs are focusing too much on raising capital and forgetting it’s only a means to a greater end. You should be driven by what your startup can achieve with the funding rather than the funding itself. Think of it like a stop at a gas station on a long road trip, and you better buckle up because it’s a bumpy road ahead.
TV can make fundraising look so easy. You might have seen an exciting deal close on Shark Tank. You may have thought that fundraising is as simple as going into a room for twenty minutes and coming away with a new business partner and a chunky check. The truth is, fundraising becomes a full-time job for founders and takes over their entire lives.
With the funding frenzy in 2021, some founders were led to mistakenly believe that investors just hand out money like hotcakes. In the bleak reality of these starkly different times, investors won’t give you anything unless you can prove you’re ready. If you try to fundraise too early, your business idea will be ripped apart and you’ll burn a future bridge for not respecting the investor’s time.
Related: Are You Ready to Seek Funding? This 10-Point Checklist Will Decide.
The problem for first-time founders is how to know when you’re ready. There are three key aspects to this that you need to have nailed down. Then you can start to think about raising funding.
You satisfy a real need
When a startup tries to raise too early, the product isn’t yet at the stage where it can afford the lack of attention it receives during the fundraising phase. It’s not uncommon for a company to digress while the founders are occupied elsewhere. This vicious cycle then makes it even harder for the startup to raise money and the founders more desperate.
This means doing the actual work and getting out there to talk to potential customers. Investors will not be impressed if you turn up to a pitch and haven’t done as much research as you can. You shouldn’t expect them to validate your market for you. You need to be talking to as many potential customers as possible about this pain point. You need to validate that it is a pain — that they either lack a solution or the solution they are currently using is missing the mark and they need something much better. Don’t be obsessed with your solution — be obsessed with solving their problem.
Investors might ask you some questions that take you by surprise but whether or not other companies are tackling the same issue should be obvious. Find every single company that is attempting to solve this pain, whether they are an enterprise solution or an early-stage startup, and see how your approach is truly different.
You can’t adequately explain how your product is differentiated unless you have a deep understanding of the struggles your customers go through and the gaps in the existing products. If you can nail this, then you are ready to start seeking investment.
Related: 7 Tips to Successful Fundraising for Young Entrepreneurs
Have an MVP or beyond
Most founders should put in more sweat equity before seeking investment from external sources. Instead of investing the bulk of your very precious time on fundraising, roll up your sleeves, dig deep and get to work on creating an MVP — or minimum viable product. Have something that works on a basic level, or beyond, to show investors.
The conversations you had with potential customers about the pain? Now come back to them and see what kind of product they fantasize about. Build it with them in mind, and have them come on as design partners. They can then be early adopters that hopefully will fall so deeply in love with your product that they will convert into paying users. And lots of paying users is the best way to persuade investors that you are a great investment prospect.
Your plan is executable
The final piece of the puzzle is whether your idea can realistically give investors the level of return they expect. You need to remember that most startups will fail. So the potential upside needs to be massive for it to be worth taking the risk.
I turn down working with many founders because their ideas are simply not venture-scale businesses. Not to say that they can’t be very nice lifestyle businesses and make their founders a great income. But they can’t scale to a venture-level business. You can’t use a small sample and then extrapolate to say you’ll be a hit worldwide. This is especially true if your home country or market is tiny. Even if you’ve got customers who love you and pay you on your home turf. You must have a plan of how you will penetrate major markets and compete with the big players.
You shouldn’t go to a fundraising pitch with the vague idea of wanting to expand overseas. You should come with clear next steps and which markets you will target first and why. Then, critically, you need to be able to explain to them how their money will help you to reach your next milestone/s.
Also, before you consider fundraising, you should have the right team in place who can manage the company effectively in your absence. Or when you’re busy fundraising. You need to trust these people with all your heart. In your pitches, it’s not just you under the microscope but the team as well. If you can pull together a group of superstars, everything becomes easier.
Venture capitalists expect you to need multiple rounds of funding to reach the big end goal. As one Silicon Valley venture partner said to me, “Once I write a check, I’m on the hook to help them raise their next round. Having clarity on what they’re going to achieve in the next 18 months is super important for me to see how you’ll raise your next round and how I’ll onboard the best investors for you.”
If you can tell them what you hope to achieve in this round and where you will be positioned after, you prove to them that you’re ready for funding. If you don’t meet these criteria yet — that’s okay! Just get to work and accomplish as much as you can before you hit the roadshow.
Related: How to Make the Most of Fundraising In 2022
Read the full article here