I recently mentored an entrepreneur who needed advice on fundraising. After working on his startup for 5 months, his product finally caught some traction. However, he barely knew any investors in Malaysia or Singapore. Our conversation resulted in him realizing that from start to finish, the fundraising process usually takes about 6 months, and that when you “ask for money, you’ll get advice; ask for advice and you’ll get money.” So I figure I’d turn my explanation into a column.
Fundraising is actually a lot like marriage. You can’t ask someone to marry you on the first date. You’ll have to court the person, go on dates, and find out if you have similar life goals before you take a leap with that person. Similarly, an entrepreneur has to first develop a relationship with an investor – ideally, a mentoring one.
The dots represent each time you meet the investor. The investor would want to see a positive pattern over time, whether it’s about the entrepreneur, the business or fundraising progress. It’s basically the perception that you’re not standing still. [Graphs from http://www.bothsidesofthetable.com/ ]
Investors want to invest in lines, not dots. Meaning, they want to see progress and “traction over time”, not just traction at a point in time. Rather than “I have 30,000 users now” (but it actually took you a year to achieve this), you’ll sound a lot more exciting with “I’ve grown 300% from 10,000 to 30,000 users in the past month” – traction over time. Otherwise, the response will be “you’re too early,” or “get more users/customers first, then come back to me.”
In addition to progress, investors look for two signals: a) your persistence and tenacity as a founder, b) interest from other investors. The clock starts ticking the moment you tell an investor at your first meeting that you’re raising money. If you haven’t raised anything 4-5 months later, you’ll become a “cold lead” to them as it indicates that you couldn’t convince anyone else to invest in you.
If investors aren’t jumping off their seats after seeing your product, then you’re either not there yet, or you haven’t developed a compelling enough story for why someone should invest in you. If 3-4 investors keep giving you the same responses, return to the drawing board and continue bootstrapping until you’re ready.
So what’s the best strategy?
- Fundraising is not an isolated one-time activity, but it takes time and requires a lot of strategy and planning. Allocate time each month like any other job function.
- Start networking early onand establish a good rapport with successful entrepreneurs who have raised funding. This could lead to warm introductions to their early investors when you’re ready.
- Follow the 30-10-2 rule. List 30 potential investors and get warm introductions – 10 out of 30 might meet you. Spend time getting to know these 10, in which 2 might invest in you (if you’re lucky). If you need more investors, double the ratio to assess how large the top of the funnel should be. It’s a numbers game after all.
- Create a spreadsheet and bucket your investors into A, B and C lists. C list investors are ones who’ll most likely not invest, but will be beneficial to practice your pitch and hear their concerns or objections, so you can prep for difficult questions. B list investors may or may not invest. A list are the dream investors you really want in your round. Save them for last when your pitch is more refined and you have more traction.
- Meet potential investors as early as possible. Tell them you’re not raising money yet but that you may be in the next 6 months or so. Research their domain expertise or existing startup portfolio, and test their reaction to your prototype. Investors like to invest if they feel they can add value to your company. More importantly, share what you plan to achieve by the time you see them next.
- Send them biweekly or monthly updates. Alternatively, meet up for quick 15-30 minute coffees, or drop by their offices. Investors love entrepreneurs who are persistent, consistent and deliver on promises.
- Raise for at least 18 months of runway – many entrepreneurs raise too little. The amount of effort raising RM250K or RM500K is similar, so avoid having to start fundraising again just 6 months after you closed your last round.
- Once you show good traction or got an investor excited enough to fund you, go full steam and hit up everyone on your list to close the round quickly.Create a sense of urgency with “I’m raising RM500K, have RM300K committed, and I’m planning to close the round in 2 weeks. Are you in?” Some investors will react for “fear of missing out” and may be compelled to invest sooner.
Ideally, you’ll only raise when you have real traction and genuine interest from investors. But in reality it’s tough to close rounds quickly, unless your product or vision is super sexy and innovative. Any successful entrepreneur will tell you that luck and timing also plays an important role.
If all else fails, you can always explore available grants, or convince your rich uncle to start investing into startups! Otherwise, bootstrap for as long as you can until you’re self-sustainable. Then your leverage to investors is that you don’t need their money to survive, but to turbocharge your growth. That’s a much better story to tell.