By Mark MacLeod
Since 1999 I have been helping startups raise money as either a CFO, advisor or VC. It’s hard to condense all the dos and don’ts of raising capital into one post but here are my thoughts on the most common and essential things to think about when it comes to raising money for your startup.
The starting point: What do you want?
It sounds simple, but before you set out to raise money you need to be very clear about what type of company you want to build. What does success look like? How big is ‘big’? These questions are especially important if you have partners. Everyone will have a different answer. So, it’s important to align on them before you fundraise. In fact, beyond funding, I’d say that aligning on the end goal is key to actually getting there. Your business won’t succeed if you and your partners aren’t all shooting for the same destination.
Next: Get Prepared
Let’s assume you and your partners have decided that you want to raise money. There are a bunch of things that you need to do to prepare before you can go looking for money:
How much money do you need? What do you need to get you to the next big value-creating milestone? That could be launching your product, getting paying customers or proving that you can acquire more customers. It’s always a good idea to add some wiggle room here. If you think it will take you 12 months to get there, assume it will take 18 – 24 months and raise enough for that.
What kind of capital do you need? Essentially, you can sell part of your company (‘equity’) or take on some kind of debt (a promise to pay back money over time). In some States you may be able to find ‘free money’: non-dilutive funding sources such as Government grants. But these are usually not enough by themselves to fund your business.
If you’re just starting out, you likely will be looking at equity since your business can’t afford to repay debt. We will talk about the different sources of equity in a moment.
Build your sales materials: Raising equity or debt is a sales process. Just like selling your product or service. Typically, you need the following:
An Executive Summary: This is a 1 or 2 page document summarizing the opportunity. You share that with potential investors and lenders upfront to establish interest.
A pitch deck: This presentation is key. It outlines every element of the opportunity from your vision to market size, product features, team and of course your financial projections. This document needs to sell when you’re not in the room. So invest a lot of time here.
Forecasted financial statements:Typically you would include 3 year forecasted revenues, expenses and cash needs. This model should enable investors to play with different assumptions and see the impact on your business.
Finally, do the deal
The process of actually raising money is a separate post in itself, but here are some pointers to bear in mind:
- Do your research upfront to identify the right investors or lenders to approach. You want to target people or organizations that invest in your industry and at your stage in the company lifecycle.
- Run a tight process. Pitch everyone at the same time. This is the best way to build momentum and competition for your deal.
- If you’re selling part of your company be prepared to dedicate 3 – 6 months to this effort. It’s a big commitment.
If you haven’t done it before, get someone in your corner. This could be an advisor, mentor, previous investor or a part time CFO. Don’t do it alone.
Mark MacLeod is one of Canada’s leading finance experts for startups. Mark spent 12 years as CFO for a number of highly successful venture-backed companies including Shopify and Tungle. He then spent three years as a General Partner at Real Ventures, Canada’s largest and most active seed venture fund investing in high-growth SaaS and e-commerce companies including Unbounce and Frank & Oak. Mark now leads finance, business and corporate development for FreshBooks, the #1 cloud accounting software for service-based small business owners. Follow him at @startupcfo.