Finding funding for your business is a process that takes a lot of time and effort, especially during the startup phase. Many entrepreneurs fail in their first attempts at fundraising because they are poorly prepared. Others get themselves into trouble by choosing the wrong financial partners or setting unrealistic expectations.
While the process may be difficult, obtaining the right funding at the right time from the right investors can be a real game changer for a business—not only by bringing in the needed capital, but also by getting the business into shape for ongoing success.
Steps for Preparing to Raise Capital
This article is intended to help you avoid common pitfalls and ensure that everything is in the best possible order to help you secure the funds your business needs to thrive.
Step 1: Analyze the Need
Businesses usually find they need additional capital for one of two reasons: either they are growing quickly, or they are growing too slowly.
Fast-growing companies may face financial challenges when they don’t have the cash they need to scale up or hire new employees to meet demand. Slow-growing companies may need extra capital to invest in new offerings or expand their marketing outreach.
To convince potential funders to invest in your company, you need to know exactly how much money to ask for and exactly how each dollar will be used. Be as thorough and accurate as possible in doing this analysis so you don’t come up short.
Investors are looking for a return on their money, and usually a stake in the business as well. Consider carefully how much you are willing to give up in exchange for the funding. As a general rule, it is in your best interest to avoid any deal that dilutes your ownership share by more than 25%.
Step 2: Consider the Timing
Most businesses start with “pre-seed” funding, generally provided by the entrepreneur(s). To grow, many companies seek seed funding from outside sources. Obtaining this funding takes 3 to 6 months on average, sometimes even longer for startups with high cash needs.
After the seed funding round, the next round is called Series A funding. According to a Carta survey, it takes an average of 12 to 24 months to obtain these funds. The same goes for each round of funding after that. Therefore, they recommend that companies should plan on a two-year cash runway between funding rounds.
Because of these timeframes, is important to plan well in advance for funding requests. It is also important to seek enough capital to get the company through to the next round of funding. Be sure to consider any foreseeable events such as seasonal market swings that might require extra cash.
Step 3: Raise Your Credit Score
A startup business will probably not have a profit and loss (P&L) statement to indicate its money-handling ability. In this case, investors will want to look at your personal credit score. Financial advisor Suze Orman recommends you aim for a score of at least 740. The higher your score, the more confidence investors will have in your ability to handle money.
If possible, it is wise to incorporate your business before seeking funding. This helps insulate you from personal liability in case things go badly. Then you should work to make sure the business has a great credit history. The better your financial performance, the more likely you are to receive the funding you want.
Step 4: Create a Cash Flow Forecast
Investors want to know that you are aware of your company’s financial situation and have clear plans for significant future growth. They want to see where you are investing your money and how aggressive your plans are.
Ideally, your forecast should include multiple scenarios, showing different paths the company could take under various circumstances to ensure consistent growth. Point out the decisions that would need to be made such as expanding offerings or hiring additional personnel. This exercise demonstrates your commitment to business success and your ability to innovate and find creative solutions.
Step 5: Prepare a Great Business Plan
Even if, like many startups, you did not begin your company with a business plan, now is the time to create one. Few investors are willing to consider funding a company that does not have a clear and achievable business plan. For fundraising purposes, you may wish to tweak your business plan to emphasize how you intend to make money and provide great returns to investors.
Your business plan doesn’t need to be lengthy, but it should be clear and convincing. Avoid jargon and complexity. Be very specific about your financial performance and goals and back them up with data.
Step 6: Get Your Financials in Order
Among the things potential investors want to see is a solid set of financial data. Make sure your financial reports are accurate and up to date. Investors will want to look at your balance sheet, your profit-and-loss statement, your capitalization table, and your multi-year financial projections. They want to know your assumptions about profit margins, overhead costs, payroll, and product development costs.
The main things investors are looking for as they review your financials are solid performance, a clear vision for the future, and above all, your ability to provide a return on their investment. If your books are currently disorganized, consider hiring a fractional CFO team to help get your books in order before approaching potential investors. A CFO can also help navigate the fundraising landscape, including funding strategy, helping make strategic connections, assisting in due diligence, negotiating and presenting, and more.
Step 7: Investigate Your Options
There are many different ways to fund a business. Venture capital, angel investors, business incubators, bank loans, and crowdfunding are just a few. Every form of funding comes with strings attached. It will take time and research to identify the best mix of funding for your company. You will need to identify how much money you can qualify for, any associated risks, and how much control you will have to give up obtaining it, if any.
Be sure to evaluate both short- and long-term costs and paybacks for each investment option as well as the effects on company ownership and control.
Step 8: Perfect Your Presentation
You will need to create a powerful pitch deck and a compelling presentation to convince investors to fund your business. You need to present a compelling story about an opportunity that has serious marketing potential. Your goal is to make it a no-brainer to invest.
Keep your presentation relatively short so there will be plenty of time for questions. Make it easy to understand, including charts and graphs that are easy to read and comprehend. Some of the things you should plan to include are:
- The problem your product or service addresses and how it is solved.
- Who your ideal customer is and the size of the market.
- Your vision and future goals.
- Your business model and current financials.
- Your team and how their expertise benefits the enterprise.
- What capital you have already raised and what you are hoping to raise.
Practice giving your presentation until you are very comfortable with it. Get feedback from trusted colleagues and friends and adjust your presentation until others get excited about it.
Step 9: Check Out Potential Investors
Once you know what kind of financing you are looking for and are prepared to give your presentation, look for appropriate audiences.
Fundera.com suggests the following ways to find investors for your business:
- Trusted introductions
- Strategic networking
- Online investment platforms
- Industry conferences and summits
- Cold outreach
- Friends and family
- Universities and incubators
You may wish to reach out to acquaintances in other businesses that have recently received funding, to get their ideas and recommendations.
Step 10: Hold Meetings and Get Feedback
When you have made a list of potential investors, schedule meetings with them and give your presentation. Be honest and straightforward in your conversations. Even if they decide not to invest, ask for their feedback on your presentation. This will help you further prepare for the next one.
If you find a suitable investor right away, it is still a good idea to continue with presentations to the others on your list. This is part of your due diligence. You might find an even better deal, or at least be even better prepared when it comes to seeking your next round of funding.
Getting the right mix of business funding at the right time from the right sources takes a lot of time and effort, but has the potential to transform your business in a dramatic way, not only through an infusion of cash, but through the process of getting your company in shape to attract investment.
For further information, we invite you to browse the articles at PreferredCFO.com or contact us today to speak with one of our CFOs.
About the Author
Jim Ogan is a versatile finance and accounting professional with lengthy experience in financial leadership. He has significant expertise in strategy development as well as capital raises & transactions.
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