There’s no way to coat it in sugar. Fundraising is not a fun process. You see the end results through splashy headlines about extravagant sums and grand expansion plans that make it easy and glamorous. Unfortunately, the process for all but a few companies is close to the exact opposite. People will tell you that fundraising is hard and time consuming. What they don’t tell you is that the process is tedious and can feel arbitrary at times. Fortunately, there are simple, repeatable steps to maximize your chances of success.
It may seem obvious, but the first and most important thing you need to do is to objectively assess whether you really need to raise funds and whether you are on track to attract investors. Entrepreneurs often see fundraising as a sign of validation, and it certainly can be, but fundraising is just one of the many things you may or may not need to do to build a successful business. . Make sure you’re not collecting money just because you think you have to. For me, the tipping point was recognizing that we had proven the viability of the concept on a small scale, but we would need to build a lot of technology and infrastructure upfront to make it scalable.
Start by thinking about how much capital you need, what you need it for, and how the investment will yield a great return. Force yourself to consider a plan where you will raise no capital. Raising funds means selling shares in your company. While necessary for many businesses, the vast majority of successful businesses in the United States are started or grow with traditional debt financing. If you have decided to sell shares of your company to maximize its potential, here are the steps to follow:
- Start with a plan: Establish a three- to five-year plan with milestones (market fit, regulatory approval, profitability, etc.). Then determine the capital you will need to accomplish each milestone and the potential valuation at each stage. This will be your roadmap for the alphabet soup of rounds of funding from Series Seed to Series A, B, C, etc. If you can’t complete the journey with a reasonable amount of equity and return for your investors, rethink your plan. Otherwise, you’re unlikely to fundraise, or worse, you won’t be properly compensated for all your hard work.
- Research: Gather as much information as possible about the funds investing in your space and why. Many funds have mandates about the stage of a company they can invest in and a thesis around a space (a fancy way of saying they see a trend that is their priority investment area). For example, Farmer’s Fridge is part consumer packaged goods, part quick-service restaurant, and part data technology company. We have sought partners who invest in each of our focus areas and have built a truly representative and comprehensive group – Danone, Cleveland Avenue and Innovation Endeavors, each, respectively, bring expertise in their domain to their function. Another example is that three of our six largest investors have also made big bets on vertical farming because they are looking for ways in which technology is changing access to fresh, healthy food.
- Network: Contact Founders and Space Angels, attend industry events and request presentations. You need to start getting to know people who can help you expand your circle and make introductions to the funds you’ve identified. Ideally, you can have another founder introduce you to one of their investors with a credible endorsement of your business, or find a successful angel investor in an adjacent space who is willing to invest. When I was first trying to fundraise, I went to a food and agriculture conference where I met the CEO of a vertical farm. He introduced me to one of his biggest investors, who then invested in us. The idea is to get your idea out there and build credibility while developing relationships that can help make warm pitches to target investors.
- Create your materials: I also like to call this step “documenting the magic”. You’ll need a pitch deck, financial model, and backing data to back up your story. Start by organizing your story into 15-25 slides that you can share via email to entice interested people to schedule a meeting with you to learn more. Once you have a meeting, you’ll need a presentation that explains your business and plan for growth. Include a detailed financial model that explains how the company’s finances should behave over the life of an investment. This will allow investors to test your assumptions under pressure and determine their potential return.
- Practice your pitch: it is essential that your pitch is well defined. Be prepared to answer every conceivable question about your business and practice with friends and mentors. Moreover, you can also ask questions to the investors. You’ll want to clarify the backgrounds upfront to confirm that the size, scene, and style of their check is compatible with your scene and visions. Things like the life cycle of their current fund and other investments that might also impact you, so you should feel comfortable asking those questions. This avoids wasting both groups’ time and shows that you know what you are doing.
- Start your contact: Once you’ve made connections, done your research, and prepared your materials, start introducing yourself to funds or cold-talking. Treat it like a sales process. You want to have as big a funnel as possible. The more people you have conversations with, the more likely you are to create a competitive process. Plan to reach over 50 people and don’t stop just because a few people show interest. It’s a numbers game, and the more shots you have, the more likely you are to succeed.
- Meetings with potential investors: Every pitch meeting is completely different. The best advice I got was from an investor who insisted on meeting in the lobby of his gym during a break in the middle of his workout. When he sent the invite I thought it was a space near the gym but when he walked up in a tank top and said I had 30 minutes to pitch we just dived there in the hall. Think shark tank, but without the cameras and no offer at the end. Investors assess how you handle the coin and test your level of knowledge. Be ready. Use all the feedback you get to iterate your pitch and story for the next one.
- All you need is one (but two or more is better): remember that it only takes one investor to set up a term sheet, and the process is usually top-down from of the. Try to get at least two people, so you can have a competitive process.
- The commitment is real: remember that you are marrying the investor. Seriously, a lot of investment partnerships last longer than the average marriage, so make sure you understand who you’re partnering with. If you receive a term sheet, do not hesitate to ask for referral calls. Also, you need to discuss expectations upfront about things like meeting cadence, communication style, reporting, investment thesis, and so on. to avoid later problems.
- It’s a two-way street: understanding what it means to take money. You’re committing to doing everything in your power to deliver a financial return to your investors, so make sure you understand the kind of return they’re looking for and make sure your company can provide it.
- Get back to work: you knew I was going to be done with this, right? It’s easy to get caught up in the fundraising process and see closing a round as an end in itself rather than a means to an end. Fundraising is not a sign of success. Running a good business and being realistic about your ability to raise outside capital and deliver a return to your investors is how you create long-term value. Getting more money on your balance sheet will give you more resources to grow, but being up and running after months of fundraising and executing strategy is the real work.
Luke Saunders is founder and CEO of Farmer’s Fridge, a network of over 400 smart fridges stocked with fresh meals and snacks.