Fundraising as a startup 101

How not to make a complete fool out of yourself in front of investors

Startup fundraising is a tale of high stakes, high hopes, and occasionally, high embarrassment. It has inspired countless movies, sketches, and memes about inexperienced founders, armed with nothing but a pitch deck and a dream, stumbling through their elevator pitches and investor meetings. 

It’s the number one skill that startup founders need to get their ideas off the ground. And it’s also a skill you mostly learn in a battle. But fear not, young founder! This guide will cover the basics of startup fundraising that you can control. We’re not saying we’ll put the FUN back to fundraising, but we’ll help you make your fundraising more professional and less, well, comedic. 

Fail to plan or plan to fail – how to make sure you’re prepared for fundraising

When you’re asking for other people’s money, the importance of preparation cannot be overstated. It’s your one chance to make a good impression so don’t waste it (or the investors’ time)! Furthermore, reputation is the most valuable possession of any founder so making a fool of yourself isn’t the long-lasting impression you want to leave. 

Here are the 10 fundamentals you need to get straight before you call up any investors. 

1. Make sure YOU understand your business – before you go looking for investment, ensure you understand your business model, target market, competition, and financial projections through and through. Be prepared to answer detailed questions about all the key numbers. 
2. Prepare a solid plan – “We’ll figure it out as it goes” doesn’t cut it. Draw up a comprehensive business plan outlining your vision, mission, market analysis, revenue model, and growth strategy. 
3. Approach the right investors – look for angel investors with a track record of investing in your industry or similar startups. They can also provide you with relevant expertise, guidance, and connections. Remember that fundraising is more than obtaining capital; it's also about building relationships with investors who align with your vision for the company.
4. Write and rehearse your best pitch – develop a concise and compelling pitch highlighting your unique value proposition. Make sure to explain the problem you're solving, your solution, and why your team is the right one to execute the plan.
5. Build relationships – attend industry events, networking sessions, and startup meetups to connect with potential investors. Investors often prefer to invest in startups led by founders they know and trust.
6. Set a realistic valuation – valuation is one of the most critical aspects of startup investing. Make sure your valuation is fair, realistic, and based on solid data. 
7. Negotiate carefully – make sure you understand all the terms of the investment, including equity stake, valuation, board seats, and exit clauses. Negotiate with a fair and mutually beneficial relationship in mind. When you feel out of depth, seek legal counselling. 
8. Cooperate on due diligence – be prepared for when the investors conduct due diligence on your startup. They’ll go through your financials, legal documents, and operations. Make sure you have things in order and be transparent and responsive throughout the process. 
9. Have a clear plan for using the funds – getting funding isn’t like winning the lottery, it’s only the beginning. Clearly state how you intend to use the funds so the investors know their money will be used wisely for the growth of the company.
10. Be prepared for rejection – getting a “no” is part of the process. Learn from rejections, seek feedback, and use it to refine your pitch and strategy.

What questions will the investors ask you? 

Investors usually ask you a range of questions to assess the viability and potential of your startup. While specific questions can vary, you should always be very knowledgeable about your business, market, and competitors. Also, think about alternative ways your potential customers solve their problems – there’s a reason the biggest competitor of most SaaS platforms is good old Excel. Practice your responses, and be ready to provide data and evidence to support your claims. Be honest about the areas you find challenging, and demonstrate a proactive approach to tackling them.

Here are some of the most common questions the investors may ask you. 

About your startup:

• What does your company do?
• What problem are you solving?
• What makes you special, i.e. what is your unique value proposition (UVP)?
• How did you come up with the idea? 

Market and competition:

• What’s the size of your target market?
• Who are your main competitors? 
• What sets your product/service apart from your competitors?
• How do you plan to gain market share?

Business model:

• How does your business make money?
• What’s your pricing strategy?
• Have you tested your revenue model, and what were the results?
• Do you have traction? How do you know? 

Team:

• Who are the key members of your team?
• What relevant experience and skills do they bring?
• How do you plan to scale your team?

Financials:

• What are your current financials (revenue, expenses, profit/loss)?
• What are your financial projections for the next 3-5 years?
• How do you justify your valuation?

Go-to-market strategy:

• What is your marketing and sales strategy?
• How do you plan to acquire and retain customers?
• What channels are you using for customer acquisition?
• Do you have a product-market fit? How do you know? 

Product development:

• What is your product development roadmap?
• How do you prioritize feature development?
• What milestones have you achieved, and what's next?

Risks and challenges:

• What are the main risks for your business?
• How do you plan to mitigate these risks?
• What challenges do you anticipate in the market?

Use of funds:

• How do you plan to use the funds you raise?
• What impact do you expect the funding to have on your business?

Exit strategy:

• What’s your exit strategy?
• Have you considered potential acquirers or IPOs?

Scalability:

• How scalable is your business model?
• How will you handle increased demand? Can your product handle it? 

Customer feedback:

• What feedback have you received from customers?
• How have you used customer feedback to improve your product/service?

Regulatory and legal:

• Are there any regulatory challenges in your industry?
• How do you navigate legal and compliance issues?

Competitive advantage:

• What gives your startup a competitive advantage?
• How do you plan to sustain this advantage?
• Have you thought about intellectual property strategy? 

What are the things investors DON'T ask but take very seriously? 

There are also many things that investors may not directly ask you about but take very seriously. 

• Founder market fit – investors may not explicitly ask about it, but they assess whether your background, skills, and passion align with the industry you're entering. Founders are crucial for any startup’s success – they set the tone for future product development, company culture, hiring, and so much more. Try to demonstrate a deep understanding of the problem you're solving and the passion that drives you. 
• Team dynamics – it’s also important, how well your team works together. Having a collaborative team that complements each other is essential for long-term success.
• Adaptability, learning, and grit – running a startup takes a lot of adaptability and resilience. Investors want to know that you can pivot when necessary, learn from your mistakes, and take feedback. A growth mindset can be more important than having all the answers upfront, so feel free to share stories of how you overcame setbacks or learned from experiences. 
• Customer focus – when it comes to market and product, investors want to know if you deeply understand and prioritize your customers. Articulate customer pain points and how your solution addresses them. 
• Industry relationships – having experience and connections can be a big plus when fundraising. A strong network can help you with business development, open doors for business opportunities and partnerships, and much more.
• Cultural and ethical fit – investors want to invest in companies that align with their values. They may observe your company culture, whether your business operates ethically and transparently, and whether you consider your social and environmental impacts.

Glossary

Understanding the industry language is a big part of appearing professional and prepared. Here's a basic glossary of terms and phrases that investors commonly use. 

Beginner’s terms

• Bootstrapping – building and growing a company without external funding, relying on the revenue generated by the business.
• B2B (Business to Business) – a business model where a company sells products or services to other businesses.
• B2C (Business to Consumer) – a business model where a company sells products or services directly to consumers.
• Elevator pitch – a concise and compelling summary of a startup that can be delivered in the time it takes to ride an elevator, typically between 30 seconds to 2 minutes.
• Equity – ownership in a company, represented by shares or stocks.
• Exit – an event that allows investors to convert their investment into cash, such as an acquisition or IPO. An exit strategy is a plan for how investors can eventually realize their investment.
• Follow-on investment – additional investments made by (angel) investors in startups they have previously funded. This helps startups secure additional capital as they progress.
• Hockey stick growth – a rapid and exponential increase in a startup's growth, often depicted graphically as a hockey stick. 
• Lead generation – the process of identifying and cultivating potential customers for a business's products or services.
• Lead investor – the primary investor in a funding round who often takes a more active role in negotiations and due diligence. Other investors may follow the lead investor's terms.
• Liquidity – the ease with which an asset, such as company shares, can be converted into cash.
• Pitch deck – a presentation created by entrepreneurs to showcase their startups to potential investors. It typically includes information about the problem being solved, the solution, market size, competition, business model, and financial projections.
• ROI (Return on Investment) – the measure of profitability from an investment. Angel investors aim for a positive ROI by receiving returns that exceed their initial investment.
• Seed capital – the initial funds invested in a startup to help it get off the ground. Angel investors often provide seed capital to cover early-stage expenses such as product development, market research, and hiring key team members.
• Seed stage – the initial stage of a startup's development, often where angel investors provide funding to validate and develop the core business idea. 
• Series A, B, C, etc. – different rounds of funding as a startup grows, with each round denoting a higher level of maturity and capital raised.
• Unicorn – a startup with a valuation exceeding $1 billion. 

Financial terms 

• ARR (annual recurring revenue) – the total amount of revenue a company generates on an annual basis from its subscription-based customers. MRR and ARR are often used for SaaS (Software as a Service) businesses.
• Bridge financing – short-term funding to help a startup "bridge" the gap between two financing rounds or achieve specific milestones.
• Burn rate – the rate at which a startup spends its capital. Investors are interested in understanding how efficiently a startup uses funds.
• CAC (customer acquisition cost) – the cost associated with acquiring a new customer. It includes marketing, sales, and other expenses.
• Churn rate – the percentage of customers who stop using a product or service over a given period. High churn rates can be a concern for investors.
• CLV or CLTV or LTV (customer lifetime value) – the predicted net profit attributed to the entire future relationship with a customer. It helps assess the long-term value of acquiring a customer.
• MRR (monthly recurring revenue) – the total amount of revenue a company generates monthly from its subscription-based customers.
• Overhead – ongoing operational expenses like rent, utilities, and salaries.
• Run rate – the annualized projection of a company's financial performance based on current financials. It provides a snapshot of how the company is expected to perform over a full year.
• Runway – the length of time a startup can operate with its current funding before running out of money. The longer the runway the better.
• Valuation – the estimated worth of a startup or company. Angel investors negotiate the startup’s valuation before making an investment, which impacts the amount of equity they receive in return.

Legal terms

• Cap table (capitalization table) – a table that outlines the ownership structure of a company, showing the percentage ownership of each investor, founder, and employee. Cap tables are used to track equity distribution and calculate ownership dilution over time.
• Convertible debt – a type of investment where the angel investor lends money to the startup to convert the loan into equity at a later specified date, often when the company raises a larger funding round.
• Convertible equity – a type of investment that provides investors with equity at a future financing round without specifying a valuation at the time of investment.
• Dilution – the reduction in a founder's ownership stake due to the issuance of additional shares, usually as a result of a new investment round. Anti-dilution is a provision in investment agreements designed to protect investors from dilution in the event of a down round (a financing round with a lower valuation than the previous round).
• Due diligence – the process of conducting thorough research and analysis on a startup before investing. This includes examining the startup's financials, market potential, team, and competitive landscape.
• Liquidation preference – the order in which investors get paid in the event of a liquidation or exit. Preferred stockholders often have a liquidation preference, ensuring they get their investment back before common stockholders.
• Non-disclosure agreement (NDA) – a legal contract outlining the confidential material that parties share for certain purposes, but not with third parties.
• Option pool – a portion of a startup's equity reserved for employee stock options. Investors may want to ensure that there is an adequate option pool for future hires.
• Pro rata rights – the right of existing investors to participate in future rounds of funding to maintain their percentage ownership in the company.
• Term sheet – a non-binding agreement outlining the key terms and conditions of an investment deal.
• Vesting – the process by which founders and employees earn ownership of their shares over time, often to incentivize long-term commitment.