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How Startups Should Prepare For Securing Investments

Usually, startups succeed with pre-seed or seed rounds if they have a compelling story and a strong team of founders. Metrics are just indicators that prove your story. Yet, the higher the series, the more important the numbers.

In this section, we will talk about the process of preparation for pitching to investors:

  • When is it the right time for fundraising? How to determine that now is a perfect time to start looking for additional funds?
  • How is the fundraising process handled? What are the catalyst elements for raising money? What are the options to start preparing for the pitch?
  • What metrics are important?
  • How to prepare for negotiations? How to find the first connections among investors and warm-up relationships before asking for investment?

The primary difference between pre-seed or seed investments and other rounds is that investors exchange funds on a startup equity share without heavy influence over the decision-making process.

Meanwhile, during the later rounds, investors usually influence companies’ strategic decisions.

Now, let’s consider the entire process.

When Is It The Right Time for Raising Capital for a Startup?

The question of the correct timing for fundraising doesn’t have the right answer. As we have already mentioned, there is no uniform recipe for raising funds. And there isn’t an ultimate approach for different types of startups and markets.

Let’s say you have a healthcare startup with a Monthly Recurring Revenue $150 000. But it doesn’t mean you’ll raise funds. Why?

It might be a good result for you, but average compared to your competitors. Besides, your team might look unreliable in the context of the healthcare industry. Or your current growth is your peak in the eyes of investors.

Another case is a standard “raise when you can raise.” But the trick is that you’ll know your ability to fundraise only after fundraising.

But how to identify the perfect time to start looking for investors?

At the very start, your metrics are far away from the ones of the unicorn-like startups. But you have a motivation and a vision on how to build a company that would help you reach such metrics. And on the first rounds, you give investors a promise to make such a business.

Round B, in its turn, is all about metrics.

Hence, adequate advice is to raise investments when your working capital is no longer enough to instantly build and expand business processes that are already profitable.

As we’ve already mentioned, this advice isn’t 100% practice-based. However, that’s the most relevant one.

When you start to implement business management practices on your startup, you are ready to ask for money.

However, if we are talking about a serial raise of funds, then there is a simple principle to determine when you need to raise the next round. You need to raise additional capital before you get down to 6 months of runway.

Define Startup Metrics

The trust and belief in your project are based on emotions. Metrics, on the contrary, are the rational basis that may lead the project to receive funds. How and which metrics should you present to make investors believe in your team?

The data you present show 2 key points: you can assess the state of your business, and you know how to leverage business processes to increase your profit.

Let’s consider a few examples of well-documented metrics and poor-documented ones.

If your project shows stable and regular growth during 3, 6, and 12 months by 10, 15, or 30% – it is a trend. And you, as a founder, should know which set of actions promoted these metrics and why.

Let’s say that you used cold outreach to 100 people, and 10 of them converted into customers. You were testing this approach for a few months in a row, and each month you tracked the growth of payable customers.

This setup shows that your hypotheses are correct:

  • The problem you are going to solve is relevant
  • The current solutions are weaker than yours
  • Your successfully defined your Ideal Customer
  • Your message is clear
  • The timing of your campaigns is perfect
  • The channels you use show excellent results

As a result, the investor will understand that you know how to realize the potential of your product wisely. And it is apparent that if you scale your product, it will continue to grow.

But what if your product is seasonal. Let’s say it’s an AgTech product. During spring and fall months, it shows outstanding results, but during the winter season, business stops.

The figures can also demonstrate this trend. As a founder, you need to describe each of these jumps on charts and describe how you plan to leverage them.

The worst scenario is when your metrics differ significantly month by month. It shows that there is no stable trend. One month the figures show enormous growth, while another – the situation is exactly the opposite. Even if the previous results of the 6-month period show sustainable growth, it doesn’t look reliable.

It means that to succeed, you need to test more and more hypotheses. Each time they will show different results, but as soon as you find the right approach – push it to the limit.

But don’t forget that you need to be able to clarify each point on your chart:

  • Show only the representative figures such as lifetime value, the number of acquired users, and churn rate. Explain how you will increase profit or lower the costs.
  • Show number on different timeframes. Use Monthly, Quarterly, and Annual frames.
  • Clarify the way each metric was calculated. Where did these figures come from? Why exactly do these numbers mean?

You must know each of these numbers by heart. Otherwise, you won’t be able to build trust within a 30-minutes pitch session.

Examples of Key Metrics for Different Types of Products

As evidenced in practice, founders with a great story, but with weak metrics have more chances to raise funds than those who can show well-calculated figures but lack consistent storytelling.

However, it doesn’t mean you’ll be able to repeat the success story of your favorite startup. Or a startup that looks pretty similar to yours. Except, you have insider information about their situation – details about the business model, relationships with investors, unique skills, or technologies, that simplified their process of raising funds.

Let’s take a look at some templates of a metrics set for different business models and product types. It would be your starting point on what to calculate and include in your investment pitch:

  • Software as a Service in B2B:
    • Core metric: run rate up to $300 000
    • Growth: >300% year-over-year
    • Round Size: $300 000 – $ 1 500 000
    • Dilution: 13-38%
  • Usage-Based Software in B2B:
    • Core metric: Annual Recurring Revenue up to $300 000
    • Growth: >300% year-over-year
    • Round Size: $500 000 – $ 2 000 000
    • Dilution: 13-38%
  • Marketplace:
    • Core metric: $4.8-63.2M GMV
    • Growth: >20% month-over-month
    • Round Size: $1 000 000 – $2 000 000
    • Dilution: 20-32%
  • Subscription-based Software in B2C:
    • Core metric: $1 000 000 Gross merchandise volume
    • Growth: >20% month-over-month
    • Round Size: $1 000 000 – $2 000 000
    • Dilution: 17-28%

However, all these metrics may vary in your specific case. Don’t forget about that.