Before we dive into this, it's useful to take into considerations these statsCB Insights offers us some sobering, but also promising statistics on startup fundraising:
- The average seed round is $700,000.
- 28% of seeded startups eventually exited via merger, acquisition or IPO within the first six rounds.
- 70% eventually failed or stopped seeking (and perhaps needing) funding during this time.
- Less than 1% became unicorns (i.e. were eventually valued at $1B or more, although Slack, AirBnB and Uber were among them)
So, we asked Carola Torrente, Investment Program Manager of YES!Funded, to reach us for a chat and give some useful advice to all the young entrepreneurs out there. This is the moment when potential investors, governments, banks or lenders believe that you are worth investing in and that you are ready for the next step. Also: being Investor Ready is the proof that what you want to do is commercial, effective and will bring value back to an investor.
How to get funding for a startup
Build a Team
Find your Market
Develop your Product
Fix your Finance
Know your Company Value
What does it mean to be Investor Ready? What do Investors look for?
Well, being Investor Ready is the moment when potential investors, governments, banks or lenders believe that you are worth investing in and that you are ready for the next step. Also: being Investor Ready is the proof that what you want to do is commercial, effective and will bring value back to an investor.
What do they look for? I can give you a huge list, but let’s summarize it in five topics: team, market, product, finance and company.
1. Build a Team
You can have the best idea, but you need a great team to bring it to the market. Did you know that in 3rd place in the ranking of the Top 20 Reasons why a startup fails is not having the right team?
So, the first question you should ask to yourself is: does your team have the necessary competences to make your business a success? Read this great article to find some inspiration.
2. Find your Market
Some questions you need to ask yourself to deal with your target market:
- Do you have a clear view on the pains and needs of your target customers?
- Why is your product or service unique?
- Is the market saturated or there is room for your idea?
Many startups think their idea is so unique that it has no competitor. First of all, remember: competition is good. Then, start your market research simply by using the free online research tools like Google, Quora, Reddit, Digg and many more.
“Traction is the most important factor which determines whether your idea will be backed by investors or not. It means progress. Investors want to see that your idea is not static, and that you're working on it. You need to show them progress in terms of product development, management teams, revenues, and all other aspects of your venture.”
A few quick examples:
- A pilot with paying customers
- A letter of intent from a big corporate
3. Develop your Product
It’s important to show to your potential investors that you know what your Most Valuable Product (MVP) looks like. If you already have it, what other must have nice-to-have features you will include?
Make a realistic development map and include, besides timeline, the amount of funding you need.
4. Fix your Finance
It's easy to put a number down on paper, but it's more important to ensure you know why you need it. You don't want to ask for too much or too little. Investors will want to know how much money you spend and at which rate. Look at this great video by Kauffman and learn more about finance for your startup.
Another thing that investors positively acknowledge is if you invested your own money. Why? Because how can someone trust you if you have not even put money into your idea?
5. Know your Company Value
Set the price for the shares you are willing to give away. I know, it is not so obvious. Many young entrepreneurs wonder how they evaluate their idea in economic terms. Unfortunately, there’s not an exact formula for doing it. For a startup, this is particularly difficult, because it's almost impossible to estimate:
- The future value of the company
- When the company will be worth that much
- The probability of it ever being worth that much
You might find this great chart by Craft useful: it shows the Value of Founders Equity at IPO for the major tech companies worldwide. Take it only as a reference, it can be a useful table to understand how equity works in your business sector.
Having an idea of the value of your company will help you set the price for your company rather than someone telling you how much it’s worth.