Should your startup be seeking funding?

Heads up, this is a longer read today!

Q: Should your startup be seeking funding, and if yes, are you properly prepared?

A: It really depends on what your longterm goal is, scalability of your product, and the type of investment you seek.

Take Venture Capital for example:

VC investment is for scaling (when you already have some traction in engaged users/customers/revenue).

VC is not for validating/fixing problems etc. ??

It also depends on how many are on the CAP table and dilution etc...

VC main objective is the ROI to their LP's through an exit.

Limited Partners (LP) - provide the funds to the VC

Venture Capital (VC) - manage and deploy allocated funds to the portfolio

Some alternative Funding Options:

Bootstrapping: It's best to begin with a bootstrapped mentality/strategy, focused on customer discovery/acquisition. This leads you from a point of strength and more bargaining power RE giving equity to the VC. Maintaining control and iterating quickly.

Additional bootstrapping funding: sources like personal savings, loans, or crowdfunding.

Grants:?Highlight government grants or incubator programs that can provide non-dilutive funding for specific industries or research purposes.

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??Not every startup wants to exit (it's not always necessary to exit to be reasonably successful without giving away part of your company).

??Not every startup is VC back-able/scalable.

??You must match the right VC with your startup, there is no "one size fits all".

There are many additional variables to consider.

?? Understanding the Investment Landscape ??

? Terms and Dilution:

ANALOGY - baking a chocolate chip cookie.

The cookie represents the ownership of a company, and the chocolate chips are your ownership stake. The more chocolate chips you have, the bigger your slice of the company.

• A capitalisation table (cap table) is like the recipe. It tracks how much ownership (chocolate chips) everyone has in the company, including founders, investors, and employees with stock options.
• Dilution is what happens to your ownership stake (chocolate chips) as the company grows and needs more funding. Here's how it works:

When new investors come in:?You need money to buy more ingredients (grow the business). You convince a friend to invest (become an investor) in exchange for some of the future profits of your cookie (ownership stake). To pay them, you have to take some of your chocolate chips (ownership) and give them to your friend. This reduces your overall percentage of the cookie (ownership stake).

How much ownership do you give up? It depends on the size of the investment and the value of the company at the time.

- Small investment:?If your friend invests a little for a few extra chocolate chips, it won't affect your overall enjoyment of the cookie (ownership stake) much.

- Big investment:?But if your friend invests a lot and wants half the cookie (ownership), you'll have to give up a significant amount of chocolate chips (ownership stake).

The cap table keeps track of everything:

It shows how many total chocolate chips (shares) are in the cookie (company), how many each person has (ownership stake), and how much that stake gets diluted (reduced) with each new funding round.

Dilution isn't always bad. By giving up some ownership (chocolate chips), you gain the resources (money from investors) to grow your company and potentially make the cookie (company) much bigger and more valuable in the future. The goal is to find a balance between getting the funding you need and maintaining a healthy ownership stake.

Is it more appealing for you to own 10% of a 1 billion dollar company that grows fast, or you own 100% of a 1 million dollar company that grows a little slower....You decide!

? Due Diligence:

ANALOGY - You're a baker who created a one-of-a-kind cookie recipe. You know it has potential, but you need some help to scale it up fast.

The Investor (The Partner):

- Tasting the dough (evaluating the business):?Investors will meticulously examine the recipe (business plan), the ingredients (team and resources), and how you plan to bake it all together (financial projections). They want to understand the market for your unique cookie (is there enough demand?), if you have the skills to bake it consistently (competent team), and if the recipe is actually cost-effective (financially sound).

- Checking the storage cupboard (legal and background checks):?Investors will also look into your oven (legal background) and your flour (financial history) to make sure everything is up to code and there aren't any hidden surprises.

- Sharing a taste test (chemistry):?Beyond the recipe itself, investors want to see if they enjoy your baking style (company culture) and if your vision for the cookie aligns with theirs (shared goals). This is like gauging if you can work well together as partners.

The Founder (The Baker):

- Presenting your masterpiece (pitching):?You'll need to showcase your super fantastical cookie recipe (business plan) in the best light, highlighting its unique flavour (competitive advantage UVP) and potential for success (growth projections).

- Answering all their questions (transparency):?Be prepared to answer their questions about the recipe (potential challenges), the ingredients (team weaknesses), and the baking process (financial risks). Open authentic communication is key.

- Assessing their taste (investor fit):?While looking for a partner, you also want to make sure they appreciate your baking style (investment philosophy). Do they like your unique cookie (understand your business model) and have the resources to help you scale it up (experience and network)? Crucial for success!

? Preparing for Investment:

Data room: A well-organised data room is crucial as it serves as a secure platform to present potential investors with all the necessary information to conduct due diligence and make informed decisions.

Documents to include: Business Summary/Company Overview - Traction/Product Market Fit - Financials?- Team and Roles - Cap Table (Capitalisation Table) - Pitch Deck - Legal documents - Marketing materials - Product Demo Video.

Pitch Deck: Your pitch deck is a powerful initial contact tool to engage investors and secure funding. It's not just about the information, it's about effectively communicating your vision and potential. Invest the time and effort to craft a clear, concise, and compelling pitch deck that will leave a (great) lasting impression.

- Showcase the Opportunity:?Your deck should be a?compelling narrative?that tells the story of your business opportunity. It needs to?highlight your unique value proposition?and?clearly communicate the problem you solve, the impact you create and the transformation. WHY you and WHY now?

- Resonates with Investors:?Speak the?investor's language. Use?clear language?(ZERO technical jargon).?Focus on the "why" behind your business?and how it aligns with the?investor's interests and goals.

- Highlight strengths of your team because investors invest in the people behind the product first!

SHORT - CLEAR - IMPACT

? Building Relationships:

Network with Investors. Building relationships with potential investors well in advance is crucial

- Warm Introductions:?Having established relationships allows you to leverage?warm introductions?from your network and can?open doors?to investors who are already familiar with you and your company, increasing your chances of getting a?fair hearing. Advisors, consultants and accelerators that have extensive experience in the investment world are a great addition to your team (internal or external) when seeking investment, because they already have an establish trusted investment network. Investors are very limited on time so will respond to them quicker, eliminating cold non-responsive outreach. (reach out to me Kellie O Hara if you want to know more).

- Understanding their Interests:?By engaging with potential investors early on, you gain valuable insights into their thesis,?investment philosophies, preferred sectors, and deal sizes. This allows you to?tailor your pitch?and?highlight aspects of your business?that resonate most with their interests.

- Building Trust and Credibility:?Consistent interaction fosters?trust and credibility with potential investors. They can witness your?passion, dedication, and progress?over time, making them?more likely to believe in your vision?and invest in your company when the time comes.

? Legal and Financial Advisors:

It's a complex landscape. Consulting with advisors in this scenario is similar to hiring experienced guides to help you navigate the space safely and efficiently.

- Expertise and Experience: Advisors bring specialised knowledge and experience to the table. They've likely seen various deals unfold, understand the nuances of different investment structures, and can anticipate potential roadblocks. This expertise is invaluable, especially for first-time entrepreneurs or those unfamiliar with the investment landscape.

- Objectivity and Strategic Thinking: Help you make sound decisions based on a broader perspective, and evaluate different offers on their merits, identify potential red flags, and negotiate the deal terms strategically. This unbiased perspective helps you avoid getting caught up in the emotions of the moment and make decisions that are in the long-term best interests of your company.

- Network and Connections: Advisors often have a well-established network of contacts within the investment community. They can leverage these connections to help you connect with the right investors who align with your company's goals and values and significantly increase your chances of securing funding.

- De-risking the Process: Advisors can help streamline the process and negotiations, and ensure all legal and financial aspects are properly addressed. This minimises risks.

- Peace of Mind and Confidence: Helping you navigate challenges, make informed decisions, and approach negotiations with greater clarity and conviction. This sense of security allows you to focus on growing your business with the knowledge that your interests are well-represented.

In conclusion…

?Do you know your longterm goals?

?Do you need to raise outside finances, or can you be successful enough without it?

?Is your business scalable to warrant VC backing?

?If you go the investment route, are you prepared?

Things that massively matter to VC: (speaking from working directly with VC's, one of which is our founder of an AI VC fund in Silicon Valley).

? Strong team visualising the same direction and mission cohesively.

? Strong collective business ops/strategy/marketing/sales/tech strengths.

? Strong UVP (unique value prop) and impact.

? Traction (engaged users/returning customers/recurring revenue)

? Scalability towards an exit

(again there are additional things).

Seeking investment is a strategic decision and requires careful planning and preparation. Seek mentorship from experienced entrepreneurs, advisors or investors to navigate challenges.

As always, thanks for reading, I hope you got some value!!

I always welcome feedback (good or bad lol).

Kellie “The Startup Whisperer” - a multi hat wearing startup founder/advisor with a special knack for people, communications & strategy within the AI and technology startup space.

Led by an AI VC we connect founders with aligned investors by executing proper due diligence to position them in a place of hot strength instead of cold weakness and invited to directly access investor doors that would usually be shut to you.

Website www.kellie-thestartupwhisperer.com (schedule a chat at the bottom of the website page).

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