Fundraising is a critical component of startup success, but it can be a daunting task even for experienced founders.
A fundraising strategy for many founders involves cold calling or emailing every investor they can find a contact for and hoping for a response. But while a scattergun approach might yield some results, it’s unlikely that a founder gets the best out of it.
Some founders seem to have hacked the fundraising game, raising round after round. Meanwhile, others barely get a response to their email. Often, the difference is the approach. But a good fundraising strategy can set even the most inexperienced founder on the path to success.
For this article, our focus is on equity financing, as that is the most common and feasible investment vehicle for early-stage startups.
PS: This article assumes that you have a good product or business and does not cover how to value your startup.
Here’s how to design a fundraising strategy that gets results.
Understand VC math
Successfully raising funds from venture capitalists depends on how well you understand VC incentives. Not all startups fit the criteria for venture capital investments, and believing otherwise is a common mistake that startup founders make.
When a bank provides a loan, a 25% interest rate works for their model, but a VC is hardly going to be impressed by those numbers. That doesn’t mean your startup isn’t a great business; you’re just not a fit for them.
On average, VCs want to see between 10x and 100x return on their investment. By its nature, venture capital is risky, with the expectation being that most startups would die and those that survive provide outsized returns. VCs also promise a higher investment return than traditional investment options, hence their expectations.
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If you plan to raise $100,000, do you see a path to a $10 million exit for the VC? If you don’t, then you might want to consider alternative forms of investment.
Luke Mostert has a more detailed breakdown of VC math in this LinkedIn post.
Beyond the potential returns on their investment, a VC wants to see a decently valued startup. Many founders price themselves out of an investment with high valuations, and not all VCs would bother engaging once they see that.
You could look at startups in your industry and benchmark your valuation against theirs. While your valuation shouldn’t be too high, it shouldn’t be too low either, as that hurts you.
A solid founding team is an investor’s dream. This looks like strong domain expertise and strong technical knowledge or experience. If you’re building a fintech, have you worked in financial services? If you’re building a healthtech, have you worked in healthcare? That would almost always put you in good standing with investors.
There’s a preference for founding teams with more than one founder. Two appears to be the sweet spot; most of the funding rounds in Africa go to startups with at least two founders.
Your startup should also be showing growth. Even if you’re playing in an industry that is a fit for VCs, your growth will determine whether investors take a bet on you. Aim for 30% to 40% monthly growth in the early stages.
Finally, identify a clear path to exit. This is a conversation that has become more common since the investment downturn, and you should always have that in mind. Exits can come in the form of acquisitions, a merger, an initial public offering, secondary sales, or buybacks by founders. Get into investment conversations with this in mind.
Create a visibility strategy
Your ability to raise capital is heavily influenced by the eyes on you. Outbound calls to investors are a reliable method to get investments, but that isn’t the only way. Investors can also reach out directly, but this usually happens because you're putting your work out there.
The best way to do this is to build an excellent business, but that may not be enough. Use social media to your advantage. Choose a platform or two and start creating content regularly. And don't overthink it.
You could share what problem your startup solves and the solution you've built. Building a startup comes with challenges, and that can be used on social media. I wrote about how founders can leverage personal branding here.
Attending events is another way to get the word out about your business. While attending too many events may drain you and seem like a distraction, having the right strategy and mindset can be a game changer.
Audit events to see who could be there. Smaller events may have a guest list that's available to attendees, and you can look them up. At each event, set a target to speak to three people before you call it a day.
Start raising before you need to
Nigerian banks are currently fundraising to meet new regulatory requirements. So far, no bank appears to have met their target. Timelines are being revised, and it may not be until 2025 that we see significant progress.
If banks have a strength, that would be raising capital. The lesson here is that fundraising is tough, a lengthy process, and may not go according to plan.
Therefore, it is advised that you start raising before you need to. The best startup founders are constantly fundraising. If you'll need money in 12 months, it's a good idea to start now.
Raising with the risk of shutting down or not meeting payroll hanging over your head is an ugly sight and could force you to accept unfavourable terms.
Fundraising is a game of numbers
Too many founders give up after a few rejections, but fundraising is a game of numbers. The first investor you meet may not write you a check, but if you keep at it, you increase your chances of raising capital.
Investors may not always see your vision immediately, or they may be unable to do a deal at the moment, hence the need to rack up numbers.
Uber had a difficult time raising money from investors, with experienced entrepreneurs like Mark Cuban turning down the chance to invest in the company.
Brian Chesky has shared how Airbnb struggled to convince investors to take a chance on them in the startup's early days, and you can expect to see a similar result.
While fundraising is a numbers game, it must still be targeted at the right people. Don't just blast off emails to investors without determining whether they're the right fit for you. Look at their previous investments and determine whether it was in your industry.
