Before you raise startup capital, there are essential questions to be asked, plans to be made, and materials to be gathered.
Here’s an outline of the steps you need to take to begin to get your ducks in a row.
1. Analyze your business. In order to analyze your business model and the economics of your startup, you need to ask yourself some hard questions around the areas of your financials, your customers, your sales, and your startup team. Specifically:
Financials
- What stage is your company? Pre-revenue? Cash-flow positive? It’s not just enough to say “early stages.” Specifically what has your company done to-date.
- What is your revenue / cash / pricing model? If you haven’t sufficiently thought this through, time to go back to the drawing board.
- What kind of financing have you taken in to-date? And how much? Maybe you’ve already received a capital infusion. Where has that money gone and why are you looking for more?
Customers
- Who is your target customer? And no, not everyone can be your target customer.
- How many customers do you already have? How many other potential customers exist? This is an exercise in top-down financial projection.
- What are your important financial metrics? Customer acquisition cost, lifetime value of your customer, renewal rate, attrition rate? You need to keep an eye on the most relevant KPIs (key performance indicators).
Sales
- What percentage of your revenue comes from your largest customer? What percentage comes from your five largest?
- How long is sales cycle? You can’t begin to measure your pipeline without first understanding the duration of your sales cycle, from start to finish.
- What does your sales pipeline look like? You want your pipeline to have a well-distributed set of potential customers well-distributed, with customers at every stage of the sales cycle. And you need to know how many funnel levels your pipeline has, with an ability to track and measure progression through the pipeline.
Team
- What is the make-up of your current team? What are your strengths and who do you have coming to the table?
- Where, if any, are your team gaps? If your team has gaps, this isn’t necessarily a deal-breaker. Be proactive at recognizing and filling—or at least accounting for—gaps.
2. Clarify your fundraising game plan. Okay, you’ve analyzed your business model and now you’re ready for some capital—but what does this money look like and where is it going to come from? Here are some key questions to help you to clarify your fundraising goals.
- How much money do you need to raise? I’ve said it before, and I’ll say it again. Milestone funding. Your goal is not to get as much money as you can. Your goal should be to outline your next milestones, identify how much you need to hit those milestones, and fundraise to those milestones.
- What’s that money going to be used for? Again, there should be a direct correlation between the money you raise and the milestones you hope to achieve.
- What type of capital is the best fit for your company, and why?Family and friends? Revenue-based financing? Angels? VCs? Bank loans? There are many options when it comes to raising funds. Once you know your goals, you can identify your best capital source.
- At what cost and with what terms and conditions? How do the costs and terms of equity, debt, and revenue-based finance compare?
3. Prepare for due diligence. To prepare for due diligence you need to collect all the necessary documentation. There are many documents that need to be gathered to fulfill this process. Documentation falls into the following categories:
- Corporate records and charter documents
- Business and financial plans
- Security issuances
- Material agreements
- Intellectual property
- Disputes and litigation
- Miscellaneous documentation (licenses, bank accounts, powers of attorney, and more)
Are you ready for investment capital?
David Ehrenberg is the founder and CEO of Early Growth Financial Services, an outsourced financial services firm that provides small to mid-sized companies with day-to-day accounting, strategic finance, CFO, tax, and valuation services and support. He's a financial expert and startup mentor, whose passion is helping businesses focus on what they do best. Follow Daivd @EarlyGrowthFS.
