Fundraising and startups often go hand-in-hand, but fundraising doesn't always go smoothly. Watch any episode of the hit TV show Shark Tank and you'll see your fair share of fundraising disasters. Some startups seek funds too early, before their products have proven themselves. Others wildly overvalue their companies, resulting in immediate disdain from investors. Others have compelling offers on the surface only to later reveal serious risks and liabilities. On the other hand, some startups bring the perfect combination of product-market fit, value, mitigated risk, and potential. In order to be successful, whether on Shark Tank or via traditional talks with investors, use the tips below to optimize your fundraising.
Understand your valuation and how it grows over time. Your product certainly has potential, but is it really worth $5 million right now? Why? Be prepared to justify your valuation with solid facts. For example, if you've been issued a patent, that's a fact worth mentioning. If someone like Bill Gates or Warren Buffet is part of your management team, that will factor into your valuation. If your company is profitable with a great product-market fit and minimal risks, you can justify a higher valuation. Not quite there? That's okay as long as you value your company at the appropriate level for its current maturity. If you're just starting out, be sure you've done your market validation- that you've actually sold your product to potential customers. Investors understand that your company has potential. That's why they're willing to risk their money right now: for the potential reward.
Determine if the time is right to raise funds. Many startups make the mistake of trying to raise funds before it's really necessary. Does your company need the cash or can it become profitable through sweat equity and self-funding? Are you ready for the pressure to return a profit to your investors?
Identify and mitigate your risks. Risks take many forms. Forms of risk may include an overcrowded market, an unproven management team, an inherently dangerous product, market timing, or, as Mr. Wonderful likes to say, "There's nothing proprietary about this." By identifying your risks, you have the opportunity to mitigate them. This is similar to anticipating and overcoming objections in the sales process.
Choose your investors with care. Just as investors choose their investments wisely, you should do the same with your investors. While an investor may make an offer, consider whether it's a good fit. Does the investor have experience in your industry? Contacts? Will the investor make your life miserable with constant demands? Will the investor come through or string you along?
Share confidential information with care. Sharing confidential information with potential investors is an essential part of the process, but you should do so wisely. Use non-disclosure agreements and a secure data room to ensure that your most confidential data is fully protected and accessible only to those you choose to share it with.
Startup fundraising requires a great deal of introspection. You need to know what your company is worth, whether it's the right time to raise funds, what risks you face, and more. Once you've addressed and optimized these issues, you need to choose your investors wisely and protect your data.