Through our work at Five Years Time with investors and startups, we have had the pleasure of meeting and advising hundreds of founders as they embark on their fundraising journey.
Over the last few years we’ve noticed that founders looking to raise investment for the first time tend to have similar concerns and face similar issues and they tend to ask us a common set of questions. If you’re preparing to raise investment before the end of the year, see our answers to the 7 most common questions below to help you get started.
1. How much should I raise?
We recommend you plan to raise at least enough cash to fund your business for the next 12 to 18 months. This is because it’s a full time job for a founder to raise investment and the process can take a minimum of six months. So make sure you give yourself time to actually run the company in-between raises and then have the runway to raise your next round.
Also, be sure the money you raise is enough to take you to your next big milestone so that you can raise again at that point if you need to, at a higher valuation.
When you calculate how much you need for the next 12 to 18 months, assume no or a minimum amount of sales — this is so that you still have cash (or runway) even if things don’t quite go to plan…
How much you can “afford” to raise also depends on what valuation you can justify for your raise, which leads us to question 2.
2. What valuation should I raise at?
This is always a tough one for first investment rounds. Traditional company valuation methods are normally based on historical financial data and future revenue or profit projections made based on that data. As a startup you won’t have a financial history available to use these more traditional methods. You can use a valuation based on potential, where you look at your projected revenue or gross profit in five years’ time ;) and apply a multiple to that figure (typically 3x 5x or 10x depending on your sector). But investors know that this is highly speculative. So another good way to consider your valuation is to:
1. calculate your minimum valuation, based on giving away no more than 20% of the business to investors (this is fairly standard for a first raise) so that you know what valuation you cannot go under when you negotiate with investors.
2. look at comparable startups or businesses in your market to validate and benchmark that valuation. Investors will also consider your valuation in the context of other deals they have done with other companies at similar stages so this is an exercise really worth doing.
As a founder who should still have most of the equity in the business at this early stage, investors expect you to be taking a minimum salary, as the idea is that you will reap the true rewards of your effort at exit, i.e. at the same time as them so that your interests are aligned.
They’ll want you to take a salary big enough to be able to work on the business full-time and live reasonably in the city you are based in of course, but don’t expect to earn your “market value” or what you might get as an employee of a big corporate. This is one of the main reasons why entrepreneurship isn’t for everyone!
4. When should I start start fundraising?
More than six months before you run out of cash. As mentioned above it can take six months to raise a round and the more you are pressed for cash, the more investors can negotiate you down in the investment terms and the more you are likely to accept cash from investors who may not have the same vision as you for the business going forward…
5. How long should my pitch deck be?
Ten to 15 slides at a maximum. Investors see A LOT of pitch decks and typically have a short attention span. Less is more here. Focus on short and punchy messages and make sure it’s pleasant to the eye. Have a look at our tried and tested pitch deck template to help you build yours.
6. I don’t have a co-founder… What should I do?
It’s true that most investors like to see a team of two or three co-founders. This is first of all because investing in two or three people is perceived as less of a risk than investing in one, who could walk away or not be able to run the business at any given point.
It’s also because it’s very rare for one person to have all of the skills and experience needed to launch a new business so they like to see a combination of complementary skills in the founding team.
If you don’t have a co-founder and you’re still at very early stages, consider finding someone to join you, someone who has skills you know you will need to make your startup a success. If however you are quite far along and bringing on a so-called “co-founder” feels artificial at this point, do find one or two brilliant minds who you can bring on board at a senior level and show that they play a decision-making and strategic role in the business so investors know they are effectively investing in the combination of all of your skills and experience.
7. How many investors do I need to meet before I get a yes?
You could meet just one investor and get a yes straight away or you could meet 500 and not get a single expression of interest. It’s all about who you approach and why you approach them. Most investors are very open about what types of companies they invest in, in which markets, at what stages of growth and also how much they tend to invest. So do your homework and make sure you approach investors who are interested in startups like yours. Otherwise you are wasting your time and theirs. There are no shortcuts here, there is a fair amount of research work to do on your side. But it will dramatically increase your chances of raising and bringing on board the right investor for you. On more about finding the right investor for your startup see our FREE Webinar on this topic.
If you have any other questions please feel free to message us on twitter @FiveYearsTime_ or contact us via our contact form.