How to raise capital: our tips and tricks
You need a very good business plan
Honestly? No, you don’t.
To get started you will need to have some plan, however, most investors know that “everybody has a plan, until they get punched in the face”. In other words, whilst a plan is something you must have, it is not a prediction of the future.
The most important aspect of your business plan is to prove that you can think strategically about your business. That you intimately know, and understand, all the moving parts of the new amazing machine that you are about to build. Another important feature of your business plan is flexibility, and even more importantly, being prepared for whatever changes might be thrown your way. As Winston Churchill once said “plans are of little importance, but planning is essential”.
You need to be able to easily answer these questions:
What problem does your product solve? (This will be your value proposition)
Who has this problem? (You will need to identify how many people?)
Are they aware that they have this problem? (Will they need convincing?)
Would they be willing to pay to solve this problem? (How will you make money?)
Do you know how to reach them? (This needs to be your go-to-market strategy)
Explaining your company's business model
Your business plan will be centred on a business model. Again, this is just a plan, but it must showcase that you are planning on creating a sustainable business.
A very effective tool to think and present your business plan is Strategyser’s Business Model Canvas. This tool allows you to summarise, on a single page, the key aspects of your business and it is also great for presentations.
Start by describing each segment of your market and for each one, detail the value proposition of your product. Then, connect the value proposition and customers through relationships and channels.
On the other side of the canvas, you also should list the partners that will allow your business to exist, the key activities that you will have to perform and the key resources that you need.
Finally, you need to, at the bottom of the canvas, quickly summarise money in (revenues) and money out (costs), making sure that at some point the first number will be greater than the second.
Understanding your marketing opportunity
Another very useful canvas which we use extensively at Activate Studio is the Value Proposition Design canvas. This allows you to “zoom in” on the value proposition and market segmentation part of the business model allowing you to gain a greater understanding of the characteristics of the market that you are addressing.
For each market segment, summarise the jobs that your customers need to perform in the context of your product. This allows you to list the gains that they are trying to obtain and the pains that they might be trying to avoid.
On the other side of the canvas, you will present your product features and describe how they create gains and relieve pains for your customers.
Using the analysis of these two parts of the canvas, you can highlight your product-market fit, which is the key to your company’s success.
Understanding the competition
Understanding the competitive landscape isn’t simply listing a range of companies that more or less do what you do. It’s providing a very clear explanation of why your company has an edge over your competitors.
If you don’t think you have any competitors, you’re probably misguided. Competition isn’t only companies doing a similar activity to you. Think in terms of what customers could be doing instead of using your product. If they sit on their sofa at home watching television instead of using your product, sofas and TVs are your competitors!
Developing a go-to-market strategy
Once you have a clear idea of who your clients are and how your product will help them, you must figure out how to secure them.
It helps to think of your market in three subsets:
Total Available Market (TAM): the total market that might develop a demand for your product.
Serviceable Available Market (SAM): the subset of TAM which is within your geographical reach.
Serviceable Obtainable Market (SOM): the segment of SAM that you can initially capture.
You need to be able to describe the size of these three segments of your market and if necessary, provide the sources that you used for your research.
For your initial fundraising pitch, focus on your SOM. This will be your beachhead market, the first users of your product. You should be able to explain your strategy on how you will reach them, how you will let them know about you and how you will convince them to adopt your services.
You must be able to articulate your marketing plan, channels that you have access to and partnerships that you can develop to extend your reach.
You should also detail the implications that reaching the different segments of the market will have on the operations of your organisation and the associated costs.
Presenting a three year financial plan
If you are pitching for a seed or a pre-seed round, most investors will ask to see a three year financial plan. Whilst everybody understands that no plan is an accurate prediction of the future, it is a useful tool to understand the way you are thinking about your business.
Your plan should include projections on: how the funds you raise will be spent, an estimate of when revenues will start having an impact on the finances of your company, and scenarios for further rounds of investment.
Whilst raising capital is difficult, there are ways to go about it effectively
Raising capital for an early-stage business is hard work, and whilst there are no tricks that will allow you to cut corners, we want to share some of the lessons that we have learned over the years:
Every investor is unique. Different aspects of your business will resonate with different people. This is especially important when you are raising an early-stage round and are dealing mostly with angel investors who will be more interested in your passion and the impact of your business than on purely financial aspects.
Be comfortable with being turned down. It often takes 30, 40 or even 50 investor pitches before you convince enough people to invest in your company. Just keep going, be gracious, and remember that either way you are extending your network. Perseverance is probably the most important trait of a successful entrepreneur.
Take criticism from investors with a grain of salt. Very often investors will suggest changing the nature of your business, either to address a different market or to build a different product. Whilst it’s always interesting to hear opinions, you don’t have to change your whole business plan to accommodate their suggestions. In most cases, it’s just a way to turn you down.
A maybe is not a yes. All startup founders are incurable optimists and tend to overstate every positive signal they get. Unfortunately, while raising capital, if you don’t get a yes (and a signed term sheet) you don’t have much.
Practice makes perfect. At first, your pitching technique might not be great. Luckily, it will improve with practice. The more times you pitch, the more comfortable you will become delivering it. In turn, you will learn to address difficult questions as well as getting a better understanding on which parts of your presentation resonate best with certain types of investors.
About the author:
Paolo Valdemarin is the Managing Director of Activate.