So you had an idea, scraped together your savings and through a combination of cunning, guile and frugal pragmatism have managed to get an MVP ready to go. 

The feedback has been amazing and you realise you’re onto something that could be, well, something.

And then it hits you, to take the next steps, to really be able to hit those next major milestones, you’re going to have to raise some money and that sends you into a panic. 

How are you going to raise investment, you don’t have a bunch of family and friends with cash, you don’t even really know how much you should raise and are worried you’re going to spend it on the wrong things.

But, whilst as founders ourselves, we can understand that anxiety, this blog serves as a guide to raising money the right way.

If there’s a right way, what’s the wrong way?

It’s worth taking a moment to think about the sort of things that folk get wrong when they go out to raise money and almost working your way back from there. From the work we do, here are some of the most common mistakes we’ve seen founders make:

1. Not having a plan.
2. Taking a spray and pray approach.
3. Trying to raise venture capital when you shouldn’t.
4. Not researching the stage, verticals, and thesis of their prospective investors.
5. Raising too much.
6. Raising too little.
7. Not having the right materials.
8. Underestimating the amount of time it takes.
9. Overestimating the value of the business.
10. Not looking at all potential sources of capital

Have a plan

If you’re reading this blog you’re already ahead of the game because it means that you want to ensure that you approach your fundraising in the right way. Planning for your fundraiser is about getting things done in advance, like prep before you cook a big meal. Make sure you have your materials ready, you know who you’re going to approach, who you’re prioritising and why. 

If you approach the fundraise in a haphazard way, investors will pick up that and it’ll jeopardise your chances at success so, always have a plan.

Personalise your approach

It is way too easy to assume that you can just take a spray and pray approach to raising investment. All these folk on LinkedIn with angel, or investor in their profile must be desperate to see your business right?

Wrong.

It is really easy to see who has thought a little about the person on the receiving end of the email or message, and it’ll probably make that person far more open to actually opening your message and having a look at your materials. And even if the investment isn’t for them, it will probably make it a lot more likely that they will give you feedback or even open up their network to you if they can see you’re the sort of person that takes a bit of time to tailor your approach and messaging. It shows you what to build a relationship and aren’t treating this as transactional.

It’s ok not to raise venture capital

We see businesses wasting their time trying to raise venture capital all the time. Why? Because they think the fundraise is the important thing, not a means to an end, or they’re more interested in the headline than the milestones or, and unfortunately, this is the reality for most, they just don’t understand how venture capital works and whether their business fits the model.

How venture capital works is a whole nother blog, but the thing to remember is that VCs are looking for a couple of substantial things – a HUGE market, a team that has proven execution abilities, some form of the moat that will protect their business and that all of this will lead to an exit outcome in the future which has the potential to return the WHOLE fund (not just the investment made).

The reality is that most businesses don’t fit this model and that’s ok, there is nothing wrong with building a great business that makes money and employs people. So take a long look at how big you believe your business can get and whether you, yourself are that interested in or even capable of trying to build a billion dollar venture and if you do decide to chase VC money, at least you’re doing it with your eyes wide open.

Send your fintech deck to a fintech investor

This is part and parcel of personalising your approach. Research the investors that you are interested in bringing on to your cap table, and ensure that you know that you fit their thesis. 

What does this mean?

Most investors will have a pretty specific idea of the verticals (industry sectors) they will invest in, the stage (early, seed or growth), and the cheque size/target ownership they’re looking for. So if you are a pre-seed, fintech business raising a £300,000 round, don’t approach a Series A, edtech investor who deploys £1 – 5m cheques and needs 10% ownership.

The great news is that whether on LinkedIn, Twitter, or their website, almost every investor publishes not only their thesis but also the best way to contact them. Some want emails, others have a form (see ours here), and others still will accept a DM as a first step. 

Raising the right amount

We’ll talk about the problems with raising too much money and raising too little money – from an investor’s perspective in a second but the first step is actually working out how much you need to raise at all. 

And this comes down to having a decent financial model where you can understand – and importantly explain to others – your numbers. As you might imagine, we see a lot of broken financial models with hard-coded numbers, circular references, and all sorts of Excel newbie errors – not to mention the poor understanding of financials in general.

This is where tools like Projected come in very handy, it’s quick and simple to get started with and because it’s built by CFOs and founders, it’s got exactly what you need.

Raising too much

It’s easy when you’re embarking on your fundraise, to just try and raise as much money as you can. This can send a poor signal to investors because it shows you haven’t thought about ownership structure, valuation (as compared to traction) and they would worry they risk spending their money funding endless experiments rather than a coherent plan.

Raising too little

The flip side is not raising enough money to get you through to the next milestone. Investors want to know that you have sufficient runway (cash availability) to see some significant traction. That means that as a founder, you are going to be in constant fundraising mode and not focussed on building. It may even suggest that you have misjudged your growth or revenue projections significantly which would be of concern – investors never expect you to hit forecasts fully, but they don’t want to see fantasy either.

Materials, Materials, Materials

It is not enough to just have a deck and assume that that is enough to get you through a fundraise. But your deck needs to explain the key problem and solution as well as show the market size and business model and, critically, should be well and, professionally, designed

You should expect investors to want to see not only the deck and financial model, but they’ll also want to dig into your data room.

This means they’ll want to see things like your accounts, cap table, significant contracts, technical road map, shareholders agreements, articles of incorporation and all sorts of other bits and pieces to complete their due diligence.

It’s really easy to let this derail a process if the various documents aren’t available (again showing a lack of planning and preparation)

Give yourself the time you need

Most founders underestimate the amount of time it takes to raise a round and again smacks of a lack of planning. You never want to be in a position where you have to take the first deal that’s on the table because you may have to wind things up if you don’t.

At later stages especially, expect a fundraise to take anywhere up to 6 months. Remember you will be talking to 100 – 200 investors and will likely face a lot of rejections (that will help hone your pitch), before getting to a yes. 

That takes time. 

And all the time you will also need to run your business without going crazy. So give yourself sufficient time and headspace to get through. It’ll never be perfect, but leaving it to the last minute is just going to put yourself under pressure that may derail the whole process.

Valuation is a negotiation

Confidently putting on your deck that your business turning over 200k is worth 10m (and yes we have seen this!) may have flown in 2021 but it won’t fly today. Overvaluing your business shows naivety and undervaluing your business means that either you’re desperate or you’ll be easy to take advantage of – neither of these are good looks when an investor is considering your business.

Valuation is always a negotiation, it is the price at which investors will purchase equity in your company and the price you will accept to sell that equity.

So don’t sweat the valuation till you have one, or preferably multiple, term sheets in your hand.

Not all capital is created equal

With all the headlines, it’s no surprise that founders often default to looking at investment as their best source of finance, but it’s actually the most expensive form of financing your business.

If you haven’t already, you should consider the other types of finance that are out there from revenue based financing, to startup loans, to R&D tax credits or grants to invoice factoring to our personal finance, sales!

Remember, your job as a founder is to keep the wheels turning, however you can.

So there we are, our guide to raising money the right way, hit us up with your best tips and tricks to running the capital raise gauntlet.