Fundraising for your scale-up business
Top tips for fundraising: ✓ Prove your product market fit ✓ Focus on unit economics for profitability ✓ Select the most useful investors and do your research
At some point in the life of every business founder, the issue of fundraising for growth is likely to weigh on your mind.
If you’ve decided to look for funding from external sources, such as venture capitalists or angel investors, here are some of the things that could help you land that all-important cheque.
Before seeking investment it’s important that you’ve proven your idea is a good one and that there is a large market for it.
Unless they specialise in very early-stage seed capital, investors will want to know that you’ve got something solid before they hand over their cash.
Gareth Jefferies, Associate at venture capital firm Northzone says “At Series A fundraising, investors would like you to have found product market fit, and by Series B, they will definitely expect to see this. By this stage you should have the core value proposition nailed down and have scalable, well-understood acquisition channels in place – then you can test additional products and geographies separately.”
Anil Stocker, CEO and co-founder at MarketInvoice also advises entrepreneurs to keep everything as lean as possible: “In the early stages of growing your business your focus should be on getting those first customers on board, learning as much as you can and building your product offering around them. It’s best not to dive in to building anything too complex before fundraising if you don’t need to.”
For businesses looking to scale, one of the key pieces of information that investors will be looking for is your unit economics. That is, how much it costs you to sell your product, vs how much you make from it.
Depending what kind of business you’re running, your unit economics may improve as you scale – for example in manufacturing and retail higher volume tends to bring your overall costs per unit down. However, in service-based businesses you’re more likely to need to hire extra staff as you scale up to handle the extra workload, which may mean your unit economics won’t improve much over time.
Stocker says “You need either stable unit economics or an impressive growth rate when fundraising. Ideally, you’d have both, but that depends on the type of business you’re running. Even if you’ve got investors on board with your growth rate and popularity, there will come a time when they start to ask questions about profit and having a solid idea of cost and profit per unit will help you get there.”
“There are, of course, some very large companies which are not profitable. Facebook scaled without a profitable model to build the network effect, with the expectation that they would monetise once the network was built.”
There is no shortage of people looking to invest in new and promising businesses, so be sure about what you want from any prospective partnership.
Are you looking for someone who has experience with businesses in your industry? Or perhaps you’re looking for a partner who can help open doors to international expansion? Whatever your priorities are, select the top individuals you want to speak to and tailor your pitch appropriately.
“My advice would be to work out who the people are that you’re going to be pitching to and what’s going to attract them to your business” says Stocker. “Also, It’s a good idea to get friendly introductions to these people. A cold approach is unlikely to get you a meeting, so really work your network of contacts to find someone who can introduce you and vouch for your business.”
Another tactic that some entrepreneurs use is to highlight the investors you most want to work with and set up those meetings last. That way, you’ll have had plenty of practice and perfected your pitch with feedback from other fundraising meetings along the way.
As with most areas of life, there are trends or fads in business which influence fundraising.
Ilya Kondrashov, COO and co-founder of MarketInvoice advises businesses to stay true to their plan: “A few years ago market share was all-important to investors. The key goal for start-ups was to get big, fast. If you could demonstrate that you had large market share, regardless of profitability, fundraising was easier so people were going for growth at all costs.”
“More recently, investors want to see a path to profitability. Market share is great, but changing your product to increase revenue is a large risk, especially if your customers are price-sensitive. Once you increase your prices you’re likely to start seeing market share diminishing.”
Entrepreneurs should aim to build a profitable core business model and focus on that regardless of what venture capitalists seem to have an appetite for. In time, the only question asked of your business will be about profit.
When you fundraise, the investors who decide to back you will do their due diligence on you and your company, so you should also be doing your own.
Bringing an investor on board is the start of a long-term relationship, so you need to be sure what you’re getting into. Make sure you can work well with the individuals involved, that the company’s priorities and vision are aligned to yours and that the partnership is likely to be mutually beneficial.
Also, be sure to set clear expectations and boundaries around board approvals and intervention. As with all personnel, board members need to be managed and communicated with appropriately, so neither party becomes frustrated with the partnership.