Fundraising can be a challenging task for new and experienced founders alike. Deciding the quantum, choosing the financial instruments, chalking out the shares and schemes, and much more are part of the process. Nevertheless, reports show an astonishing growth of the startup ecosystem in the US and the world over.
Considering how 2020 was disrupted by the novel coronavirus. Now, as 2021 has come to an end, the year had made records regarding investment.
About $288 billion was invested globally in venture capital in the first half of 2021 – up by $110 billion from the record-setting 2020.
These numbers are promising and testify for a very positive venture ecosystem for years to come, as the world emerges from the shadows of COVID-19.
If you’re a founder looking forward to raising funds for your start-up or growth-stage company, this read is for you.
Checklist Before you Set Out for Fund-Raising
To facilitate a smooth funding process, contemplate on this checklist:
1. Be sure to adhere to your quantum
Before venturing into fundraising, it is more important to have a pre-planned budget, which will help you figure out how you’re going to use your funds.
For example, for hiring and retaining good employees, you can use ESOPs instead of money offers. Since shares provide a sense of ownership, this will motivate employees to work with increased motivation.
According to Srikanth Iyer, Co-Founder, and CEO at Homelane: “I believe start-ups in their early stages should go for 10-15% of their ESOP pools and increase it as they scale.”
However, founders should remember that by using ESOP to hire talents you exchange your ownership for funds, this is called “Founder Dilution“. Normally, founders should keep around 20% of the stakes but it depends totally on the founder and company value. For example, Jeff Bezos’s shareholding in Amazon has decreased from 42% in 1997 to 10% currently.
Jitendra Gupta, Founder & CEO of Jupiter, joined us for our maiden trica equity Connect Summit to share his fundraising journey. In his unparalleled transparent style here’s what he had to say:
On changing landscape in fundraising:
“It has become easier to raise money today but pressure of performance & delivery has increased regardless of one being a first time founder or one with past experience.“
Thumb rules for first time fundraising:
- Don’t dilute more than 10% in your seed / angel round
- Don’t dilute more than 20-24% in Series A round
- Keep a target of retaining minimum 40-45% stake for the founders group after Series C funding.
On staggering the fundraise:
“My approach is to raise capital when it is available but at the right dilution. Every decision should be made with respect to dilution, that helps in filtering out the extra capital.“
Advise of managing raised capital:
- Hire a highly skilled finance professional, ROI will be really high
- Have an annual expense plan and track it diligently
Watch the entire session here. #tricaconnect
2. Build a diverse, talented core team
Fundraising is dependent on the perspective you create about your company. Your employees are a core component of this perception. If you can boast of a diverse, dynamic, and remarkable talent pool when moving beyond the seed stage, it shows the team is building a strong foundation. This raises your prospects of securing more funds from investors who now see a capable team working for a cause.
3. Highlight the startup’s growth and momentum
Investors are more concerned with multiplying their investment than with your startup. Hence, it is important to graph your growth pattern. For example, look at the graph above which shows the monthly growth pattern of the company over a year, and notice the significant difference between 10% and 30%.
The higher the height of your graph, the more attractive it is to investors. Nothing is going to attract investors more than a 10%+ growth rate per month. Describe how you will maintain that and update the investor before and after you receive the funds.
Your investors have full rights to be updated with your progress so that they feel like they are also part of your incredible journey.
4. Show that your product is market-fit
You can display data here about how your product is doing in the market. Demonstrating that your product suits the market is crucial to attracting new investors.
The following signs indicate your product is market-fit:
- Exponential growth rate (described above)
- Positive feedback from customers (conduct a customer survey)
- High customer retention graph
These are only some signs that indicate your product-market-fit and there are other ways too. This data will bolster your product’s reputation in the eyes of investors.
5. Easy transactions
Provide as much ease as possible for investors in the transaction process. Someone interested in investing in your idea or business should not be asked to spend a considerable amount of time to understand your complicated process before investing.
So, make the process simple and be ready with the required documents.
Some required documents for fundraising are:
- Company Constitution
- Statutory Book
- Shareholders’ Agreement
- Employees’ Information
- Business Financials
- Intellectual Property
- ESOP Scheme (Know more about ESOPs from Jitendra Gupta).
- Cap Table
6. Maintain investor records
It is essential to maintain a record of investors for future reference. Be sure to keep track of their contact information and record their behaviour, too, as that will help you determine whether you should approach them for your next fundraising campaign or not.
7. Ensure that your pitch is strong
“Every time you open mouth,
you let men look into your mind” – Bruce Barton
Be cautious while presenting, writing emails, sending proposals, and communicating over the phone because what you say will reflect your vision and commitment. Give investors a strong reason why they should hear you, what is so special about you, and your idea. Develop the ability to communicate well. So, invest time in composing thoughtful emails, carry out ample research, and control your online as well as offline reputation.
8. Provide easy access to the cap table
Cap table is a very important document, and the investor will ask for it, as it provides all the information regarding the ownership of the startup, current shareholders, types of shares issued, current investors, and ESOP pool.
Make sure that the cap table is up to date and it has all the above information correctly. By looking at the cap table, the investor will understand the investing pattern, which will highly affect the amount of money they will invest.
The best way to provide easy access to the cap table without compromising on its security is to digitize it.
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