Capital for an emerging growth company is like oxygen for a person: You need it to survive.
So, at some point, nearly every founder will encounter the daunting task of raising a round of financing. Founders spend an inordinate amount of time pursuing investors, but what happens once they capture funders’ attention? Are they, in fact, ready to make a strong, compelling pitch? Are they “investor ready?
It’s incredibly challenging to get into a room with a potential investor — and even more difficult given the current economic climate. Acknowledging all the effort behind securing such a meeting, once you’re there, you want to give yourself the absolute best shot possible. During this process, it may feel like the role of “founder” actually transitions to full-time fundraiser. Since time is by far the scarcest resource, it’s helpful to break down the essential steps to establishing investor readiness and efficiently tackle them one by one.
Shore up your legal foundation
No matter how disruptive, groundbreaking or promising a new product or service, any potential investor will both identify and go to great lengths to avoid any glaring red flags.
A company’s corporate documents — covering its formation, trademark protection, the election of its board of directors and officers and the issuance of founder’s stock — must all be in good order. Before they sign on the dotted line, an investor expects a complete list of all stakeholders in the company alongside proof of compliance with federal and state regulations.
In conjunction with the essential documents, every founder needs to protect the company’s intellectual property. They can do this by requiring all employees and contractors to sign a Proprietary Information and Inventions Assignment Agreement (PIIAA), which ensures all confidential information will be kept confidential, and all IP created by the employee or consultant while providing services to the company belongs to the company — and not the individual.
Juggling these high-stakes obligations is undoubtedly overwhelming. As many capable leaders learn throughout their careers, knowing when to seek guidance can make all the difference. Don’t hesitate to seek legal counsel to check each of these boxes.
Build your company’s financial model
Include a projected income statement for roughly three to five years. A successful model demonstrates you understand your market and how the business scales, which is then reflected through the different assumptions you use to build the model. Although investors appreciate the challenge of accurately projecting total revenue each year, expect that your model, particularly for the next 12 months, will accurately identify your costs.
As a founder, you’re responsible for never losing sight of your “runway” — how long before you run out of cash. You calculate this by dividing your cash on hand by your monthly burn rate. Your model should reflect a runway that is long enough to get you to your next round of financing or break even under a more conservative set of revenue assumptions. For example, does the business have enough runway, even if you only achieve half of your expected revenue?
Identify where you are, what you’re trying to achieve and how to get there
Where does the company currently stand, what milestone are you aiming for and how much capital will it take to reach these targeted benchmarks? Each milepost you hit further de-risks the company and increases its value. Think of them as islands and the capital as bridges that take you from one set of milestones to the next.
Does the business have enough runway, even if you only achieve half of your expected revenue? Anthony Millin
You need to ensure you’ve sufficient capital to reach the next goal, or you risk failure for the entire company. Keep in mind the importance of building in a buffer: It almost always takes more time and money to build a successful business than anyone anticipates, so be mindful as you map out the trajectory.
Be in the right room with the right investors
Regardless of a founder’s preparedness, if a healthcare company deals with a fintech investor or a seed-stage startup pitches to a late-stage funder, the founder most likely will not make it out of the room with that investor. While seemingly obvious, too many ignore the reality that securing the investment largely revolves around choosing the right potential investors.
Use available resources to ensure your effort is intentional and targeted. Lean on your advisors — your attorneys, accountants, bankers, etc. — and research platforms like PitchBook. Take the time necessary to explore an investor’s portfolio, the companies in which they’ve invested, these companies’ stages, the industry categorizations and geography to really hone in on your ideal audience.
Wherever possible, look within your network. Warm introductions that offer familiarity will often yield a greater outcome than any cold call attempt. Despite the discomfort, take the chance on someone you know rather than having your name show up “unrecognized” in a stranger’s inbox.
Prepare your investor materials and your performance
No founder should ever enter a room full of investors without meticulously rehearsing their pitch or catering the entire presentation to the specific audience. Preparing an investor deck and pitch is not a static exercise: It evolves, improves and shifts over time as you gain both experience and feedback. It will always present founders with an opportunity to learn and grow.
Be aware of the time you have to pitch. You may have five minutes for a pitch event and 30 minutes for an initial investor meeting; an investor pitch should be adjusted to fit this time window, and should always leave room for questions and conversation. Direct the pitch specifically to the individuals in the room, their area of expertise, their interests and what they seek in terms of investment potential.
Be confident and passionate, as you’re selling your innovation. A potential investor may very well pose the question, “What is it that you’re looking for?” You must have an answer that aligns with what they can provide.
The need to raise capital to support the growth of your business is a lifeline for the organization, and your success will be highly dependent upon your preparedness upon entering the room.
So many founders fail to take the time to ensure all five aforementioned essential pieces are in place as they hyperfocus on securing meetings with investors. With grit and perseverance, the investor meetings will come. The question you will need to answer is: When they do, will you be investor-ready?
Knowledge is power!
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