Every ambitious startup founder has an innate desire to raise funds to help his venture grow. We are bombarded with news of millions of dollars being raised by various innovative startups and we feel we need to do the same. But before we get too excited, let’s ask ourselves are we ready to raise funds yet?
Team Arthayan has compiled a checklist for early-stage startup founders to refer to while deciding whether they are ready to raise funds. This is a checklist that every founder needs to analyze with complete honesty and then come to a conclusion about raising funds. This checklist also helps founders chart a path for their startup to reach a stage where they should be raising funds.
Still experimenting or ready to work?
If you are at a stage where you are dabbling with a few ideas and testing if they work then you better not reach for your phone to call an investor. Investors prefer actual work and not ideas in the majority of cases. Exceptions to this statement are when the founder has a great proven track record with some other venture or is a subject matter expert.
Do you have a business plan in place?
No, don’t tell us. Show it to us on a paper. It is critical to pen down your business plan and support it with sufficient market research, competitor analysis, revenue model justification. If this document is not ready with you then it should be put on your task list as a priority action item.
What about customers?
The most important question to ask yourself, do you have paying customers using your product or service? Customers are the single greatest validation any investor will look for. In cases where the fund is being raised as seed money then you need to be ready with research about people already paying for similar or inferior products/services from another company.
Have you planned for the utilization of funds?
Imagine you got the funds that you pitched for. Now what? How will you utilize them? What results will it bring? The thing about investor money is that it is bound to burn up real fast if there isn’t a structured milestone-based path for using it. Investors demand a detailed fund utilization plan from the founders. They want to know how each and every penny they give you is going to be used and why.
Financial projections and valuation?
Investor says, ‘Hey listen I am ready to give you an X amount and I want Y percent equity for it’. How do you know what the investor is proposing is a good or bad deal for you? Enter financial projections and valuation which gives you a good idea of the value of shares in your company and places you in a better position to negotiate with the investor. Before you have your 3-year financial projections and valuation in place it's moot to discuss anything with an investor.
What is in it for the investor?
In the process of fundraising one thing founders often neglect is to put themselves in the shoes of an investor. They forget to think from an investor’s point of view. As a founder, you should have a very clear answer ready for ‘what is in it for the investor?’. The answer usually consist of return on investment at the exit stage.
Are you a team player?
This question is applicable only for founders who have the money to invest in their startups and don’t need funding from an investor. While we understand that raising funds from external investors dilutes your risk, we would like to tell you it's not just the money you’ll be getting. Investment is usually coupled with demands, opinions, approval processes, discussions in decision making, etc. If you are not a team player and like to run things in your own way this may get taxing for you. It may have negative effects on your performance and thus indirectly on the startups as well. So we advise you to think a lot about the investment and its tradeoff. For the rest of the founders who don’t have the money, you need to be a team player and accept the investor money and everything that comes along with it.