As an entrepreneur, there might come a time when you start looking for outside funding.
Unless you happen to have an incredibly rich and eccentric uncle or a map leading you to a hoard of fabulous treasure, chances are you’re going to be turning to bank loans, angel investors, or venture capitalists when trying to raise money for your business.
Running a business, even a small one, requires a great deal of cash. When used correctly, raising capital can provide entrepreneurs with the resources they need to grow faster than they ever could by themselves.
However, according to the National Small Business Association, 1 in 4 businesses were unable to raise the funding they needed, which severely limited the growth of their businesses.
So how do you raise money for a business?
Pop Quiz: What separates a 6-figure business from an 8-figure business? The answer might surprise you. Find out here.
To answer this question, we turned to 10 of the best VCs, angel investors and founders in the world to see how they’d answer the following questions:
- What’s the biggest benefit from raising money?
- What’s the best way to convince a potential investor to invest in a business?
- What’s the number one rule for anyone seeking funding?
If you want to know the best way to approach, pitch and secure capital for your business, then you’ll definitely want to see what these experts have to say.
- Janine Allis – Plan and Prepare First
- Rob Hayes – Take Time to Find the Right Investor for Your Business
- Nicole Glaros – Raising Capital Is Like Getting Married
- Joshua Baer – Sometimes The Easiest Thing to Change is Your Team
- Kim Teo – Use FOMO
- David Cohen – Raising Capital Should Never Be Your First Option
- Adam Stone – Don’t Sacrifice Long-Term Growth for Short-Term Gain
- Gautam Gupta – Raise Money to Grow, Not to Survive
- Ivan Zhao – Investors Bring Knowledge and Experience, Not Just Money
- Nitesh Banta – Always Be Prepared
- Key Takeaways
Plan and Prepare First
One of the biggest risks and reasons business fail is often due to lack of capital. Unless you have an endless supply of cash, often there will be a point in your business when you will need more funds.
You should be planning your business strategically and financially for a year in advance. With good reporting and cash flow forecasting, you’ll see pretty quickly if and when you need capital. Planning allows you to ask for cash when you have cash in the bank, when banks are more likely to say yes than when you are desperate.
Having a proof of concept is the number one way to convince a potential investor. Showing growth in sales tells the investor that you have a customer base. Keep strong budgets and forecasts and most importantly, make them realistic.
Always be honest whenever you’re looking to raise money. Often I see businesses that have lost money for years and the forecast they show me is that suddenly in the next year, all problems are solved and they are making heaps of profit. This is not believable for an investor and turns them off pretty quickly.
Take Time to Find the Right Investor for Your Business
The number one rule for anyone looking to raise money for their business is to be authentic.
Your goal is to find the right investor for your company, one who is as excited as you are about the company you are building and who will be the best partner for you over the company’s life. I see too many founders try to fit their story to what they think a particular investor wants to hear and that rarely turns out well.
– Rob Hayes, Board Partner at First Round Capital
Raising Capital Is Like Getting Married
The biggest benefit of raising capital is you get the expertise and partnership of individuals experienced at helping grow companies.
Experienced investors that have helped dozens of companies grow can have deep insights on how to help you navigate the challenges you have in your company — they can be great partners and confidants — and the best investors will often be your first phone call when something goes wrong, or when you want to celebrate.
This is why it’s important to screen your investors well, because there are bad actors out there as well who won’t support the companies through the hardships. They simply add to the hardship you’re going through. Raising capital is like getting married, so you only want to do it carefully with someone you want to spend the next 7+ years of your life with.
The best time to raise capital is when you don’t need it! Too often companies raise capital when they don’t have any real product-market fit and the issue is that investor capital becomes the thing that keeps you alive, rather than revenue or their business model, and most of your focus goes into keeping your investors happy, rather than building your business.
When you focus on revenue and profitability, you will build a better product and company and then investors will pitch you to invest, rather than you pitching them.
Most early-stage investors want to invest in great founders working on interesting solutions.The problem with that statement is that “great” and “interesting” are relative to the investor, not to the company.
You never know whether the investor thinks you’re great or if your product is interesting. So the best way to convince an investor to invest is to build a business that’s growing (which shows her that the market will buy the product) and build a relationship with the investor over time, so she gets to know you.
Don’t think about fundraising like a transaction — think of it like a relationship and focus on growing sales!
I do tell founders to target their investors carefully. Understand what kinds of investors are the best fit for your business and target them. That means knowing what sectors, stage and check sizes are common for that investor, what might be competitive in their portfolios, what geographies they invest in, etc.
Additionally, get a warm intro if possible! Investors are bombarded by fundraising requests and you’ll increase the likelihood of getting the meeting if it comes through a trusted source. Lastly, have a backup plan — if you can’t raise, have a plan so your future success doesn’t depend on something you can’t control (investors).
Sometimes The Easiest Thing to Change is Your Team
One of the things that many entrepreneurs don’t realize is that the easiest way to make your business more “investable” is often to add a co-founder or key employee to the team. That can be the fastest way to completely change the trajectory of an early stage venture because the team is such an important part of getting funding.
– Joshua Baer, Founder of Capital Factory
The number one benefit of securing outside funding is that you have the resources to invest in hiring amazing talent before the business can ‘afford’ it. Being able to attract high-quality talent early is crucial to the success of so many startups.
The best way to convince a potential investor is to let your passion speak for you. Get them to fall in love with your vision.
Create FOMO (Fear Of Missing Out) when courting investors. Investors are like anyone else; they want to be sure they’re making the right decision, so use social proof whenever you can.
Raising Capital Should Never Be Your First Option
While angel capital can be used for exploration, venture capital should generally be used to scale something that is already working, or to add more product mix once the first product is clearly working.
Don’t start with the assumption that you should raise capital; it’s not right for the vast majority of businesses and can lead to capital dependency before you know it.
Persuade investors by helping them understand your vision and your obsession. Then help them understand how big and important it can be. Then ask them to help make it a reality.
Finally, don’t lie. It will always come back to bite you in the rear end. Once you have a reputation for lying, word spreads quickly.
– David Cohen, Founder and Managing Partner at Techstars
Attention Founders: There are only 3 things you need to learn if you want to build a successful business. Find out what they are.
Don’t Sacrifice Long-Term Growth for Short-Term Gain
I think the right time to raise money is NOT because you need it, but rather because you believe in your business so much to the extent that there will be endless growth verticals for you to move into.
If you raise for a company just to fix short-term cashflow issues, then you are sacrificing long term growth for short-term gain. If you find yourself in a cash-flow predicament in a cash-flow business, then the best fix is the business model itself not raising capital.
The biggest benefit, therefore, is the ability to increase optionality and decrease risk, for certain types of businesses with long-term potential growth. These normally have a strong IP focus and with serious innovation.
The best way to convince an investor is to present a strong business. Of course, your business is probably not that strong, or you probably wouldn’t have any issues pitching. So it’s important to get the story straight and on point.
A good way to do this is to keep pitching and write down any feedback, especially if you don’t agree with it or don’t see its relevance. It just means that you should address them in your pitches going forward.
The second part is a strategic one: timing. You can have your pitch right and get to what looks like a ‘yes,” however if you don’t have a forcing function in place, then the round may be difficult to pull together.
– Adam Stone, Founder & CEO of Speedlancer
Raise Money to Grow, Not to Survive
It’s never been easier to start a company but also never been harder to scale. I believe in the idea of “default alive/dead” and think it’s important to make sure you are raising capital to accelerate the growth of the business, not just to survive.
Make sure you understand why a potential investor might pass on your pitch and address that concern head on. By addressing it, you can control your narrative.
Finally, understand that the process of raising capital is just as important as the story. Take the time to prepare your pitch, have the important data and reporting ready and know what firms you want to pitch before pushing the start button.
Investors Bring Knowledge and Experience, Not Just Money
For us, the biggest benefit of bringing on investors has been the strong connections to incredible and helpful expertise. Most of our investors are individuals who have been exceptionally generous along the way with advice, wisdom, introductions and support.
The number one rule to follow when seeking funding is to demonstrate intense customer love.
– Ivan Zhao, Founder of Notion
Always Be Prepared
Raising money enables you to move faster toward your vision with a stronger team.
The best fundraisers accomplish two tasks simultaneously.
First, they convince investors that the size of the opportunity can support outsized returns for the investors. What that typically means in startup land is that you could build a multi-billion dollar business.
Second, they convince investors that the company is better positioned than any other company to be the market leader in this massive opportunity. This competitive advantage can be due to team, technology, or traction (or potentially all three).
The number one rule when fundraising is to be prepared. Too many entrepreneurs go in flat-footed when raising capital. They don’t have materials prepared, they haven’t battle-tested their pitch, or they haven’t sequenced conversations to build momentum.
– Nitesh Banta, CEO and Co-founder of B12
When it comes to raising money for your business, it’s vital to know how to convince people that you and your business are worth investing in.
Investors can bring in cash, knowledge and experience, but at the end of the day, it’s you who has to be the one that ultimately decides the fate of your business. Keep in mind that outside funding is a means to an end, not the end goal itself.
Thanks to all the great advice shared by our respondents today, we’ve been able to find a few pieces of advice that many of them consistently agree on, such as:
- Preparation is key. You should be planning out funding strategy at least 6 months in advance, if not more. Nothing turns off a potential investor more than a disorganized and unprepared pitch.
- The money itself is important, but not as important as making sure you’re partnering with the right investors for your business.
- Always be authentic and honest whenever you’re approaching a potential investor.
- Never rely on outside investment as a way to cover short-term problems or for short-term gain. Investment should always be the last option available when it comes to growing your business.
How do you raise money for a business? Are there any tips, tricks, or tactics we missed? How has outside funding helped you grow your business? Let us know in the comments below!