This week marked our second PowerWomen Chat. We sat down with two female entrepreneurs to learn the ropes of Fundraising for Early Stage Startups. What’s a good amount to raise? How to find the right investor? These two PowerWomen, one a business owner and the other an investor, share their approach to it all.
Get the best of both worlds! Think like both an investor AND a business owner.
It’s okay not to know everything about fundraising. Distributing the work between you, a cofounder, or a team, can make things a lot easier.
Keep your industry “friends” close, and your industry resources even closer.
Tiffany Young, Investment Manager at AllBright
Cat Gozzolli, founder of Piccolo
Best of Both Worlds
First things first, as a business owner you shouldn’t expect investors to be walking checkbooks, and as an investor you shouldn’t expect business owners to be walking calculators. Either way it just doesn’t work. It's much better to try acquiring the mindsets of both.
As an investor, your main goal is to find a scalable business model that can generate returns. But before shelling out any funds, Tiffany mentioned that investors often check for a number of red flags. Does the business have a decent portion of equity? Is it going through multiple funding rounds? There’s a lot at stake, but ultimately, it all boils down to how a business is spending, conserving, and expanding its cash flow.
So here’s three terms to live by: cash burn rate, cash head room, and cash runway. Investors like to see that your business isn’t going to breakeven, rather your business is going to be profitable and capable of surviving without as much long-term fundraising.
Yes, we know your main goal as a business owner is to achieve the maximum amount of funding, but it’s important to remember how exactly that funding is being decided upon. Investors conduct extensive valuations based on the financial and commercial elements of your business (i.e. equity drive, transaction multiples, trading costs, your team), so why not create your own valuations beforehand? Prior self-valuations can give you an idea of how investors are actually weighing the different elements of your business. That way, you can be confident in your investment asks and clearly state how much you intend to raise and how those funds will be allocated during the lifespan of your business.
The Money Team
Okay, so you’re not a mathematician… But what if you had a cofounder or team who is?
While some founders are quickly turned off by the idea of giving someone else equity to handle fundraising, others give equity without hesitation.
Take Cat for example. She’s given equity to her two cofounders, but still manages a majority stake in the business. Even though she had previous industry experience, she knew she wouldn’t excel in crunching numbers alone so that’s why she sought out cofounders who could.
There's currently a bias towards cofounding teams in the market at large, but that doesn’t mean you necessarily need a cofounder to succeed. You can simply delineate roles to specific members on your team. When deciding these roles, think wisely about how you’re going to incentivize and hire the right skill sets that complement you and your business. Essentially, it’s about learning how to manage your economics of control—determining how much stake in your business you want to give up and how much you want to retain in your role as a founder.
Who Do You Know?
Whether you have a lot of industry friends or friends of friends, use them to your advantage! Any experiences they have had with fundraising or investment could prove to be valuable, especially if you’re an early stage startup.
If you don’t know anyone in the industry, model your business action after other successful businesses in your sector. See how they are expanding in the market, how they are crafting their team, etc. Once you do find a good business model, you can further understand what the market requires. You’ll be able to prioritize your investment needs and wants as well as use practical examples to base numbers on before sitting down with investors.
The key to fundraising is not going into your investment meetings desperate. Don't think you have to make rash decisions based on the first numbers investors give you. Think in the long term. Think about how you plan to build your network and what relationship you want to have with your investors. In the end, it’s about more than money, it’s about finding the right people you want to be involved in your business.
Want to hear from more PowerWomen and their experiences as female entrepreneurs? Check out our future events here!