by Ross Kimbarovsky, founder of crowdSPRING
It’s not enough to have a great idea. While you might be able to bootstrap your businesses, many founders will need outside funding to start (or grow) their businesses.
You might get lucky and raise start-up capital from venture capital firms. But the vast majority of founders raise the initial funding for their business from friends and family, or angel investors, wealthy individuals who fund new startups.
To improve your chances to raise funds from any possible source, consider the following tips:
Have a plan.
Your plan does not need to be a formal, 100-page document. It can be a simple PowerPoint or Keynote presentation.
The act of writing a plan forces you to crystallize your thoughts and to make sure that you could articulate your ideas succinctly, accurately, and with sufficient detail. It also forces you to thoroughly research the market and competitors.
Include a good description of your business, light financial projections, and a competitive market analysis.
Research. Research. Research.
Know your business. Know your market and your competitors.
Most investors are smart people. They’ll want to know about your idea, the potential market, the competitors, the pitfalls,etc. While it’s impossible to prepare to answer every single question, you should try to learn as much as you possible can so that you are ready.
Potential investors will quickly tune you out if you can’t answer key questions about your business.
Practice. Practice. Practice.
I can’t stress this one enough.
Find the smartest people you can and persuade them to be brutally honest with you. You’ll really appreciate this later, even if you’re uncomfortable about this initially. Pitch your idea to those people and then listen carefully to their feedback.
Be transparent.
Be honest and don’t hide things. Be sure that in your written materials as well as in your oral presentations, you are fully transparent about your business, what you’re looking to do, and what you want from investors.
Consider crowdfunding.
You can also consider raising money from your friends, family, members, customers or clients through crowdfunding sites like Kickstarter.com, Indiegogo.com or Peerbackers.com. You can ask for a specific amount of money and in return for the donations received, offer prizes to reward those who believe in you.
You can also tap communities like Kiva.org’s Kiva Zip program. Unlike traditional crowdfunding sites where you exchange prizes for donations, Kiva Zip allows you to crowdsource a 0% interest loans.
Find the right investors.
This is easier said than done. For many new businesses, any investor is the right investor. But some investors will make you miserable. It’s always a good idea to look for experienced investors.
Novice investors may demand a lot of attention, and this becomes very difficult when you are trying to run your company.
But don’t ignore novice investors merely for this reason. Several of the investors who invested in crowdSPRING, for example, had never invested in an Internet start-up. They’ve been really valuable over the years with their advice.
Limit the number of investors.
If you have too many investors, you’ll have to manage many relationships and expectations. While for some, there is no way around it, try to keep the number of investors under two dozen.
Be prepared with legal documents.
If you are asking others, especially strangers, to give you lots of money, don’t be surprised that they’ll want to see equity financing documents. And you don’t want to start thinking about such documents too late in the capital raising process. The most important take-away: when an investor indicates their interest, have your equity financing documents ready. Don’t ask them to wait. Either bring the documents with you or FedEx for next day delivery.
You can download free templates for equity financing documents from YCombinator, but this is a complex area and you really should consult an attorney if you’re raising outside funding.
Pro Tip: Equity Financing Documents
You can download free templates for equity financing documents from YCombinator, but this is a complex area and you really should consult an attorney if you’re raising outside funding.
Keep working on your new business while you raise capital.
Raising capital takes time. A lot of time.
During the time that you raise capital, you must remember to keep working on your business. If you focus solely on raising capital and ignore your idea, you not only run the risk of failure but your investors and potential investors will wonder whether you will be able to complete your seed round and launch your company. You must find a way to do both.
Don’t take rejection personally.
You’ll be rejected. A lot. By very smart people. In all aspects of business.
Don’t take rejection personally. People will decline to invest for many reasons. Some won’t see much merit in your idea. Others will think that you are inexperienced. Still others might decline because the terms of the investment don’t fit their investment requirements.
Don’t ignore rejection. Learn from it.
Simplify negotiations with investors.
Instead of negotiating separate deals with each investor, figure out what share of your new business you would be comfortable selling in return for the investment. Then divide it proportionally based on the amount of the investment, so that each investor pays a proportional share for their interest.
Raising capital is hard. It requires a lot of preparation and effort. Many new businesses fail because they can’t raise sufficient funding. It will be one of the most difficult things you’ll ever do with your business. But – it’s not impossible if you properly prepare.
Ross Kimbarovsky is founder and CEO at crowdSPRING and Startup Foundry. In 2007, Ross left a successful 13-year career as a trial lawyer to pursue his dream of founding a technology company (in part so that he could wear shorts and sandals to work every day) by founding crowdSPRING – one of the world’s leading marketplaces for crowdsourced logo design, web design, graphic design, product design, and company naming services.
