Before You Ask For Funding
… pay attention to these points
It’s Friday and we are back with another helpful article for you. You don’t want to miss this one.
We bring you an article written by Ifeoma Nwakwesi Uddoh, a Nigerian social entrepreneur. She is the founder of Shecluded, a financial literacy and credit company focused on the success of women-led businesses in Africa. Ifeoma’s expertise lies in MVP, business development, products (product road map, feature phasing, usability testing, iteration), operations, women financing, and seed investing.
In December 2019 Uddoh was one of five female entrepreneurs to emerge as winners of a UK-Nigeria Tech Hub competition sponsored by the British High Commission in Lagos.
She shared some things to keep in mind while talking to investors.
A while back, I took up a role in a technology seed funding company. Before that, I had worked in executive roles with a few technology companies that have raised money for growth.
As such, my perception had always been from the receiver’s side; I’ve experienced the high hopes that fill your heart when an investor is interested in your startup. The wait and the distraction from the business while you try to hold their interest. The nerve-racking due diligence preparations. And the long silence that often mean the investor could pass on this opportunity. Investor interest doesn’t always result in investment. And when we tried to find out why the investment didn’t go through, we almost never got any clear, specific reasons.
After a year on the other side — the investor side — especially at a time when the Nigerian tech space is abuzz, I have been repeatedly asked for some sort of checklist that startups can work with to increase the chances that we’ll eventually invest. I’m not sure this is entirely a great idea because it’s kind of like working to be exactly what the investor wants, which is not the goal of investment. What an investor is trying to do is back the venture you have created with the resources it needs to scale.
Having said that, there are certainly a few important things you need to keep in mind for when you are talking to investors. And never forget that a compelling business idea, the track record of the founder(s), and the capabilities of the team are key things potential backers look out for.
- Funding is not a source of revenue
It is a short-term lifeline to gain traction. Show that you understand that.
Investors will typically fund only startups that demonstrate clear potential to grow into a viable business. This is why it is not a great idea to still be articulating the value of your product while asking for funding. Sketchy revenue assumptions and no definition of who your customers are won’t do you any favours either.
I have heard a lot of founders say: “but when Facebook and Twitter started, they weren’t making any money and really weren’t sure how they would make money”.
“If your product isn’t exportable beyond Nigeria and you aren’t in Silicon Valley, you would be better off basing your assumptions on the local environment”.
- Do your homework
What are the alternatives to your product/service? What is your exact market size? Is it a marginal niche or mass market? What are the barriers to entry for new competition? Is the technology replicable? Who are your early customers? What is your burn rate? What is the go-to-market plan on a lean budget? Do similar products exist in other markets?
I listened to a pitch from a startup that was working to create a platform for drivers, and I asked the entrepreneur if they had heard of Uber. They said “no”. On another occasion, I listened to another entrepreneur pitch us on audio format e-books and I asked them if they knew of a similar service called Audible. As it turns out, they didn’t know about Audible.
You must know that except you are creating a very disruptive product, a similar product probably already exists on the market, and you can learn from it if you will take some time to do the research.
Some ignorance is not a death sentence. When presented with areas you failed to cover, show that you have a learning spirit by taking down points for research. After you figure it out, send the investor an email with your thoughts. That shows investors that you are teachable and are passionate about innovation.
- Are you ready for funding?
There is a stage just before your startup starts becoming attractive to investors. It is that stage where you have a clear focus of who your customers are, and you’ve most likely bootstrapped to the point where you have a minimum viable product. Anything before this is an emotional decision on the part of an investor. It is hard to procure investment at this stage without parting with a large amount of equity.
Bootstrap as much as you can.
- How much funding do you really need?
Whenever I see a “funding ask” of up to $2 million for a startup — and this happens very often, even for e-commerce sites built on templates — I quickly go to their financials to see the cost breakdown and revenue projections. Most of the time, a chunk of the funds are allocated to recurring expenses. If your product development costs $2 million, the product had better be disruptive or be throwing off cash from day one.
The best practice in the technology startup realm is to develop the product in phases. At the seed level, you should be asking for the funding you need for a particular phase, and make sure that phase results in a working prototype.
If your recurring expenditure is high and you don’t have a big pocket to draw money from, you would run out of money.
- Don’t stay in the same place
If your startup is in the same place it was six months ago, it might as well be dead.
The first time you talk to an investor might be the beginning of an interest in your startup. So, even though they don’t make an offer immediately or act interested, they might want to look at your start-up 4–5 months later to check out your progress. Zero user growth and a stagnant MVP in technology where product iteration and feature release is key is a giant strike. If the conversion of your sales prospect list from 6 months ago is still zero, there is a problem.
I have talked to a few startups with this issue and most of them attribute it to financial constraints. I once read a quote by Eric Ries that says:
‘startups that succeed are those that manage to iterate enough times before they run out of resources.’
- How big is the opportunity?
Some products and services might have a tangible market opportunity, but might not be disruptive enough to create exponential returns. What this means is, at their peak, these startups may make enough to get by but said returns would not be large enough for an investor.
A lot of self-declared startups fall into this category. They are at best lifestyle businesses. But that doesn’t mean they aren’t good businesses. When I come across them, I try to be upfront with the entrepreneur. If this is you, consider looking for grants, loans from friends and family, and growing your customers quickly to the point that the venture becomes self-sustaining.
- Don’t focus on fundraising at the expense of growing the business
One of the top mistakes that can kill a startup is when the founder is focused on chasing investors, and not customers. While you’re trying to raise funds quickly, it’s important to know when to draw back. Be careful not to become a notorious “always trying to raise money” entrepreneur.
Too much focus on raising money will take your eyes off what’s important…growing the business.
(This is also why co-founders are important).
- It’s important to look the part
Asking for a seed investment of just $50,000- $100,000 when you look unkempt and possibly homeless doesn’t exactly inspire investor confidence. Investors often make investment decisions based on both subjective and objective factors. You don’t want investors thinking that their funds will be going to your personal needs.
You don’t need to wear expensive clothes or be obviously fashion-forward; just look clean and dress the part.
- All you need is funding? Wrong
If you haven’t seen the Dragon’s Den TV show, you really should. There have been a few occasions on the programme where an entrepreneur had to choose which investor they wanted to go with. Beyond funding, the savvy ones choose investors with experience and business networks in the markets they are trying to get into.
When you pitch to an investor, it is an effective strategy to request for more than seed funding. You should indicate interest in their business network, resources, and skills. Doing this gives the investor security that you are in this to win.
None of this is set in stone, by the way. There’s a lot more that I could say that has not been contemplated in this piece. But I’ll say one last thing. The truth is, not all startups get funding. Most eventually fail, which is not a bad thing for the ecosystem as we only learn from failure. Remember, a startup is a temporary organisation used to search for a repeatable and scalable business model — Steve Blank.
There you have it
Things to understand before talking to that investor
I hope this has helped you.
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