Are you ready to seek outside funding for your startup? The question of timing when it comes to raising outside money is a key consideration for most startups. How do you know that outside investors will have sufficient interest in your product and significant confidence in you?How do you know that they will invest in your company?
In, other words, what are some telltale signs that your startup won’t get funded?
If you’re like most entrepreneurs, you thought of a great idea and either went out on your own or convinced one or two friends to join the ride and become co-founders. At this stage — although it may seem premature — you need to decide on your corporate structure, especially if you have business partners.
You also need to select a suitable structure based on your longer-term goals and to clearly define the ownership configuration. A competent corporate attorney is essential, as well. Once you have these things in place, you can get to work.
This phase of the company will typically be the bootstrapping one, where you are using your own resources to flesh-out the proof of concept on your product idea and even developing your first prototype or minimum viable product (MVP).
Many entrepreneurs will also do a friends and family round of financing to help the product concept gain maturity, and establish some initial customer traction before they seek outside financing from angel investors or venture capitalists (VCs).
This is a good idea. Raise friends and family funds as convertible debt, with a simple conversion discount based on the first round of outside financing.
Another recommendation: Find at least one outside advisor who has domain expertise in your market. This person can be a guide and sounding board for you. Such people are typically not founders of the company and are compensated with some type of equity package; they may even be early investors in the company.
Now . . . you’re ready to start the process for raising outside money. And here are the red flag signs that that won’t happen.
1. You’re finding it difficult to land investor meetings.
You can’t get investor meetings, or when you do — because you had a friend ask her investor friend a favor — they ask very few questions. This could be for several reasons.
- Lack of team credibility
- Lack of upfront networking with key investors
- Poor backchannel references
- Poor team reputation
- Targeting of the wrong investors
If you’re facing this problem, you need to take a step back and see if you’re actually ready for outside money.
There could also be a problem with your introductory marketing materials, such as the executive summary. The executive summary — like a person’s resume — is designed to get a meeting. That is its sole purpose. If you’re trying to explain too much, or you fail to describe things sufficiently, you may not get the meeting.
2. Your target market is too small and growing slowly.
You may not recognize this issue unless you have done a thorough strategic plan, which looks closely at your market, target customers and competitive landscape. You need to listen to questions from prospective investors talking to you about this issue…