There is a myriad of considerations entrepreneurs must grapple with when they raise outside capital: When should I raise money? At what valuation? Should I sell control or a minority stake? While all these questions are absolutely critical, there is a key consideration that precedes these questions: how do I find investors?
Who are your mentors?
Before you start meeting with potential investors, a great first step is to find industry mentors, both on the operating and investing side, who can serve as “honest brokers” for you throughout your fundraising process. These mentors could be entrepreneurs in your industry who have successfully raised capital in the past, investment professionals who you respect but are not necessarily an option for you, investment bankers, or others with the expertise and experience to guide you. These folks, who most likely have been through fundraising processes, are a great jumping-off point for understanding the relevant investor universe in your space.
What do you want in an investor?
Sure, all cars can get you from point A to point B, but the style, handling and experience along the journey—as well as the likely maintenance required— will be very different depending on the make and model you choose. The same can be said of the entrepreneur’s journey from point A (investment) to point B (exit). As an entrepreneur, you need to ask yourself if you want an activist investor who will be on calls with you several times a week and help you make “in the weeds” decisions on issues like pricing, suppliers and new hires, or if you want passive capital that will write you a check and only see you four times per year at board meetings Or, perhaps you want a firm that has deep experience in your sector, or a firm that has deep experience in a distant location where your company hopes to expand. There is no right answer to the type of investor question, but aligning yourself with an investor who shares your vision is a great foundation for a successful partnership. The first step in doing so, of course, is for you to decide yourself what you want and need. Make sure you conduct reference calls with several of the potential investor’s current and former portfolio companies to understand the firm’s style, and, more specifically, the style of the specific investor who will be leading the investment in your company.
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How much money are you raising?
If you are raising 2 million, your potential investor-set will be very different than if you are raising 10 million. Most businesses need to put a defined minimum amount of equity capital to work in each deal, so you don’t want to find yourself raising 2 million but pitching to a firm who needs to put 10 million to work in a platform deal. They’re probably only meeting with you to learn about your company or they view your company as an add-on for an existing portfolio company. Similarly, if a firm’s average check size is 50 million and they are willing to write checks for as little as 10 million—which happens to be what you are raising—you need to understand the implications of this: the firm will likely pay much less attention to its investment in you because you are a much smaller portion of their fund, so if their investment in your company does not succeed, it’s less impactful than if one of their 50 million investments falters. Another scenario is you may plan to operate your company at a loss for the next few years to invest in sales and marketing, which would require equity to plug the loss. Some firms might tell you they are okay with this strategy, but make sure that they have done it before; otherwise this will cause uncomfortable conversations every time you need a new capital infusion.
Understand the Competition.
No matter how unique your idea and business is, there are comparable companies who have raised capital in your space. Their products may be different, but there are almost certainly companies that have served either the same market, need-state or customer-set that you serve.
To obtain a more realistic Competition set, look in the direction of DSI who can help you identify the ten businesses in your space whose growth trajectory you most admire—companies that are a few years ahead of you in their lifecycle. Presumably a few of these companies have raised money: we will help you identify the investors they raised money from when the brands were your size. While you probably won’t raise capital from the same investors, you can learn which investors lost out on the opportunity to invest, which ones are still bullish on the space, and which investors have a similar profile to those that did invest in your competitors.
Sit back and relax
We will go out and pitch for you! We will guide you.
At DSI we believe that your future holds better promises for you than your past.