​​​​​​​The Art of Fundraising

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As a mentor I get involved in a huge cross section of businesses in different sectors and at different stages of their development. As a result I have been involved in many hundreds of meetings about almost every aspect of setting up and running a business, but it would be true to say that raising money is the most common conversation of all.

There are maybe two reasons for this: firstly, many companies find that at some point they need to raise external funding; and secondly, finance is probably the area that most founders feel most uncomfortable with or understand the least.

The actual conversations cover the whole range of subjects around the process but again one of the most common parts of any conversation is ‘how exactly do I value my company?’ Well, put simply, for an early stage business there is no simple or exact way and there is definitely no real science behind it which means that I always approach the issue as looking at it as ‘the art of fundraising’. The art is everything from the valuation all the way through to what is the best way to go about it and who do you involve. Unless you get all of these things right then the chances of your fundraising campaign being successful are greatly reduced.

One of my most common themes in my conversations, my BBC Radio interviews and my numerous articles is the need to write a good business plan, whether you are looking at fundraising or not. And a critical part of the business plan is the accounts to date and the financial forecasts for the future. It is these financial forecasts that are a major part of arriving at a valuation for an early stage business. But what is even more important is the assumptions used in arriving at those forecasts. These assumptions must be well thought out, realistic, achievable, and defendable.

As an early stage business it is not possible to use the normal valuation methods that would be used for more established companies such as the price to earnings ratio or discounted cash flow and hence the valuation itself is also much more of an art. There are many different variations on the valuation of an early stage business but these would typically include:

  • Is the company pre revenue or already making sales?
  • Is it still loss making or already profitable?
  • What is the size of your total potential market and what is a realistic market share to aim for?
  • What are the barriers to entry to prevent new competition challenging you in the future?
  • What is the strength and depth of the management team?
  • Is there a good Advisory Board in place?
  • How much is being raised and how will the money be spent?
  • Will there be further fundraising rounds?
  • Do you already have plans to introduce new products or services?
  • Do you have an exit strategy? If so what is it and when?

On top of all the other variables is the fact that a ‘sensible’ valuation can depend on where and how the funding is to be raised. But it is very important not to set the valuation too high as not only will this jeopardise the fundraise, but it would be extremely damaging to go back for a subsequent round at a lower valuation. As such, it is always better to under promise and over deliver and leave some room for flexibility in the future.

This then leads on to choosing the best way of actually raising funds for your business. The best route will vary from business to business depending upon the type of product or service; whether you are looking for pre-seed, seed, series A, or series B funding; what the funds are required for; the size of the fundraise; whether you seek a financial investor or a strategic investor or ‘smart’ money with contacts that will play an active and informed role; and a whole range of other variables.

As is obvious already, there is an almost infinite matrix of variables regarding fundraising and with early stage businesses there are not the same fixed guidelines as there are with larger and better established companies. All of this is why fundraising cannot really be described as a science but is actually much more of an art.

But nevertheless, it is very important to understand the art of fundraising and to ensure that that knowledge is used to increase your chances of success. I would suggest that you should always seek a number of opinions as well as doing as much online research as possible to see what other similar companies at a similar stage of development have done. Not only will this help you decide what is the best route to take but it will also give you good direct comparisons for the valuation. I wrote a two page article in the March / April edition of Startups Magazine and also two articles in The Mentor’s Perspective series available on the website and on my LinkedIn page that outlines some of the major funding routes and the benefits and drawbacks of each.

But whichever way is finally decided upon, the same basics will be required, albeit they may vary in the depth of detail required depending upon the size of the raise and the investors that you are approaching. You will certainly need:

  • Business Plan with a good punchy executive summary
  • Pitch deck
  • Deep knowledge of your business and the market and be able to communicate that
  • Management Team with experience appropriate to the size and stage of your business
  • Advisory Board that can add high level support and guidance
  • Valuation that you have arrived at and the rationale behind it – most founders over value
  • Equity amount being offered in exchange for the investment
  • Amount required in the fund raise and a breakdown of how the funds will be used

All of this needs to be presented in a very professional way as if you are not able to do that then any potential investors will certainly take the view that they cannot trust you with their money or indeed to run the business well.

Given that there are so many elements to fundraising, and given that it is an art and not an exact science means that it will take longer to achieve than most business owners realise or allow for. That is, it will take both longer from start to finish and longer in terms of the amount of time and effort required. A typical fund raising campaign will take six months from starting, to obtaining the actual investment monies, although this can of course be much quicker or longer. And unless you are a larger business then you as a founder or one of a small management team will be diverted for many, many hours every week from actually running and growing your business and this can of course prove to be detrimental to sales or even the business as a whole.

So, it can be seen that fundraising is a complicated and inexact art but the more you know and understand about it the better your chances are of success. You should seek advice and guidance and get assistance to help you ensure that you raise the right amount of money, at the right valuation, and in the most appropriate way for your business. These can also make sure that some of the fundraising burden is shared with someone else and you will be able to spend a little more time on running the business.