In an age where everyone wants to be an entrepreneur, the startup market gets crowded and it becomes imperative to figure out a way to stand out in front of investors. Here are three tips every startup founder needs to know when raising money:
Put yourself out there and build relationships. Find ways to meet the very best people and listen to their advice. Consider joining an incubator like Y Combinator in order to gain insights from experts who want — and know how — to help. This will also grant you access to great investors and the opportunity to participate in demo days, which lets you showcase your company to a large audience of interested investors in a short period of time. It would ordinarily take months — if it’s even possible — to get on this number of investors’ calendars. I also believe this kind of participation leads to higher valuations, as it adds credibility and validation. Leverage other events as well: Try to get on stage around your product launch at events like TechCrunch Disrupt and other industry gatherings.
Look for investors with more than money — look for sophistication and experience. Family and friend rounds are often done earlier than any formal rounds, and they present an attractive option. However, my personal advice is that raising money from family and friends can be risky (unless they are experienced investors). These are people who you will have in your life for a long time and you are asking them to invest at one of the riskiest times of your company. It may be the greatest gift you provide them, or it may be a source of pain over the Thanksgiving table for years to come. Proceed with caution.Approach investors at the right time. Of course, the right time depends on how many funds exist to chase the idea. Generally speaking, later is typically better, but always leave yourself with negotiating leverage. If you hold off until you’re almost out of cash, you’ll end up potentially being perceived as desperate and less powerful during negotiations. I always appreciate seeing entrepreneurs who are so excited and committed that they have a fair amount of “sweat equity” invested before raising funds. This is more attractive to me than a team that raises money on an idea and their reputation.
Generally, seed investing happens with angels (which may or may not be friends or family) and some VCs, while formal rounds (A, B and C rounds) happen years in, and are largely the province of VCs. There should be about 18 months between early rounds. This is because your investors will be with you for a long time and because their ownership will often come with influence, so chose investors wisely. They should be people whom you can work with, who can offer advice and experience and who want to help you succeed.