What Goes on in Investor’s Mind? Part 4
In the past few years, the demand for financing has increased exponentially. The process of fundraising is as much of a challenge as it is an opportunity. It involves extensive planning, diligence, and perseverance- so it's important to understand what investors go through the time before they invest in your company.
One of the most challenging aspects of the fundraising process is to keep an investor on your side throughout the entire process. That doesn't mean you can't lose them — on the contrary, sometimes you need to be more active than they are to keep them with you through all stages of the fundraising process. You'll want to be able to answer their questions about your business and help convince them that you're worth the risk.
Table of Contents
Hacking Investment Thesis
Let’s study the above graph for hacking investment thesis.
1. Start of Product Development – Funds raised by own funds or friends and family. You may need to invest in your team called “Bootstrapping”. Mostly includes teams or founders. The money usually raised is USD 100K. The revenue in this phase or stage is negative with a high cash burn rate.
2. Mid Product Development – Funds raised from seed funding. Mostly includes teams or founders. The product must be fully built out before you can sell it. The money usually raised is USD 500K. The revenue in this phase or stage is negative with a high cash burn rate.
3. End of Product Development – Funds raised by Series A round of funding. The product is validated in the market, whether it is a good fit and people are willing to buy it. The product team will have to ensure that it is ready for market and has everything it needs to succeed. The money usually raised is USD 3M. The revenue in this phase or stage is still negative with a high cash burn rate but starts to rise.
4. Scalability and ROI - Funds raised by Series B round of funding. The product is distributed in the market on a large scale. This is where companies start making money through their product offering. The money usually raised is USD 10M. The revenue in this phase or stage starts to become positive, giving profits to the investors.
Most of the time VCs provide funding for sales and marketing efforts. The revenue here is positive with a low cash burn rate, but this needs to be done by a strong team that knows how to sell products online and offline.
5. After this comes full scalability at point E where the company has reached a product market fit where the product has become profitable and has generated positive cash flow from operations for at least one year (usually two). The company has reached sales growth where it has been able to maintain its sales growth through continued investment in marketing and sales efforts, which have resulted in increased revenues and profits.
At this point you have reached market fit, meaning that there is already a demand for your product or service, so now it's time to focus on scaling your business by adding new features and products until you reach 100-200% monthly recurring revenue (MRR), which means that you are making enough money to cover all of your expenses so that you can reinvest profits into expanding the business even further.
Right Time to Raise Investment
When you are raising your first round of funding, you want to make sure that you are raising the right amount of money at the right time. The most important thing is to not raise more than you need. Raising investment is a key moment in any business. When your business is ready, you should raise funds to help scale it and get it off the ground.
In today's world, it is difficult to set a time frame for when you will raise your next round of funding. There are so many factors that could affect your business and its performance. Some things can help you determine whether now is a good time or not.
• Committed to your venture- You need to be committed to your venture. You will work with investors and management to develop a business plan that's aligned with your goals and values. The more committed you are, the better they'll take care of you when it comes to setting up your company's finances.
• You will work to make this business work- You need to be comfortable with the challenges of running a business. You can't plan on getting your money back for years or even months, so you will have to be prepared for the long haul.
You should be able to work towards making the business work by working hard, following the right path, keeping track of your expenses, and making sure that everything is under control. You should be able to take proper decisions based on these factors so that you do not run into any problems later.
• Strong belief in your execution capabilities - The right time to raise investment is when you have the right people and a strong belief in your business model. Your startup should be able to generate revenue, have a product-market fit and be ready for growth.
Investors have high expectations of how well you'll execute those plans. They want to see strong execution capabilities and confidence that their investment will pay off in the end. Investors want to see that their money is going toward a genuine opportunity rather than a gamble or something unproven. They want proof that your idea has legs before investing in it!
• Set practical milestones- You should come up with practical milestones that are achievable and scalable. You want to create a plan that can generate ROI for the investors.
Set practical milestones that can be achieved over time and get feedback from the market. It's important to set these milestones based on your team's capabilities rather than the external perception of how fast you should grow or what type of return investors should expect from their investment.
• Scalable and can generate RoI- To raise investment, you need to have a scalable business model that you can show investors. You will be able to use this money for marketing purposes or other similar activities which help increase your customer base or increase sales revenue.
Do not raise investment in case of the following situations or conditions:
• Will do business only if it is funded.
• Someone else has raised investment.
• To increase visibility.
• Experimenting with ideas with investors’ money.
• Easy availability, take now and decide later.
To understand furthermore read our blog on 7 stages in startups – When is the best time to raise funds? Here:
https://www.datakatalyst.com/post/7-stages-in-startups-when-is-the-best-time-to-raise-funds
Conclusion
Raising investment is a long-term process and should not be rushed. You should prepare for a long fight and be ready for tough decisions. In general, if you think your business has the potential for revenue growth, market traction, and scalability, it's time to start raising investment.