Jan 23, 2019
DOs and DON’Ts of startup idea testing
In our previous blogs, we talked about how to test your ideas and how to build the right team in order to turn your ideas into awesome products. Especially if you are a first time founder, however, you’ll probably lack the financial resources to put all this into practice without some additional help. Getting people to put money into the early stages of your idea can be a daunting task. That’s why we talked to Daniel Gutenberg, one of the most active Swiss Angel Investors, to find out about the secrets of early stage investing.
The 3 topics we covered are:
Let’s have a closer look at them. You can listen to the full interview with Daniel here.
Fundraising means putting a price tag on your company. Especially for first time founders this may not be such a straightforward process. Therefore, it may be tempting to look at the valuation of your peers for guidance. This can however lead to an unhealthy upward spiral of ever higher valuations which are completely unsustainable. Consequently, you risk your next round to be a down round. This casts a bad light on your ability to make realistic estimations and can also be a source of serious demotivation for the founding team. Therefore, instead of going for the highest valuation possible, it may be advisable to consult with a range of seasoned investors on how they would value your company based on their experience.
The next difficult numbers question is how much money to raise. The general wisdom here is to always raise for achieving your next milestone. This may be a beta product, a certain number of customers or similar. The milestone should be defined in a way that it will allow you to attract new investors based on it. Once you determined the amount of financial resources needed to achieve the milestone, you’ll want to raise double that, since it always takes longer to get there than you expect. Also consider that it will typically take you between 3 to 4 months to close an investment round, so the round should give you runway for at least a year or better more.
Establishing contact with investors
The best way to establish contact with potential investors is through their network or portfolio companies. Send a comprehensive business plan, covering all important areas of business such as the team, go-to-market strategy, competition, etc. Try to focus on the underlying logic rather than on the exact number of office chairs you will be buying in the next 3 years. Also try not to exceed 20 pages with the entire deck. For a first meeting, be prepared to talk about yourself and your track record. At a very early stage, it is as much about you and your ability to execute as about your business idea.
Managing the process
Fundraising is like a sales process. Much of the success is based on having a broad enough funnel and a well-structured process. Don’t expect your investors to manage the process for you. Be clear on the timeline and the next steps.
Think about how to structure your investors. You will most likely want more than one in order to minimise risk exposure. You however also don’t want too many since this will make managing them time-consuming and cumbersome. Also beware of large numbers of „non-professional“ investors, such as friends and family. While they may be a viable source of funds, it’s important to structure their contributions in a way that their participation will not hold you back once you enter a high growth stage.
If you have a variety of investors lined up to choose from, don’t hesitate to do your own due-diligence, for example by talking to CEOs of their portfolio companies.
After the round is closed
One of the sensitive and tricky questions which often comes up after a successful fundraising round is how much the founders should now be paid. Daniel Gutenberg’s view on this is clear: „If you really believe you are building a unicorn, then investing every cent you have into it is the only logical way to go.“ This decision will depend very much on your personal situation, particularly if you are supporting people besides yourself, for example a family.
With regards to your investors, don’t be surprised if they decide to take a more hands-off approach and are not looking for an active role in the company, for example on the board. They will most likely be heavily involved again once you see an exit or similar on the horizon.
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