6 Questions To Ask Yourself When Preparing For Fundraising

Let’s face it, starting your own business is difficult, and no matter how unique your idea is, it’s unlikely to get off the ground without proper funding. Securing the necessary funding to start and sustain a business is one of the biggest hurdles that every aspiring entrepreneur will face.

Fortunately, in Northeast Ohio, there is a growing number investors and organizations dedicated to helping local entrepreneurs succeed. But keep in mind, finding the right investors for your business will take careful research and an unwavering commitment to growing your venture.

Here’s an entrepreneur’s perspective on a few of the questions you should be asking yourself as you prepare for raising outside money—summarized from a very interesting panel discussion I took part in at Startup Scaleup 2017 entitled Get Funded and Grow.

Do I have the right product/market fit?
It should go without saying, but an excellent product/market fit is absolutely crucial if want your business to succeed. You should be focused on getting into the market where you can have the most impact today, instead of waiting years for conditions to be perfect.

With that said, it’s also critical to start the customer discovery process before you go to market, not after. Whether it’s a series of interviews with potential customers who share a common problem, or one to three beta users whom you rely on to give honest feedback on the value of your product, don’t forget to talk to your customers! They are one of your most valuable sources of information

And remember, simplicity of the story is critical. The right return on investment for a customer will be simple and clear. Focus on how your product will make your target customer more money while reducing the amount of work they have to do.

Am I solving the right problem?
It’s common for early-stage companies to be pulled in the wrong direction, because often, opportunities present themselves that tempt you to attempt the task of solving many problems at once. Instead, solve one problem and do it right.

The key is to tune out the noise focus on what customers want to buy—the thing that will solve a legitimate problem they have right now. Once you narrow your scope of expertise and fully understand your customer’s needs, you’ll be able to create a high-quality product that they are willing to pay for. In addition, gaining commitment from beta customers speaks volumes about your product’s efficacy.

How do I know I am actually ready for outside funding?
You must understand that not even a mildly sophisticated investor wants to take giant risks, so it’s unlikely that they will fund many startups in the pure “idea stage,” no matter how great the idea may be. That’s why the best way to be successful in raising outside funding is to demonstrate proof that customers want your solution before you ask for the money.

It helps to approach things as if investors are looking for reasons not to fund you, not the other way around. You will get funded when you eliminate any reason for them not to fund you—which means showing them customer validation, traction, repeatability and predictability.

How do I evaluate different funding opportunities?
Not every source of capital is equal, and when it comes to specific deal terms, it’s very critical for an entrepreneur to have experienced legal counsel to help them make sense of the terms they are being offered and ensure their interests are protected. With that said, here are seven key elements you should pay close attention to when evaluating your various funding options.

  1. Length of process – Know how long the process will likely take from first engagement to funding. You can’t rush an investor’s timeline, but you do need to understand it.
  2. Clarity of process – Gain a handle on the steps and mechanics of how the organization/individual makes the decision to fund.
  3. Clarity of milestones –Even with a clearly defined process, things can drag out if you don’t have the major milestones clearly identified.
  4. Complexity of the process – If the process is too complex, it can often drag out longer than you’d like or anticipate. make sure you have enough runway to make it to the close of the deal.
  5. Accessibility – How accessible are your potential investors for coordination, collaboration and relationship building? An open line of communication is essential for a successful entrepreneur/investor relationship.
  6. Expertise – Are your funders investing the necessary time and resources to learn about different industries—including yours?
  7. Track record – Does the investor have a reputation for doing what they say they’ll do?

Where do sales fit in the equation?
In regulated spaces like healthcare, sales can be a more flexible issue, but as a e general rule, most traditional startups will not get funded without some demonstrated ability to generate sales.

However, in many cases you don’t necessarily need a completed product to begin selling. You can start by selling, or pre-selling, your proof of concept. Letters of intent and early commitments will also be considered sales by most investors.

What investors really want to avoid is an obviously risky investment. By demonstrating sales and creating predictability within your revenue stream, you are eliminating risk, thus increasing your odds of securing funding.

What’s the last thing I need to know or do before closing a deal with an investor?
Remember this—don’t go into a bad investment just because you need the money. Think through the details and downstream ramifications, because if your interests are not aligned, the resulting disputes can wreak havoc on your company.

Ultimately, the best deals always come down to relationships. Focus on build strong relationships with your investors and you’ll have a strong a sense for whether the deal is in your best interest.

Looking for good local funding and business assistance resources? Check out this Northeast Ohio Access To Capital Resource Guide for a list of area venture capital and non-dilutive capital resources, including those specifically designed for female and minority entrepreneurs.