Why Do Companies Raise Money?
Companies raise money to be in a position to seize an opportunity. This opportunity usually entails solving a market pain point problem in a novel way. Conversely, investors give money to companies on the assumption that the value of solving a particular market pain point is much greater than the value of their investment.
In the context of a startup company, the founding team usually decides to seek investment in order to either a) get their idea off the ground or b) capture market share. The first type of money is called seed capital or angel funding, the second type usually falls under the category of “Series A” (this will be covered later).
Now before a company can even start thinking about raising money, the founding team must be able to clearly answer two critical questions. Simple, yet extremely significant, they are:
1) What problem will your company solve?
2) Why is your solution better than existing solutions?
For example, let’s say you want to start a meal-kit delivery company.
What problem will your company solve?
“Consumers want to cook fresh organic food, but don’t have the time or desire to research recipes and shop for ingredients.”
Why is your solution the best?
“We deliver all of the ingredients in perfect portions right to the consumer’s door so that they can make delicious, home-cooked meals without going to the grocery store.”
It does not have to be complicated. The problem-solution statement above has been used to raise over 200 million dollars for meal-kit delivery startups in NYC.
Make sure you have a clear problem-solution statement before moving on.
Ok, so you have your vision laid out.
Many startup founders attempt to raise money as soon as possible. That is not always the best option.
Quantifying Your Financial Needs
Before seeking investment, you should know exactly how much you need and what you are going to use it for. Investors will want to see how you plan to use their money.
For example, let’s say your fictional meal-kit delivery company ships 20 boxes a week from your garage. With a $200,000 investment, you would be able to lease a warehouse, design a back-end order fulfillment operation, and triple your marketing budget. Then, you would be able to ship 200 boxes a week within two years.
Investors will want to see something like that, with a bit more detail, to justify your fundraising goals.
Developing the “Pitch”
Once you have your vision and a defined fundraising goal, you can develop your pitch. If you have a clear problem-solution statement and a justification for seeking investment in the first place, you are already halfway finished with your pitch.
To learn how to quickly develop an effective pitch, read this.
A large part of your pitch will be explaining the size of the opportunity.
After all, investors are out to make money and are looking for an ROI between 10X and 25X their initial investment.
However, they expect different types of returns depending on what stage your startup is in. Different stages correlate with different levels of risk. If an investor is taking a bigger risk, they will expect a bigger return… a lower risk, a lower return.
Not sure what stage your startup is in? Check out our guide here,
As explained in the above guide, understanding what stage your business is in is the first step to identifying what kinds of investors you should pitch to.
Not all investors are created equal, so it is essential to understand what kind of investor will be a good fit for your fundraising needs.
Once you define which type will best fit your needs, you can begin the process of identifying and contacting investors.
The actual process of getting in touch with them can be the toughest part of raising startup capital. This is especially true if you don’t already have a strong, extensive network. Most serious investors are extremely busy and receive requests to hear hundreds of pitches per year. In reality, most fundraising starts through warm introductions, and having someone “in your corner” helps open doors.
That’s where Syntiq comes in. Through our powerful investor network, we give you the best possible chance of connecting with the right investor for your startup. From early stage startups looking for seed money, to established firms looking for additional capital, we can help.
Interested in accessing the Syntiq network? Go here.