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This article was contributed by Mike Fay, CEO and co-founder of Island,
This is the lucky time to be a technology startup. Global venture capital investments reached more than $ 157 billion in fiscal year 2021 alone, a record high. Despite the unpredictable economic landscape brought on by the epidemic, or perhaps because of it, investors have shown an almost insatiable appetite for keeping technology companies behind – in search of the next unicorn. But while there is currently a surplus of capital available for technology startups, the responsibility rests with the founders to not only successfully engage with financing partners, but Right Financial partners.
As co-founder of Software Startup Island, I have seen for myself how partnering with forward thinking investors with a Sterling reputation can radically change the path of a startup, and even attract like-minded financing partners. While there is no shortage of playbooks on the basics of raising funds, the guidance I received from my fellow founders proved invaluable during the financing process. Below are five pieces of advice that can be availed by technology entrepreneurs in the initial stages of funding to attract top tier investors.
Create a peer advisory group to better your technology startup
When cash is available for startups, investment companies receive an average of 1,000 proposals per year, which means there is stiff competition when targeting a particular venture capital firm. Before a start-up ever consults an investor, they need to validate their idea and adopt a game theory approach to their funding strategy. They should expect every possible question, objection or suggestion they may receive during the funding process to ensure that they advance a fully designed vision. The most effective way to do this is to create a peer advisory group.
With the advice of the best and brightest minds in their network, startup founders gain access to a number of objective perspectives that can help them strengthen their businesses or, in some cases, completely redesign them. Founders should enter these meetings with an open mind, and be prepared to listen and pivot quickly based on feedback from their advisors. For Island, we spoke with more than 100 industry experts to validate what use cases and key functionality is required for our initial design partners.
During this consultation process, it is important that the founders avoid the mistake of confusing “allies” with “buddies”. His advisory group should be made up of respected thinking leaders who will challenge the founder’s ideas when needed and who really want to see improvement in the industry. Founders should also resist the urge to treat their advisors as prospective buyers. The guidance they give to start-ups in infancy can be infinitely more valuable than any potential sale.
The founding team of a technology startup is more important than you realize
One reason why some startups take about six months to hire an employee. A founding team is the engine of a new technology company and can make or break its success. However, many startups fail to understand how much impact team makeup can have during the funding process. In the early stages of a company, before there is a tangible product, the founding team is the biggest asset of the startup when approaching investors and the selection of each member of the team should be done keeping in mind in part. Technology visions and products naturally morphed over time, but a successful founding team can be relied upon to succeed through these changes. At some of Island’s initial fundraising meetings, investors spent more time reviewing the background and expertise of our founding team as they evaluated our offer.
Having the right founding team gives investors confidence. Therefore, it is important to adopt a people-first, role-second approach. Founders can start with a list of everyone in their network who have proven to be rock stars with a passion for building a company from the ground up. They should then cross-reference the roster with a list of required skills and expertise that will complement the founders and talk to investors. The overlap will provide a solid probability list with which to start the recruitment process.
Try to demonstrate market aptitude
A post-mortem study by CBIsights found that 38% of startups fail due to lack of cash flow or capital, while 35% of startups never offer positive returns to investors due to negligible market demand. Surprisingly, these two causes of new business deaths are intertwined, making it important for potential investors to demonstrate a high probability of market suitability at the beginning of the funding process.
Technology startups must first establish how the market looks appropriate and in demand for their company. Does it display competitors? Does it produce tangible results for the main consumer group? Or, in the case of the island, to prove the demand for a new category based on repeated use cases? Once a startup has set a goalpost for market fit, it is much clearer to potential investors how and when it arrived. To further alleviate any hesitation, founders should be prepared with customer data to prove to financing partners that the market needs it. By defining their Total Addressable Market (TAM) and then showing step-by-step how they will enter TAM and monetize their product, startups will clearly demonstrate market needs through hard data.
Wise investors will look for market-fitting red flags during the proposal process, including low barriers to entry. We saw that investors were less concerned about whether we could make the pitching we were doing and focused more on whether the market would be there if we did. Top-level investors are comfortable funding difficult issues; In fact, they welcome it. They understand that high barriers to entry create lasting benefits. Creating a great new company is fraught with risks, but if you succeed, you win for everyone who takes a risk with you.
Identify and connect with investors
Startups should identify investors who not only want to fund them, but their unique knowledge and experience can help them actively shape their technology company. In the early stages, the emphasis is often on the terms of the money and not enough on the firm from which you are getting it. Although economics is important, it doesn’t make sense if the company doesn’t succeed. So a partnership with an investment team that increases your chances of success should be at the forefront of the decision making process before evaluating it. After all, owning a large percentage of a failed company does not pay well.
By conducting an internal audit, the founders can identify their strengths and, where they need support, allow them to partner with investors who can raise any weak points. Each founding team is different – for example, I wanted, individually, investors who could collaborate with us to create our category and provide guidance on how aggressively we should fund our efforts. Other founders may need help creating their own team, product design, or messaging. Firms may have different skills, but the board member you join also adds dynamism and should be taken into account.
As a startup is involved with investors, it is tempting to take it as a normal sales process, but the reality is that it is a team-building process. The goal is not a round of funding. Instead, look for partners who will make your company successful, especially in the early stages where hundreds of decisions will be made at the board level that can make or break a company.
The initial alignment makes a difference
In my experience, different founders may have completely different experiences with the same investors. The difference was one of alignment. Not only sound education but his alertness and dedication too are most required. During the selection process, we discovered that the best companies really add value with great feedback and insight from the very first meeting. The questions they engage in are often a clear indication of their expertise and the refuge of your future collaborative process.
After signing the term sheet, both parties are now in the same team. As such, expectations must be aligned before a percentage can be invested. For example, some technology products may hit the market in six months, while others may take years. Without setting expectations early, it’s easy for both parties to get frustrated. Firm leaders should share the rewards they expect, while startup founders should propose when and how they can deliver them. Through frank and open communication, timelines and KPIs can be reached to ensure that all parties are satisfied with the business strategy.
The right strategy attracts the right investors
Since the market seems to be saturated with companies ready to invest, there is no shortage of capital available for today’s technology startups. The challenge is no longer one of scarcity, but of connecting with the right investors through the right channels. By taking the time needed to deliver a refined offer and interacting with the intent of each step of the funding process, a startup can reach out to investors who have true faith in their vision and have the ability and capacity to help them achieve it. As founders, we can never lose sight of the fact that the goal is not just to raise funds, but to build a successful business. Every step we take should be measured on progress.
Mike is the CEO and co-founder of Fay Island,
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