The Right Approach to Seek Funding from Investors

When startup founders meet with investors, it always comes down to the same question:

How much do you need?

Most founders don’t know the right answer to this question and often try to get as much as possible. They stumble and fumble their way to saying a number that sounds right and has lots of zeros in it. It's the startup-million-dollar buzz affair. As if founders need that million-dollar valuation to validate their ego and feelings.

Only unicorn startups land those crazy numbers. Keep chasing paper like a hungry animal, but it doesn't change reality. You won’t get anything near that amount because investing in startups is a risky deal.

The Wrong Approach

Other startups will have better ranks, more revenue and industry insights than you. They don't land high valuations. Why are you chasing it too? This is the wrong approach to go for when seeking out investments and funding.

Instead, focus on providing value to investors. Consider them a type of customer (they are, after all).

Make a list of the resources you need, within reason and reality. Whether that’s hiring the right talent, picking up supplies or investing in marketing. You need to know exactly what you need to do with the money that you pick up.

If an investor is offering more for less, then take it.

Be Conservative with Equity

But if they value your business more than you care to admit, then you need to hold off for a while. Holding on to equity may be in your best interests, as investors not only bring value in terms of capital but also in terms of industry connections. This is a key attribute when it comes to value-investing, as it focuses heavily on the things that count outside of the numbers.

When entrepreneurs think way too much about the numbers, they get confused. They think that a million dollars isn’t enough, and they want 10 million, when what they really needed was a $100K. You need to be able to get a realistic picture in your head, and that’s a tough thing to do. When everyone around is making bank with their investors, you want the best deal as well.

But wait, there’s more – you would have to give up more equity and your goals get that much more difficult to achieve. Maybe an investor offers twice the amount for three times the revenue figure you’re getting today. Since projections go on promises, you need to understand why it’s so difficult to predict true value.

What Experience Tells Us

That’s where experience comes in. Experienced entrepreneurs will tell you that you don’t need to go for a cash grab early, because there will so many challenges to face either way.

Even if you take the big money and get as much as you can, you will have to answer to more parties and more expectations. Unless what you’re doing is a sure shot and you are going to have lock-in money coming in every month, you need to change the way that you’re approaching investors.

Another key factor in taking lesser early on, is a sign of courage and resilience. By not taking large sums of money, you’re waiting for a better deal in the future.

Your equity will be worth a lot more in the future and you’re going to have to negotiate for the best value then as well. Giving away a large chunk of your equity early on is going to be difficult because there is a lot of uncertainty in the future and you’d rather wait and watch than go full steam ahead.

Actual Investment, Expansion, Growth, Etc.

When thinking about how much money you really need, you need to think about what your plan is going to be in the future. When you have a clear idea of what you’re going to do with the money you’re raising, you need to have a solid plan to back it up.

When your plan is easily communicable and has scale embedded in it, investors see that as a value add to them. They will then ask you about who else you’re investing with and then gauge your overall profile. If the profile makes sense to them, then they’ll invest.

Otherwise, they might get scared off because they’re fighting big money from big investors.

If you just need money for marketing, you can work with agencies and invest directly with them. This way an investor has a clear understanding about where the money is going and what the plan is going to be.

When the plan is clear, and the growth seems self-evident, you can have a better shot at getting the right amount and the right kind of money. While some investors are laid back, others are ferociously stingy.

You may have to work with different types of investors in the field of entrepreneurship, so you’d rather work with people that you get along with.

You can always raise more money from them later on.

When thinking about growth, sometimes more money can lead to lesser growth. This happens because there is too much pressure on the company to perform, and the industry hasn’t matured to that level yet.

There is a lot of pressure on the sales teams and the management offices to produce these promised results, which leads to inevitable attrition and value lost in terms of development. It snowballs ahead and becomes worse as more problems get attached to the same issue. When a lot of factors get embedded into one system, it tends to accelerate towards failure.

Conclusion

When considering startup capital, you should aim for value and quantity.

 

However, biting off more than you can chew is an irresponsible approach to running a startup – and one that a lot of investors are aware of early on.