Lessons for Founders from 50+ CrowdInvesting Campaigns (4/4)
16 lessons learned on raising an investment
A few weeks ago we've marked the 50th crowd investing campaign launched on SeedBlink. Our business analysts have seen more than 1500 startups, of which only 50 have passed the Funding Committee and launched their funding campaign on the platform. From this experience, we have identified some patterns and compiled a consistent set of do's and don'ts when it comes to running an investment campaign. Read on the last part of this wrap-up of recommendations
In addition to the hurdles of growing your business you also need to manage your Cap table properly, so that it does not cause you problems later on when you need to make important decisions. The Cap table shows the distribution of equity across the company, and how healthy it has been managed. The most common situations we have encountered were:
a. Lack of a Cap table - Developing and properly managing a capitalization table is a must. Most companies rely on competent legal counsel to maintain the Cap table and provide actionable information to the leadership team, in an understandable format.
b. Sharing too much of your company too early - Find out how much equity you’re giving away on average in each investment round (in our experience, it should be 10-20% in the seed and Series A stages) and calculate the impact of dilution along the way.
c. Rounded number of shares - Numbers must be accurate up to 4 decimal places, not rounded to integers.
d. Too many shareholders - Having too many (and especially small) shareholders is a logistical and practical nightmare. Imagine needing documents signed by all shareholders; what happens if they can not get to some of those?
Another thing we found out from the 50 startups that had campaigns running on SeedBlink is that if you raise money in one round, you have to be prepared for the next round as well.
Take a look at the investors who are currently putting money on the table, and try to discover which ones have the potential to follow in the next round too. Your backers should be willing to support your success in the long term.
If you raise money in one round, you should prepare for the next round as well. Make sure at least one of the investors has the "firepower" to follow. If no one does, people will wonder why.
Some startups faced problems with equity dilution after the initial round of investment. During the fundraising process, the equity of the existing shareholders diminished, to such an extent that it led to changes in the board and the company management.
A piece of advice for founders would be to be careful with your investment process because every decision you make can have an impact on how much you’ll own in the end, in other words, it can influence the money you’ll get if you decide to sell the company.
If this is your first funding round, focus on the amount you need and don’t be greedy. What you raise at the beginning of the journey will be the most dilutive amount of money of all rounds.
There are some things that nobody is telling you about.
One of them is that you have to talk about your exit strategy with the investors supporting you in the first stages. You might think it is not relevant yet, but most of them have this in the back of their minds anyway.
So, never tell an investor that you plan to keep the company private.
At the same time, don’t bring unicorns to the table when you’re just going for a seed round.
Out of the 50 startups launching a campaign through SeedBlink, a few encountered the situation in which the lead investor was missing.
The lead investor plays an important role because it is the liaison between you and other investors interested in bringing money in the game. It can be a single investor or you could have an investor entity taking the lead on your fundraising round.
Its type is not necessarily important, but one thing we should worry about is that the lead investor takes the biggest share of risk that the fundraising round or the business has. Having said this, too little money can kill the company as well.
It takes a lifetime to build a reputation, and only a few seconds to lose it.
This is a risky area and you have to be careful who are the people behind the investors showing interest in your startup and what type of image they have built for themselves or their VC fund.
Making a fundraising deal with someone not well seen in the community might affect your image and credibility. Other investors who’d like to follow you now or in the upcoming rounds might back out and look for someone else to invest in.
Some early-stage startups tend to borrow their first money from different sources, to stay alive until their first real funding round. All understandable, but we recommend they pay their debts before launching a funding round.
Outstanding company debts bring limitations to how much money you can raise.
One of the mistakes entrepreneurs make is to get themselves a hefty salary. If you allocate a high amount of money just in your own interest, this will not contribute productively to the growth of the company.
As an entrepreneur, you must understand that this road is not paved with roses. Sometimes, or – better said – most of the time it is about working more than 8h per day, and many years of little or no financial rewards. Don’t be greedy; the pay-off will eventually come if you work hard enough!
If you’re choosing to lead your funding round through a platform like SeedBlink, there is one thing you should know:
The community behind a crowdfunding platform can boost your campaign and help you attract more attention, through all the people behind it. However, when calling for their interest, make sure to showcase you already have a lead investor (angel or VC) supporting your startup.
Having someone to back you up, builds credibility and attracts other people’s curiosity.
A term sheet is an agreement laying out the basic terms and conditions under which the investment will be made.
Since this agreement contains a great deal of information, we’ve found out that many first-time founders might find it difficult to understand.
For a typical startup that has just built its management team (i.e. usually the founders), establishing a BOA is a simple way to effectively increase the team's capabilities and an extremely strong signal to the potential investors when recognized personalities are brought in.
This can be a competitive advantage and help increase the visibility & credibility of the company.
"Surround yourself with real people, inspiring people, role models, people who can bring synergy and positive multiplier effects to the entire company. People with accomplishments that are relevant to what you are trying to do. Do not fall into the trap of professional "consultants" or "speakers..." The most effective advisory board members are motivated by the challenge and intellectual stimulation of building successful businesses."
Florin M. Pop - Member of TAN and founder of PrimaInvest Capital
It could be that your product is still making its baby steps out there and you would need as much power as possible to make it better & faster.
However, make sure you don’t intend to spend all investment money solely on product development. Investors who put money in a startup want to see improvements across all your business departments; they want especially to see the startup growing and gaining a higher market share.
We are all humans and deserve to be treated with respect.
An investor can be intimidating, but most of the time they are just trying to help founders have a reality check while also making sure their investment is secure. So, don’t raise the money and then say nothing till the next round.
Here are a few things you can do:
● Start by communicating clearly and regularly; keep them up to date with what’s happening with the money they have provided.
● Keep professional etiquette even after you have signed the contract.
● Try to be one step ahead & have all the information prepared when you meet for business talks.
● It’s okay not to know everything, but let them see you’re curious or committed to finding out the missing parts.
If your review or audit has stated a negative revenue flow or a bad trend in your product traction, don’t try to hide it.
Investors will find out sooner or later and they have their ways to bring this to light right before an investment.
Deciding the valuation for an established startup is relatively straightforward: there are revenues, cash flow, growth rates, and other financial metrics, all helping to determine the value of the company.
But what if a young tech company has little or no revenue and maybe not even a prototype? We usually recommend a mix of the following two methods:
● By looking at similar companies in the same industry or niche. The more comparable the startups – be it from the points of view of sector, location or potential market size – the better.
● Using the stage model. The further along the development path the company is, the lower the company's risk and the higher its value. This model might look something like this:
Between €1-2 million: Has a finished product or a tech prototype.
Between €2-5 million: Has strategic alliances or partners and/or evidence of a customer base
€5 Million and above: Has clear signs of revenue growth and an obvious path to profitability
Beware of setting your startup valuation too high in the seed phase; reaching the required milestones may prove impossible. Numbers will strike back in the A round, and even more in the B and C rounds.
You always need to plan ahead and think about the assessments you’ll have in the next funding rounds, even if they seem far away now. If you miss the milestones, this will warrant having your initial evaluation declared as “inflated”, and the company may face lower funding round or even worse
Startups face many challenges when running an investment campaign, and we sincerely hope that this 4-part article will be helpful to all founders who read it. Every single aspect has a different weight in an investor's decision.
If you are a tech startup with an MVP already tested and planning to raise capital soon, apply here.
By SeedBlink Knowledge
PublishedNovember 02, 2021