This article was originally posted on the Tech North website.
Our Founders’ Network events might be exclusive to our hand-picked network of digital business founders in the north of England, but we’re keen to share the knowledge and insights from these events with you, our wider audience. So here’s the first in our new Founders’ Network Knowledge Series.
Rob Fitzpatrick runs the workshops at our Founders’ Network events along with his business partner Devin Hunt. Together they founded startup education specialist Founder Centric working with the likes of Oxford University, UCL and Tech City’s Digital Business Academy. They’re also both seasoned entrepreneurs and really know their stuff, so we thought we’d ask Rob to share with you the highlights from one of our recent Founders’ Network workshops – so here he is.
How much are you raising and what’s it for?
Talking to an investor, this is one of the first difficult questions you’ll be asked. There’s a right answer, but it takes a little bit of advance prep.
Before we get to the solution, the classic mistake is to say you need the money so you can “keep working” or “focus” or “improve the product”. All of those might be true, but they’re fuzzy and don’t give the investor a clear grasp of what exactly their money is doing once they hand it over.
Rob Fitzpatrick of Founder Centric speaking at Tech North’s Founders’ Network
Set business milestones
The right answer is based around business milestones. The point of investment is to get you to the next one. A business milestone is a clear event which makes your business more valuable and less risky than it was the day prior. An example would be significantly improving a key metric like conversion rate or retention. Or closing a first major enterprise customer. Or making an extremely critical senior hire. Or reaching a growth target or launching a hotly anticipated new feature. They’re the moments which, if you were making a timeline of your company’s history, you would spend the time to add to it.
To figure out how much money you’re raising, you lay out all the business milestones that you hope to hit in the next 18 or so months, and then figure out how much money it would take you to get to each of those points in the future (if you aren’t sure how fast you’re going to be growing, a safe rule of thumb is that you’ll be able to hire one top-tier engineer per month).
When you meet with an investor, you do a little bit of due diligence on the types of rounds they like to get involved in, and you choose the milestone (and thus the funding amount) that you think will be a good fit. The more complete your round becomes, the less wiggle room you have to adjust the numbers like this, but at the beginning, your freedom is more or less absolute.
Delegates at a Tech North Founders’ Network event
Look at other startups
The other bit of research you’ll need to do to figure out how much you ask for is to look at other startups at a similar region, stage, and industry to your own who have raised recently. If they’re further ahead than you, then you’ll probably be facing worse deal terms. You can benchmark yourself against these successful raises to figure out if your round is even viable, or whether you need to get back to pouring in the sweat equity for a few more months (as an aside: these numbers aren’t always public, and being able to learn them is one of the big benefits of being part of a tight-knit startup community).
We’re raising £X00,000, which would let us achieve [major business milestones] A, B, and C. But in a pinch, we could also work with £Y00,000 (a lesser amount) to get to [smaller but still meaningful business milestones] D and E.
The strength of this answer is in providing a rock-solid justification for the money you want. It helps investors see that their money isn’t going to be frittered away; it’s going to meaningfully reduce the risk and increase the value of the business. It’s all going to move forward. And the two numbers, provided up front, give you a safe place to fall back to during tough negotiations (without losing credibility).
It may turn out that you weren’t entirely correct with the amount you needed to hit your milestone. Both entrepreneurs and investors understand that sometimes reality is more complicated than the optimistic plan. And that’s okay. You can roll with the punches once you’re in the ring. But first you have to get there. And to do that, you need a good, solid answer to this question.
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