7 Essentials that unlock Start-up equity investment

Different people like different things. Take cakes for example. Would you choose chocolate or fruit cake? It’s worth remembering this when it comes to raising start-up equity investment. Different investors like different opportunities for different reasons.

Image of a cage dollar bill with the words 7 Essentials that unlock Startup equity investment

For some investors it’s all about sector – what’s hot, disruptive or growing fast? For others it’s about the stage of development. Some investors like to get in early, others like to wait till the business is scaling. For many investors the management team behind the business really matters. The point is, you can’t predict the individual preferences and foibles of investors.

Communicate what is on offer

You can’t predict, but you can communicate clearly what is on offer. The quicker an investor understands what is on offer, the quicker they can decide if they will back you, or not. Raising investment is time consuming. It’s a distraction from your real job of growing your business. You don’t want to waste time talking to people who are not interested in what you have to offer – so make sure you are clear and succinct in your communication. Give people the information they need to make the right choice for them.

The ingredients of success

Most cakes have four essential ingredients (flour, butter, sugar and eggs). Similarly, most investors taste test the appeal of a start-up equity investment against four ingredients:

  1. Opportunity – what is the problem the business solves for its customers? How big is the market? Are there many competitors in the sector?
  2. Traction – investors don’t back hunches or ideas. They want evidence that demonstrates how effectively the business develops products and recruits and monetises customers. They want to know how established the product range and marketing strategy are?
  3. Team – who is behind the business? What motivates them? Do they have the skills, experience and relationships to deliver a successful business?
  4. Deal – how much investment does the business need and what equity is offered in exchange for that investment? Is that realistic and fair?

7 Essential Ingredients

When you dig into the detail of what investors look for in order to make a start-up equity investment, there are 7 Essential ingredients investors look for to unlock start-up equity investment:

1. The problem your business solves for customers

Customers don’t buy products. They buy solutions to problems they face. What problem does your business solve for its customers? How does it do this better than anyone else?

2. The market size and targeting approach

This is usually addressed in terms of the Total Addressable Market (TAM), the Serviceable Available Market (SAM) and the Serviceable Obtainable Market (SOM).

The Total Addressable Market is the number of people who could buy your product. This show investors the ultimate size of the market and is usually demonstrated with industry sector research reports.

The Serviceable Available Market draws a picture of the customer segments your business can reach given your geographic/financial/product constraints.

The Serviceable Obtainable Market – or your target market – identifies the customer segments you intend to target first. Given all businesses have limits to their marketing budget you have to focus somewhere, even if you will extend to other segments at a later date. Different customer segments have different needs and most start-ups choose to focus their attention on customers who have the strongest need and ability to pay.

3. Monetising the market and growing revenue over time

How does your start-up make money? Investors expect to see clear revenue streams. Ideally more than one as this de-risks the opportunity. A detailed 3 year (or sometime 5 year) forecast should tell the story of your start-up’s growth trajectory in numbers.  

4. Traction

Traction provides evidence – or proof, if you will – of what the business has achieved so far. Traction is an equation . It isn’t something that happens over night. It is an iterative process which showcases not just your start-up’s ability to deliver, but that you have the grit and determination to perform over the long term. Running a start-up is a marathon not a sprint!

5. Brilliant team

However good your business strategy and executional plan, it is people who make things happen. Does the team behind your start-up have the skills, experience and relationships to deliver the strategic drivers that will make your start-up thrive?

6. Ask

Cash is king, right? Investors need to understand how much money your business needs to succeed. They are not interested only in what X or Y costs, but that you have also thought about how much time it will take you to achieve key milestones in your start-ups development. There is nothing worse than the cash running out before you have reached a critical milestone that unlocks the next stage of start-up equity investment.

7. Valuation and term sheet

If all the elements of your start-up strategy are in place, then investors will assess the deal. What are you offering in exchange for investment? Does that taste good or not? Most founders focus on valuation (the percentage of equity (shares) they are offering in exchange for a cash investment), but the detail in the term sheet is important too. What type of shares are on offer? When do they vest? Who will sit on the board to represent shareholders? It all influences the appeal of the deal.

Investors are busy – the 7 Essentials help you communicate quickly & succinctly

It’s important to recognise investors are busy people. They are short on time and have lots to distract them from looking at your opportunity. The 7 Essentials give investors the information they need but you must also be succinct in conveying this. Go on for too long and a potential investor will drift away.  No one like stale cake!

Everything you prepare needs to be short, to the point and focused on giving investors the information they need. Nothing more and nothing less! It’s a good exercise to convey the 7 Essentials on just one page of A4. One page can usually be read in 5 minutes which is how long most investors take to make up their mind whether this is the cake for them, or not!

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To find out if your start-up is ready to attract investors, take the Start-up Investment Scorecard

Funding Accelerator is designed to speed up the process of preparing your start-up for equity investment.

7 Mistakes that stop you raising investment for your startup

Startup founders are resourceful and move quickly but sometimes that haste can work against them. They make mistakes. When it comes to raising investment for your startup, there are plenty of mistakes you can make that may cost you dear!

Mistake 1:  A brilliant idea is all you need to raise investment for your startup

This is the most common mistake of all – and an easy one to make.

I made this mistake. The first time I raised investment for my startup I had a brilliant idea, a wire-framed web platform and a well-considered business plan and forecast. I was skilled at getting meetings with investors. We had great conversations. The people I spoke to gave me really useful feedback. But they didn’t invest, and they weren’t going to. Not at this stage. It was too soon.

I hadn’t built the platform. I didn’t have what investors would call the Minimum Viable Product (MVP).

I hadn’t got my first customers. I hadn’t got any revenue.

I hadn’t got what investors call traction.

It wasn’t that the idea wasn’t good. It wasn’t that I wasn’t capable of building the business it was just too soon for an investor to get involved. They needed more evidence, more proof it would work.

It took me four months to realise this. Four precious months.

When the penny dropped, I invested my life savings and spent just two focused months building the platform and recruited my first customers. Then I raised £150,000 in a week. That’s the difference traction makes when you are raising investment for your startup.

Mistake 2: You just need a beautiful pitch deck to raise investment

I’ve seen a lot of very good pitch decks. You can tell a lot of work has gone into producing them, but nine times out of ten those pitch decks won’t help in raising investment for your startup because they lack the key information all investors need to back a business.

There are two common mistakes with a pitch deck. Image is prioritised over substance – it looks good but doesn’t give investors the information they need. Or there is so much content in the deck that investors can’t see the trees for the wood. They are overwhelmed and left wondering what the opportunity really is.

Working out what investors need to know to back your business may feel like a game of smoke and mirrors but there are actually seven key pieces of information (The Seven Essentials of a Successful Pitch) that allow you to raise investment for your startup.

You need to present this key information logically. It’s all about positioning the opportunity. So, stop worrying about what your pitch deck looks like and focus on getting the message right.

Mistake 3: If I speak to everyone I know I’m bound to find investors

It’s very common to think investment is a numbers game. The more conversations you have the better. Someone will invest eventually and, if not, they’ll introduce you to someone who will.

Like all mistakes, there is some truth in this. The problem is that believing raising investment is about having lots of conversations often leads to founders mistakenly sending out endless emails seemingly asking just about anyone for money.

Do you respond to random requests asking you for money? Do you think “I must have this” when someone pitches to you on a subject you’re not even interested in? No? Nor do investors.

What is more important is reaching out to the right investors. Investors who are interested in your stage of business, your sector, your type of market opportunity. It’s about targeting.

Save your voice and use it for the conversations that really matter. Take time to do your research and find the right investors (or work with someone who can make the right introductions).

Mistake 4: It’s easy to get investors on the hook when raising investment for your startup

Serious investors get a lot of opportunities across their desk in any one week. You need to make yours stand out. That’s about getting the positioning right – for sure – but it’s also about making sure you stand out as a credible founder.

Your aim is to build a relationship, establish your credibility and gain the trust of an investor before you ask for money.

You don’t (usually) ask someone to marry you on the first date, nor should you ask for money the first time you contact a potential investor.

Think of your investor outreach as a dance, if you will. You need an investor to notice you, spot how good a dancer you are, to ask you to dance and then to thoroughly enjoy the process of dancing.

Don’t try and reveal everything all at once. Give them enough to entice them. (I favour sending a one-page executive summary not a pitch deck in the first instance). Leave them wanting to know more. Offer them a meeting to allow you to start a conversation. Build the full picture of your business over a series of documents and meetings.

Relationships are built over time. Allow time for your relationship with an investor to flourish. Don’t rush it. If you do your investor outreach right you’ll know when is the right time to ask for investment – and it, if you’ve done your job properly, it will be well-received.

Mistake 5: I don’t know exactly how much money I need to raise – but I’ll work it out as I go and take whatever I can get

What is the right amount of money to raise? It’s an interesting question. Raising too little could mean you have to go through the time-consuming process of raising investment again, sooner than you want to. Raising too much investment could mean you sell more equity than you really need to at an early stage (and probably at a higher valuation than you might like).

A common mistake founders make when raising investment for their startup is to cost the activities or projects that need to be completed and aim to raise enough to cover that.

It’s perfectly natural to start by thinking what will it cost to… launch a new product, recruit some new staff members, carry out some marketing campaigns.

The trouble with this approach is it has you thinking only about what things cost. It doesn’t consider the amount of time such projects take to complete. Time has a cost too. Every week or month it takes to complete a project you also need to cover your monthly outgoings – or what investors call your burn rate. You need to ensure you have consider how long a project will take and factored in your burn rate costs as well as the project costs.

Another problem with thinking only about costs, is it ignores the bigger picture. It is almost certain that you will need to raise more investment. It is easier to raise investment if you have achieved significant milestones in the business and moved the business on a stage in its growth cycle.

For this reason, it can be better to think in terms of milestones when raising investment for your startup. Think about what would be the next milestone that demonstrates your business is succeeding. It might be attracting your 1,000th customer, achieving revenue of 6 figures or entering a new market. What constitutes the right milestone will vary from business to business. The point is you need to think about it now and ensure you raise enough investment to get you to that milestone. Give yourself enough runway to reach the milestone.

Thinking in this way will not only help you determine the right amount of investment to raise but it will also help you sleep easier at night once you have raised because you will have bought time to focus on the business, rather than be distracted by another investment raise.

Mistake 6: I don’t need to talk about valuation – it’s all about opportunity

Founders who don’t think they need to be clear about their valuation from the get go are delusional.

Raising investment is an exchange of value.

First you have to be clear about the value you have already created in your startup. This could cover all sorts of things – it might constitute assets in the form of technology or a strong brand that you have built. It might be intellectual property (IP) or it might be your approach to capitalising on a market opportunity.

No one is going to throw of money at a question mark so you must be clear about what you have created.

The second thing to consider is that you don’t get something for nothing. If you want to raise investment you must be clear about what you are offering in exchange.

So many founders don’t know when to introduce the topic of valuation into their conversations with investors. Some founders seem nervous about putting valuation into a pitch deck for example. However, you must. Not doing so is like offering a product and not indicating its price. Without a valuation investors can’t work out what the opportunity is worth to them.

Worse than that, not mentioning valuation undermines your credibility with investors from the get-go.

Mistake 7: I don’t have time to raise investment I’ll get someone to do it for me

It is true that raising investment for your startup is time consuming. It can even feel like a distraction from your real job of growing your business. It is tempting, therefore, to look for short cuts, cut corners or even to get someone to do it for you.

If you delegate part or all of the process of raising investment to someone else you lose on two levels. You can’t be certain how your business is being portrayed to investors (and what commitments you might be held to) and you miss out on the opportunity to meet investors, get to know them so you can be sure that an investor is a good fit for your business.

Rather than get someone else to do the work for you, find an adviser who can guide you through the process of raising investment and support you in unlocking investment. Be wary of advisers who talk a good game but have not actually raised investment themselves. There are a lot of people who will offer advice – some of it contradictory – which can leave you more confused than when they started.

Generally it is good advice to learn from someone who has raised investment themselves. Someone who knows first-hand what it takes and who can support you through the process with a proven methodology, insights and resources. This will make it quicker and easier to raise investment.

Funding Accelerator uses a proven methodology to unlokck investment

It is a wonderful moment when you raise investment for your startup. Investment can unlock so many opportunities for growing your businesses. It is definitely a moment to be celebrated. However, don’t make the (ultimate) mistake of thinking it’s the end of your journey. Really it’s just the beginning of the adventure…the adventure of growing your startup to the next stage. Enjoy the journey!

Discuss your funding options

If you would like to discuss your funding options, you can book a Funding Clinic with Hatty Fawcett (who raised two round of investment for her startup) here: