As much as every entrepreneur would love to get all the funding they need for a fast growing company on the first try, most successful startups have to raise funds several times as they grow — especially if they want to keep growing quickly.
And, as you’ve probably discovered if you’ve just started researching funding for your startup, investors use a different term for each successive funding round.
Early funding rounds are called “seed” or even “pre-seed” rounds to indicate that they’re just helping a company get started and hoping for a sprout of growth. Once companies start to get more established, funding rounds are labeled by letter: Series A, Series B, and so on (although few companies will get past more than a few of those letters).
As an entrepreneur, the most important thing that you need to know about each round of fundraising is what investors will be looking for at each point. Reframe your efforts to look at potential funders as customers and your financial models as sales pitches, and identify their goals and hesitations.
Here’s what you need to know to pitch your startup successfully at each round of funding.
Founding and Pre-Seed Rounds
Founding and pre-seed rounds are the very earliest opportunities your company has to raise money.
The cash raised at this stage is usually used just to get a concept off the ground, and the investors at this stage are usually people that the founders know personally — they’re mostly friends and family.
It may be strange to think of your friends and family as “customers.” But the fact is that if you want to get them on board, you’ll still have to carefully identify their interests and anticipate their objections before you approach them.
At this stage, investors’ commitment has more to do with their relationship and trust in you than with your financial projections. However, friends and family still want to know that you’re being responsible and you have a plan.
As we wrote in our post How to Build a Financial Model for a Startup, it’s impossible to create a cohesive story behind your business plan without a financial model. If you plan to raise any money at all, step number one is always to make sure the numbers work out. (Even in the rare cases where startups don’t need any funding at all, a good financial model can justify founders’ investments of time and energy).
Once founders have a viable business, some customers, and a little bit of growth, they can start to seek investors outside of their own friends, family, and personal connections.
At the seed round stage, you’ll mostly want to target angel investors — individual accredited investors who invest their own money in startups that they find compelling. Occasionally, other organizations or venture capitalists (those who invest money pooled from groups of individuals, funds, or companies) will show interest in seed rounds, too, but they mostly come into play at later stages.
Depending on their interest in investment and their funds available, angels use varying levels of scrutiny when looking at your financial forecast.
But unlike friends and family, they won’t be satisfied with just a vague assurance of your responsibility and a basic financial plan. They’ll want to see exactly how your forecast yields a specific ROI for their investment within five years.
They’ll also be able to use their expertise to suss out whether your forecast is believable. They’ll compare your claims to industry norms. They’ll ask you how many customers or units you’ll need to sell in order for your company to hit projected revenue goals. They’ll ask how much of the current market you’ll need to reach in order to hit projected revenue goals, and they’ll have an idea of whether or not that’s realistic within the timeframe provided.
You can weave the story however you believe it makes the most sense, but the numbers have to back the story up at every step.
Once your company is showing real traction, it may be time for a Series A round.
At this level of investment, you’ll certainly be dealing with professional investors who have specific investment goals to hit.
If you want to impress investors at this level, you’ll need to show them that they’ll be likely to get at least a 30% internal rate of return (IRR) on what they put into your company within five years.
That means that your forecast should show a much healthier IRR than 30 percent. Otherwise, investors consider the margin too “skinny.”
And, of course, the financial forecast at this stage needs to include details on an exit for investors. Not only do investors want to know that the exit can happen within their ideal timeframe, they’ll want to know who will facilitate the exit and how the valuation of their ownership will be calculated.
Series B and Beyond
If your company continues to want to invest in its growth after the Series A funding round, you can eventually seek a Series B and even a Series C or beyond.
Seeking funding past Series A generally means your company has already proven itself to be quite successful, but wants funds that will help it to achieve a new level of success in a bigger market.
In these later rounds, the main investors will likely be bigger players such as hedge funds, private equity firms, and investment banks.
However, very little changes about what you’ll need to show those investors as an owner.
Professional investors will still be looking for similar rates of return and details on valuations and exits on any deal they make. They’ll also apply the same level of scrutiny that your company faced at the Seed Round and Series A round, although they may expect to see bigger growth and revenue numbers that reflect your company’s maturity.
It’s All About the Numbers
Investors at every stage of the funding process will be looking for exciting ideas and compelling leadership on a startup team.
But those things don’t matter much if you as an entrepreneur don’t have the numbers to back up your ideas and show that you know what you’re doing.
That’s why a clear, well-researched financial model is crucial for startups seeking funding at any stage. And if you want a professional financial model without sinking a ton of cash into getting expert help, you should check out Raise IQ.A clear, well-researched financial model is crucial for startups seeking funding at any stage. Click To Tweet
RaiseIQ is an easy-to-use platform that guides you through every step of creating a professional, stunning financial projection. We’re angel investors ourselves, and we’ve put in everything we want to see when analyzing a deal.
Head over to our site to sign up for RaiseIQ’s waitlist.