Mastering startup investment strategies is a critical skill entrepreneurs must learn. Achieving success in a new venture is challenging as it is, with about 90% of them failing eventually. However, statistics also indicate that at least 29% go under because of a lack of funding.
Have you developed a groundbreaking new concept that can disrupt the industry? Don’t let financial shortfalls get in the way of capturing the market and investor interest. One of the first steps you’ll take is to devise effective strategies to get the funding you need.
Considering the high failure rate startups face and the uncertainties of the commercial landscape, investors are wary of supporting ventures.
Compelling pitch decks and understanding their approval criteria can get you a foot in the door. Read ahead for more information on how to make that happen.
The Ultimate Guide To Pitch Decks
Identify Your Goals and Objectives from the Startup Investment Strategies
Before reaching out to investors, founders should be clear on their goals and objectives from the fundraising process. Here are some of the key factors you should consider.
What’s the Company Size?
What is the size of the company you intend to build? Are you looking to build a startup using a great business concept as a cornerstone? In that case, you’ll need preseed and seed funding along with expert guidance every step of the way.
Accordingly, you’ll reach out to venture capitalists and angel investors to attract not just money. But also expertise in crafting the business plan. The funding can help you develop the initial product prototype, production infrastructure, advertising and marketing, and logistics.
Alternatively, you can apply to and get into an accelerator or incubator program to launch the venture. However, if you’re looking to build a small or mid-sized company, you’ll apply for a government grant or bank loan.
How Much Funding Do You Need?
The next factor on your list should be the asking amount. Or the amount you need to raise to get the startup off the ground. Before you estimate this figure, you’ll create a financial model.
This document will trace critical metrics, including all the expenses and sources of revenue. Add up inventory, rent if you’re working out of a physical location, and tools to get traction for your products.
Advertising, marketing, Customer Acquisition Costs, and logistics should be on the list, along with other incidentals per the industry. You’ll also plan for a time lag between production, transportation to customers, and the cash appearing in the company account.
Work out the expected cash flows needed to sustain the startup through any unexpected setbacks, so you have adequate runway. Keep in mind that 82% of new businesses are likely to fail because of cash flow issues.
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How Much Equity Do You Wish to Offer?
Investors need returns from the funding they offer startups. The startup investment strategies you devise should factor in the payment terms. Founders typically offer equity or stock in the company or convertible notes.
Before accepting equity, investors conduct a thorough valuation of the startup. However, if it has yet to generate revenues, evaluating it is not a practical option. Accordingly, you can offer convertible notes that investors can exchange for equity once the startup is stable.
You’ll also estimate the equity offer based on the stake you’re willing to cede to investors. By giving up equity, you’ll accept a dilution of the owner’s stake and, with it, control power. Bringing in funding could also mean offering investors a seat on the board of directors.
You’ll work out your startup investment strategies after considering all these factors and accounting for them.
Understand the Startup Screening Criteria Investors Consider
When investors sink money into a startup, the objective is to make money off it. Considering the high percentage of new venture failure, they need to safeguard their investment and ensure adequate returns.
Not only do they want assurance that their money is safe, but investors also need to earn profits. And make a smooth exit within the shortest interval possible, preferably in three to five years.
Startups, undoubtedly, have a high mortality rate. But a more worrying factor is that even if they sustain beyond the initial one to three years, just 20% are likely to become profitable.
Angel investors and venture capitalists supporting new ventures diversify this risk by backing multiple projects. And you need to come up with robust startup investment strategies to make that cut.
Most importantly, you should be able to demonstrate that your venture can be one of their 20% successful investments. Funding your company should be able to compensate their losses and earn adequate profits. That’s how you can interest them in funding future rounds.
Keep in mind that in fundraising, storytelling is everything. In this regard, for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.
Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.
Effective Startup Investment Strategies Founders Should Deploy
Now that you have a clear overview of your objectives and investor criteria, let’s talk about how to align them. The game plan here is to convince funders that the venture is worth backing with multiple rounds of funding.
Provide Impressive Metrics
Nothing is more impressive and compelling than actual statistics and numbers. Even if the venture is not yet generating revenues, you can use appropriate valuation methods. Here are some of the best approaches to consider:
- Berkus Method
- Risk Factor Summation Method
- Comparables Method
- Scorecard Valuation Method
- Book Value or Asset-Based Valuation Method
- Cost-to-duplicate or Discounted Cash Flow Method
- Venture Capital Method
- Valuation by Multiples Method
You’ll pick the approach that presents the startup’s metrics in the best light possible. However, expect investors to conduct their due diligence and use their valuation methods to estimate whether the project is worth backing.
Make sure to deliver verifiable statistics and employ complete transparency to build credibility.
Investors need affirmation that the startup is scalable, and for that, they’ll study your pitch deck’s growth projections. If you paint a picture of an impressive outcome, you’ll allude to the returns they can expect.
The right metrics and numbers can create a FOMO or fear of missing out or a sense of urgency. The objective here is to indicate what the venture can achieve with the funds investors provide. You’ll also outline what the funds will sustain until the next round.
Accordingly, you’ll provide month-to-month projections through year one and then annual estimates for the next three years. The pitch deck will display information like Customer Acquisition Costs (CAC), profit margins, customer churn rate, and cash burn rate.
Lifetime customer value, the number of existing and new customers, revenues, sales, and gross and net profit are other statistics investors examine. The market share you hope to capture also indicates the company’s potential for scaling. Figures like the TAM, SAM, and SOM indicate potential.
If the brand targets a rapidly-growing market with a proven customer base that will buy its products, that’s a win. Investors view it as possible traction and growth. So make sure to add data depicting how the market is expected to grow in the next few years or more.
Financials from the last couple of years are also of interest to investors. They’ll want to look at the company’s growth over the last 12 months or more to estimate how it will perform moving forward.
Ultimately, investors are looking for assured returns. As a rule, they expect profits to add up to three to five times their original investment. They also anticipate making an exit within five to seven years.
Of course, these estimates are variable and depend on several factors, such as the industry, venture, company stage, and more. The amount of risks the founders and investors are willing to take also influences the long-term returns.
A great example is Alphabet Inc. which eventually became Google, the search giant. The startup launched in 1997, fuelled by $1M in seed funding from FF&F. By 1999, it had grown so quickly that venture capitalists invested $25M.
Two of them each acquired a 10% stake in the company. When Google came out with an IPO in 2004, it raised $1.2B, and the original investors earned returns of close to 1,700% at half a billion dollars.
So, your pitch deck should demonstrate that the company is likely to earn substantial profits. And grow quickly and sustainably to produce those returns.
Once you have your startup investor strategies in place, what are the next steps when you have a great business idea? To know more, check out this video I have created. You’re sure to find it helpful.
Does the venture have a solid foundation? When coming up with startup investment strategies, make sure to have a compelling business model in the pitch deck. You’ll also talk about the founding team and core talent that drives the business.
A strong company culture is likely to attract employees committed to working for its success and stability. You’ll build a well-synced team that functions in perfect coordination.
Talk about your value proposition, the target market, and the competitive landscape or industry where the startup operates. Your pitch deck will clearly outline the company’s values and mission statement.
Ultimately, that indicates how the company intends to make money and sustain itself over time. Most importantly, the business model shows the contingencies it has to deal with unexpected snags and remain stable.
The founder is typically the main selling point for most investors. They are willing to back the face behind the company and rely on their business proficiency when funding the startup.
When presenting a pitch deck to investors, you’ll include a financials slide. This section will include the profit and loss statement, balance sheet, and cash flow statement.
The balance sheet gives a clear picture of the company’s financial health within a particular period. It lists the income, expenses, and the startup’s ability to meet its short-term debts and obligations. The profit and loss statement is indicative of the revenues and shows whether the company has made any real profits.
Then you have the cash flow statement that shows how money goes in an out of the company. This document will list accounts receivable, accounts payable, inventory, depreciation, and cash in hand.
You’ll also calculate and display the breakeven point, or the point at which the business operates at a profit and not a loss. However, you should also make sure to present the data in easy-to-understand formats in the pitch deck.
Create the Fear of Missing Out (FOMO)
One of the most effective startup investment strategies is to have multiple investors lining up to back the company. Building up a sense of competition can entice investors to make more attractive offers.
You can leverage the FOMO to negotiate for more favorable terms and conditions like less equity. Or a lower interest rate or convertible notes. Founders can then pick the options that are best suited for their venture’s needs.
Market conditions can change, the business landscape can evolve, and customer needs can morph with changing times. Investors are more likely to support companies that can adapt. Make sure to refine the pitch deck constantly and adapt it per the feedback you receive from your investors.
Your business model should also indicate product flexibility and the capacity to pivot according to customer demand. Investors also like to see if the startup is prepped to deal with the competition in the market.
Competition indicates that there are multiple sellers catering to the customer base. And that there is a strong market for the niche. But, if you can demonstrate a USP that sets your brand apart and a step ahead, that would attract investor interest.
Entrepreneurs looking for funding need to come up with effective startup investment strategies to convince investors of the viability of their projects. You’ll start off by identifying your goals and understanding what investors are looking for.
Next, you’ll compile robust data and metrics to demonstrate the startup’s stability and scalability. And its potential to earn profits and provide rich returns to your investors. Make sure the information and data you proffer stand up during the investor due diligence process.
That’s how you can ensure adequate investment for not just the seed round. But also for further funding rounds when you’re ready for more finance.
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