You need to know that investor finding doesn\’t happen the way you see it on TV shows. When the eyes of entrepreneurs and investors meet, there is no emotional music playing, and rarely do investors fight for the startup\’s favour. Business life is more complicated, the road to investor readiness is long, and you can not spare the hard work.
So how does an entrepreneur find an investor in real life? First, it\’s essential to understand how these processes work, how investors think and what the industry standard is. This involves preparation, documents and knowledge on how to contact potential investors. Let\’s look at the 5 most pressing questions of startups we often encounter at Konsultori and give answers from our extensive FAQ repository.
1. The Pros and Cons of Convertible Notes
Startups need to structure their financing rounds and there are different options available, i.e. an equity round, a SAFE note or a Convertible Note. For this reason, we often discuss when to use which instrument.
What are the advantages and mechanics of a convertible note? How does this compare to an equity participation of an investor?
Convertible notes are a loan that can be transferred into shares at a later stage or need to be paid back. They are used as a bridge financing instrument between financing rounds or at the very early stages of a startup when there is still no total financing round. There are some mechanics included that define the future valuation and conditions at which the loan is converted into shares.
2. Fundraising amount
“So how do I decide how much capital to raise?” That is the most frequently asked question – you can also find it everywhere on the internet. It is a crucial question for the startup because you should not raise too much and not too little. And raising an amount has a consequence on the shares you need to give off.
How much money should I raise?
You need to be able to survive for about 18 months once the money is on the table. Increasingly, startups are in \”continuous raising mode\”, but you might want to account for 18 months of cash.
3. The ask in the startup investor pitch deck
Who dares wins? That\’s not entirely true when it comes to finding investors. The right investor profiles need to be on board and you do not want to risk overstating the potential future development of your startup. This is a topic we need to discuss a lot with startups before they reach out to potential investors.
Should I put the higher amount to raise in my pitch deck or the lower amount?
If you put in a higher amount than needed for the next 18 months, then you would give off more shares than needed. Moreover, if you do not get enough investors on board, then the financing round is not going to take place. It would be better to raise a realistic amount and if you could create more demand than the money needed (potential over-signing) you can still decide to take in a higher round and scale faster if you feel like being able to pull it off.
4. Choose your legal structure
Investors need to minimise their risk and they need an investment vehicle that fits their situation. Going with the wrong legal structure keeps investors off.
Which legal structure do I need to get an investor on board?
Depending on where you are located, there are different legal setups. Anything similar to a limited company is a minimum. Having a sole proprietorship, for example, is not an investment vehicle that would work. In some cases, investors would want to have an investment vehicle in their region, if they are not located in your region.
5. Fear of giving off shares
The cofounders’ shares are their gold for the future because they trade them for more investor financing coming in. Giving off shares does not feel comfortable, but there is some encouraging mathematics behind this process.
As a founder, my shares decrease with every financing round. Is this bad for me?
If the valuation increases more than you give off shares and dilute, then it is positive for you to go into the next round. You would create more value with the additional capital you got into your company. You use the capital injected for more value creation. So if all goes well, this is not bad for you. Think about it as owning a smaller part of a much larger cake. In absolute terms (if all goes well and that is the bet), you are better off in absolute terms even if you give off shares.
Find out more
There are many questions around the fundraising process from investors that startups need to answer for themselves. There are industry standards, and it pays off to get acquainted with them before you enter the process in order to be able to structure your round effectively.