GD1 Founder Series – #1 When is it time to seek investment?

Welcome to the first instalment of GD1’s Founder Series, a collection of bite-sized pieces designed to provide entrepreneurs with all the basics needed to make your startup a success. Over the coming months, we’ll be covering everything from perfecting your pitch, to building relationships, and what we look for in our investment companies. First up – how do you know when you’re ready to start fundraising?

Ask Yourself the Big Questions

With some 70% of startups scaling prematurely, many founders are guilty of either seeking outside investment too early in their company’s lifecycle or asking for too much. While the temptation to fundraise as early as possible is understandable, the long-term viability of your startup relies in part on being able to nail down a few key questions first.

What problem does your startup solve? Is it scalable? Do you have a robust business model and financial plan in place? Have you achieved product-market fit? If you can’t clearly articulate the answers to these questions, both to yourself and to potential investors, you and your business aren’t ready to pursue funding yet.

Have You Achieved Product-Market Fit?

Product-market fit is as simple as being “in a good market with a product that can satisfy that market”. The keyword here is a “good” market. While it’s easy to be seduced by early growth, these metrics are meaningless if you can’t demonstrate a compelling value proposition to a sufficiently large and clearly defined group.

This process takes time, requiring rigorous trial and error, understanding customer feedback, and translating it into actionable improvements. Companies often go through several iterations before finding product-market fit. If you’re not ready, it’s better to continue bootstrapping rather than pursuing fundraising too early and chasing after a ‘bad bet’ in a weak market.

Bootstrapping vs Fundraising

Choosing to bootstrap over seeking external investment can feel a bit like voluntarily taking the hard road, but prioritizing “controlled, profitable experimentation over exponential growth” comes with many advantages. By staying lean and fueling growth internally during the early stages, you’ll get a better sense of whether you’ve achieved product-market fit, without diluting your ownership.

Remember – the more capital you raise, the greater your dilution. Bootstrapping is an excellent way of demonstrating market validation and tangible early traction, which will only make it easier to raise external capital when the time comes.

A Guide to Finding Your Angels

Once you’ve nailed your market, mastered your pitch, and are ready to accelerate growth, you’re probably ready for fundraising. Beyond investment from family and friends (also a good way to demonstrate validation), and non-dilutive capital (in the form of grants or other ‘no-strings-attached’ cash injections), “angel” investors and VCs are likely to be your next logical steps.

For early-stage startups, an angel investor can provide essential capital, mentorship, and access to additional resources. These high net-worth individuals tend to focus on a particular area of expertise, so survey your industry contacts for recommendations and introductions to angels, or angel investor networks, operating in your space.

For startups that are further along in their lifecycle, with a proven revenue model, rapidly growing customer base, and the desire to scale exponentially, it’s time to talk to VCs. When compiling a list of VCs to approach, it’s important to know your audience. Does the fund they manage have a particular industry focus? Have they already invested in a potential competitor? Is the size of the fund they manage proportionate to the level of investment you’re seeking? Don’t just fire out enquiries to every VC in town – do your research, match your pitch to your audience, and improve your prospects of finding the right champion for your startup.

Both VCs and angel investors will tend to expect equity in return for their investment (with VCs typically also expecting a seat on the board), so be careful not to ask for more capital than you need. Be clear on the next milestones you’re wanting to achieve, and exactly what you’ll need to achieve them.

Where to From Here?

Before seeking outside funding, make sure you’ve answered essential questions about your business, developed a sound financial plan and nailed your product-market fit. Then, once you’re ready to talk to investors, you’re going to need an engaging pitch that succinctly communicates why your startup is worth their time and money.

Keep an eye out for the next instalment of our Founder Series for tips and advice on building the perfect pitch deck.