So you decided to raise funding.
But how can you persuade investors to give you money?
That’s exactly what we are going to be discussing today!
Do You Actually NEED Funding?
First of all, we want you to take a step back, look at your business idea, and ask yourself if you actually need funding.
Keep in mind that although raising capital may seem glamorous from the outside, it has some major drawbacks, such as:
Equity Dilution
Investors give you money in exchange for a piece of your company aka equity.
This may not seem like a big deal when all you have is an idea. However, as your business grows, that equity is going to increase in value. You might come to regret giving it away.
Loss of Control
Once you take someone’s money, it’s not just you anymore. They will want to have a say in how you run your company. And understandably so!
How much control they will have legally will depend on the contract that you signed but you will inevitably have some sort of obligations towards your investors.
Also, regardless of the legal aspects, you will probably feel indebted to them, which might affect your decision-making and complicate things.
Getting Fired
Finally, if you are considering raising venture capital, we strongly advise doing some research on what goes on behind the scenes in Silicon Valley.
As a founder, you might naively assume that you cannot get fired from your own startup. However, if your company has a board, its members probably can oust you if they want to.
This happens more often than you think, usually because the founder and the board members disagree on the direction that the company should take. As a result, the board decides to bring in “adult supervision” aka an experienced CEO, and replace the founder.
We don’t hear much about these situations because the founders who get kicked out of their own companies tend to stay silent. Why?
Because they want to remain on good terms with venture capitalists in case they need funding for their future endeavors. Discussing stuff like this publicly can get you blacklisted.
In addition to that, many founders get pressured into signing draconian NDAs to keep their equity and can’t talk out of fear of lawsuits.
If you want to read a horror story that illustrates what a lot of VC-backed founders go through, here’s a Twitter thread by Ian Crosby, the founder of Bench:
This thread has generated a lot of discussion so you can find more founders sharing their own experiences in the replies and quote tweets.
Avoid Raising Funding for as Long as Possible!
You want to avoid raising funding for as long as possible because once you do it, your business is going to change irreversibly. It’s in your best interest to see if you can make it work on your own before asking anyone for money!
Start by Bootstrapping
Think about it: if you were an investor, would you rather give money to someone who has a PowerPoint presentation or to someone who has a profitable business?
As Rob Walling, the co-founder of TinySeed put it, you want to build your business, not your pitch deck. It’s the single best thing you can do to raise funding.
Validate Your Idea With a Minimum Viable Product
Whatever your business idea is, you can probably bootstrap a minimum viable product.
For example, the founders of the chemical manufacturing startup Solugen built a tiny version of their reactor – small enough to fit on a desk – with their own money.
Once they were sure that their design worked, they built a larger version that was powerful enough to produce hydrogen peroxide in quantities that could be sold.
Then, they applied to Y Combinator. Unlike a lot of other aspiring entrepreneurs who apply to this famous startup accelerator, they had more than just an innovative idea – they had a working reactor.
Then, while at Y Combinator, they zeroed in on selling hydrogen peroxide to hot tub stores. Hardly glamorous but by the end of the program, they were bringing in $10k per month in revenue.
This modest success enabled them to raise $4M which they used to build their company. Since then, they have raised more than $400M and grown Solugen to a $2.2B valuation!
The takeaway here is this: if a chemical manufacturing startup can bootstrap the minimum viable version of their innovative technology, you can probably bootstrap whatever it is that you have in mind!
Do Things That Don’t Scale to Get Your First Customers
Paul Graham, who’s a co-founder of Y Combinator, wrote a now-classic essay called “Do Things That Don’t Scale”.
In this essay, he argues that in order to get your startup off the ground, you need to be willing to do things that don’t scale to acquire your first customers.
In practice, this typically means in-person sales, cold emails, and cold calls. It’s worth remembering that the founders of Airbnb, a company now valued at more than $85B, started out by going door-to-door in New York to recruit users for their platform.
So do whatever it takes to get customers, even if you know that it won’t scale. Needless to say, the larger your customer base, the easier it will be for you to raise funding!
Get to Ramen Profitability
Paul Graham also popularized the term “ramen profitability” which denotes the point where a startup becomes profitable enough to cover the founders’ living expenses.
Basically, once you are making enough money to pay rent, buy gas, and subsist on ramen noodles, you are ramen profitable.
This is an important milestone because it means that you don’t need to raise funding in order to continue working on your startup. You are not desperate for money anymore.
Also, as Graham pointed out, it makes you more attractive to potential investors because it proves that:
- You can get someone to pay you
- You are serious about building things that people want
- You are disciplined enough to keep your expenses low
Ideally, you want to reach ramen profitability before you start seeking funding because it will give you more options and enable you to negotiate better terms.
What Type of Funding Can You Raise?
Angel Funding
Angel investors are individuals who invest in early-stage startups.
The amount of money they put in tends to be relatively small, usually ranging from $5k to $250k.
Angels bring more than money to the table, though. They tend to be retired entrepreneurs who had successful exits and now want to participate in the startup scene without having to go through the grind of building a business.
This means that they can offer mentorship, experience, and connections, which can all be extremely valuable, especially for first-time founders.
However, it can be difficult to get on the radar of angel investors as this type of funding often relies on introductions by people you know.
Indie Funding
Indie funding revolves around investing in startups that have potential for seven or eight-figure exits, typically promising SaaS companies.
It can be a great option if you want to create a sustainable business that can be sold for a life-changing amount of money and aren’t interested in chasing the Silicon Valley dream of building the next “unicorn” (a billion-dollar company).
TinySeed is one of the main players in this niche. If you want to learn more about indie funding, consider watching this video where Rob Walling explains how it works:
Venture Funding
Venture funding revolves around investing in startups that have the potential to reach a billion-dollar valuation.
It’s a high-risk, high-reward game where venture capitalists make a bunch of bets and hope that a few of those companies will become unicorns and generate 100x+ returns.
The only reason to seek venture funding is if you believe that you can turn your business idea into a billion-dollar company. Just know that the odds of success are abysmal and that you will almost certainly fail.
Rob Walling has made a helpful video where he explains how venture funding works in less than five minutes:
How to Pitch Potential Investors
Now with all that out of the way, let’s talk about pitching investors. How should you go about it?
Arguably, one of the best resources on that is Y Combinator partner Michael Seibel’s talk “How to Perfectly Pitch Your Seed Stage Startup”.
We are going to highlight some of the key takeaways but we highly recommend watching this talk in its entirety. You can find it below.
Common Elements of a Seed Stage Pitch Deck
Your pitch deck should include this information:
- What do you do?
- Your team
- Traction
- Unique insights
- Market size
- Ask
Arrange your slides in descending order from the most impressive stuff to the least impressive stuff. This will help you grab the investor’s attention.
Now let’s take a closer look at each of these components:
What do You do?
If the investor doesn’t understand what your company does, they certainly won’t be interested in funding it.
Keep in mind that if they don’t belong to your target audience, you shouldn’t be talking to them the same way you would talk to a potential customer because it won’t resonate with them.
You as the founder need to figure out how to explain your unique value proposition in a way that will make sense to them.
Seibel advises using this formula: a simple two-sentence description of what your startup does with a specific example. That’s it. Keep it concise!
Your Team
You want to be clear who are the co-founders, who are the employees and what are everyone’s titles.
Investors tend to be particularly interested in who’s the CEO because that is the person who will be handling the money. If you are building a software product, they will also want to know who will be writing the code.
Refrain from sharing life stories, just state the facts. If someone on your team has done something impressive in the past, make sure to mention that specific accomplishment in a factual way.
Traction
Seibel emphasizes that you can have traction even if you are pre-launch because it’s about:
- What you’ve done
- Why that’s impressive
It’s important to note that you also need to explain the timeline. Okay, you got 100 users, but how long did it take you? If you did it in a month, that’s impressive, if you did it in two years, much less so.
Investors are looking for momentum. They want to fund founders who get things done quickly. That’s what you want to communicate when talking about traction.
Also, if you don’t have any traction yet, simply don’t include that slide in your pitch deck. A bad traction slide is worse than no traction slide!
Unique Insights
Investors prefer to fund founders who have unique insights into the problem, the solution, and the target audience.
If you want to include this slide:
- Make sure that your insights are indeed unique and not just basic common sense.
- Provide specific examples to illustrate them.
- Use numbers and facts whenever possible.
It’s okay to incorporate storytelling but avoid being vague.
Market Size
The market size slide should provide a bottoms-up calculation where you multiply the number of customers by the revenue per customer per year.
The investor may not be familiar with that market so it’s your job to educate them on this business opportunity. Make sure to show them the math and explain the competitive landscape.
This will also help you to establish yourself as an expert. Needless to say, investors want to fund experts!
Ask
According to Seibel, around 70% of founders present their pitch decks and answer the investor’s questions but don’t actually ask for money. You need to end your pitch with a clear call to action!
Start a Conversation
You don’t want to present your pitch deck like a school report where you just recite the information in a monologue. Ideally, you should draw the investor into a conversation.
Make Your Slide Design Boring
This tip might seem counterintuitive but you want your slides to look as boring as possible: black text on a white background and only the images that are absolutely necessary, like your revenue chart.
That way, the investors will be more likely to pay attention to what you’re saying because they won’t get distracted by cool backgrounds or crazy graphics.
As Seibel put it, if you need a designer to build a pitch deck, you’re doing it wrong. It should be visually uninteresting.
Watch: How to Perfectly Pitch Your Seed Stage Startup
Again, we highly recommend watching the entire talk:
Sales Funnels: Startup Growth Secret Sauce!
Ultimately, what investors want to see is growth. In fact, according to Paul Graham, startup = growth. So the question is how can you grow your business fast?
This is where sales funnels come in. Our founders used them to bootstrap our SaaS company from zero to $10M+ in annual revenue in just one year. Pretty crazy, right?
When your business is growing that fast, you don’t need to seek investors – they come knocking on your door. However, our founders chose to continue bootstrapping.
Now, more than a decade later, our annual revenue is at $100M+ and we are still growing!
Want to Learn How to Build Sales Funnels That CONVERT?
Our co-founder Russell Brunson is widely considered to be one of the top sales funnel experts in the world. Want to learn from him?
His best-selling book “DotCom Secrets” is the best place to start because it covers everything you need to know in order to build sales funnels that convert.
This book is available on Amazon where it has over 2,500 global ratings and a 4.7-star overall rating.
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