Fundraising is an important part of your start-up journey. While you might be able to bootstrap your growth for the first year or so, at some point you’ll need to look for external funding to accelerate your hiring, marketing, and growth.
Whether you’re raising from VCs, banks, or angel investors, it’s important that you raise funding on the right terms. You don’t want to give away too much equity, nor lock yourself into painful terms that come back to bite you.
So, don’t just leap into fundraising unprepared. It’s important to approach the process strategically and intelligently. And, as an entrepreneur, one of your most important focuses should be taking steps to drive up your company valuation in advance of the fundraise itself.
A higher valuation means that you’ll either raise more money or hold on to more equity. But, how do you maximise your valuation? The following five tips will give you an edge over your competition when looking to raise funds on better, more economic terms.
1. Demonstrate traction
Don’t raise funding too early. It’s better to put together a so-called minimum viable product (or MVP in start-up lingo) to generate some industry demand and traction before doing out to VCs and other funding sources.
This early traction will give you an evidence base to argue for a higher valuation by demonstrating your potential. If you try to raise funding too early, then all you have is a concept and idea. And it’s very difficult to value a concept.
Instead, both you and your potential funders will just be guessing at the valuation or, even worse, just picking numbers out of the air. The result is that you will not be in a good position to fight back against funders pushing down your valuation.
That said, early traction doesn’t need to be sales and finances. It might just be the number of social media followers that your start-up has generated within a certain period of time, the size of your launch waiting list, or otherwise.
2. Showcase your team
At an early stage, investors are often backing the team and their ability to get things done. In fact, one of the greatest predictors of the success of a business is the quality and track-record of the founding team.
Most investors know that the early-stage concept that you present to them may have to change, pivot, and evolve over the coming years. As you scale, you will not only need to make changes in response in the fast-moving competitive environment but also in response to you discovering new, unexpected opportunities. That’s why many investors say that when it comes to start-up investment, they are really just backing the team.
However, many start-ups overlook profiling and raising the profile of their teams during the fundraising cycle. They put a huge amount of energy into showcasing the company and its products, but then stick the photographs and biographies of all their key team members on a single slide at the end of their fundraising deck.
If you’re looking to drive up the valuation of your start-up, consider investing in the profile and credentials of your team. This might mean investing in an executive thought leadership programme, engaging a public relations agency, or otherwise.
3. Signpost opportunities for growth
When investors back a business, they are investing in the future potential of the start-up. For example, although you might be operating in a very narrow niche today, your investors might be investing in your business with a view to your expansion potential, such as how you can tap into new markets, launch allied products, or tailor your product to other use-cases.
However, too often, many start-up founders only focus on what their business, products, services, and finances look like today. That’s important, of course. You want your pitch to be credible and grounded in reality.
But you need to dedicate a significant component of your pitch to the wider, longer-term growth vision: not only selling your existing product to more of the same types of customers, but, instead, showing that you’re in a unique position to sell to different markets or cross-sell other products and services to your existing customers.
This is important because the multiple that you can command for your business will very much depend on the potential. If you can show that your business can multiple its revenue by 10 over the next 12 months or beyond, you will get a higher valuation than if you could just show a doubling in revenue. Linear growth is not enough. Investors are looking for exponential scaling.
4. Fundraise when you’re strong
Do not wait until you need the money to fundraise. It’s very easy to put off fundraising when everything is going smoothly. If you don’t need the money today, why go through all the faff, stress, and effort of raising money.
But this is wrong for two reasons. Firstly, if you wait until you need the money, then there need be added pressure to take a deal regardless of what you’re offered. If you get an offer from only one VC at a low valuation, you will be forced to accept it. You won’t have any other option.
Secondly, if you’ve waited until your financial position is jittery or your growth has slowed, then it’ll be much more difficult to paint yourself as a strong, high-growth, and disruptive start-up. You risk ruining the whole narrative about the strength of your business and the potential returns that it will deliver to investors. The result? A lower valuation.
5. Hit the market at the right time
Finally, this last one is a little more difficult to control, but one of the greatest determinants of commanding a higher valuation is market timing. It’s no secret that markets rise and fall. Sometimes markets benefit from so-called irrational exuberance, where investors are optimistic, positive, and willing to pay higher valuations. Other times markets can be depressed.
At the moment, we’re going through a relatively depressed market, but that isn’t completely the case. In particular, some areas of tech, such as AI, are commanding strong valuations, while others, such as plant-based meat start-ups, are starting to come off the boil.
If your industry is hot right now and your competitors are raising a lot of capital, then this is a signal you should be doing the same. Don’t put it off because a market can change in the blink of an eye. Take advantage of a bull market before it’s too late.
Raising funding can feel like a real grind and distraction for many start-ups. But it’s often an essential ingredient for growing a large and successful company. While pushing up the valuation of your business may not always be under your control, if you follow some of the tips above, you will be in a better position than many other businesses.