Thursday, March 26, 2015

5 Things to Do Before Your Startup Tries to Raise Capital

 Raising Capital by Jonah Engler

You've developed a unique idea or product, and now you want to bring it to life. Unless you come from a wealthy family or have a bunch of money stashed away, you'll need to raise capital to make your dream become a reality. The following five must-dos are essential for any type of startup before you start pitching to investors:

Get a Mentor First

The process of raising capital is long, difficult and filled with ups and downs. Someone that has been through the process before successfully will be able to give you advice on what to do and what not to do.

Pick your mentor carefully. While a successful business owner might be able to tell you how to run a company, they might not have any experience with raising capital. Try to find someone close to you who has recently founded a company and has been through multiple funding rounds.

Do Your Research: Learn the VC Lingo

You might have the greatest idea in the world, but if you pitch investors without knowing any common terms or phrases used in the venture capital world, you'll get nowhere.

Talk with someone that is up to date on venture capital. Learn some of the lingo and what is going on with valuations. After doing some research on other startups, their valuations and how much money each one has raised at various rounds, you'll learn how to value your company and how much money you'll need to raise. Giving an investor some outrageously high valuation during a seed or A round will set you up for failure.

Hire a Lawyer

If you haven't hired an attorney and you're ready to ask for investments, you've missed a vital step.

Your attorney will be one of the most valuable people on your team. He or she will draft investment agreements, form an LLC or corporate entity with your state and assist with any other legal or formal paperwork that you need completed. If you're lucky enough, you'll be able to find an attorney that has experience helping startups and will be able to give you advice on valuations, stock dilution and more.

Perform Research About Your Competitors

Knowing the ins and outs of your market will not only help you build your business, but will help you sell your idea to investors.

Venture and angel investors need to know how your business will perform against the competitors. They want to know if the problem you solve is worth solving, if the market is big enough that you'll be able to make a nice return on their investment, and whether or not you'll be able to penetrate the market with the amount of money you're asking for if the market is extremely competitive.

Drawing up a specific plan about how you plan to spend the money will also help make investors feel more at ease. For example, if one of the weaknesses in the market you're trying to penetrate has to do with accessibility to a particular service and you want to create a mobile app that solves that problem, your money should be heavily invested into development and user interface design.

Create a Solid Team

Building a solid team is essential before asking investors for money. While you won't have funds to pay salaries, get potential team members excited about your idea and work with them on a part time basis until you get raise money for salaries.

While you might not be able to get that ex-developer from Facebook or marketing professional from Google, your team should be dedicated and have experience in each of their respective specialties.

Jonah Engler is a successful entrepreneur, investor, franchise owner and coffee lover who hails from New York City.

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