4 Key Areas To Understand Before Starting Your Funding Journey

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One of the often underestimated aspects of fundraising revolves around the crucial element of planning. This oversight is significant because, lacking a well-thought-out plan, there’s a high probability of pursuing inappropriate funding sources, targeting the wrong investors, or aiming for an inaccurate funding amount.

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Establishing a clear roadmap detailing how, when, from whom, and why you intend to raise capital is paramount for ensuring success in your fundraising endeavours.

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Regrettably, many founders neglect the pivotal role of planning in a fundraising round. Frequently, they hastily dive into creating a pitch deck, exploring investor databases, and presenting their ideas without a strategic foundation. This inclination is understandable.

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Conventional educational institutions rarely teach the skills needed to navigate the intricacies of capital raising or introduce the concept of investment readiness. This gap in knowledge inspired the development of the FundingHero platform, designed to empower founders with my 6-pillars of fundraising.

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The first pillar of the FundingHero framework delves into fundraise planning. Here, you’ll gain insights into four essential areas that demand understanding before embarking on your fundraising journey.

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1. Start with a Fundraise Plan:

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Your fundraise plan is the backbone of your fundraising journey. Remember, fundraising is not a one-time event but an ongoing business function. Here’s what you should know:

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Continuous Business Function: Fundraising isn’t a sprint; it’s a marathon. It will impact several areas of your business, making it vital to view fundraising as an ongoing function with peaks and troughs. This perspective is especially crucial if you’re aiming for a journey from idea to exit.

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Multiple Funding Rounds: Early-stage companies should anticipate the need for numerous funding rounds every 12-18 months. The business world is uncertain, and you might need fresh capital for unforeseen opportunities or challenges.

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Success Determines Business Success: The success of your fundraising efforts directly impacts your business’s trajectory. It keeps your business solvent, fuels growth, and maintains momentum. So, start building a well-oiled fundraising machine to execute your dream exit.

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Before you start on this funding journey, brace yourself for the reality of fundraising:

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No Guarantees: Success isn’t guaranteed in fundraising. Be prepared for rejection and uncertainty.

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Time-Consuming: You’ll devote a significant chunk of your time to fundraising, often between 60-100%.

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Potential Risks: Your fundraising efforts could put your hard-earned progress at risk.

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Major Distraction: Fundraising can be a significant distraction, lasting from 6 to 12 months.

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To increase your chances of success, create a robust fundraising plan that outlines your goals, target investors, and pitch perfection. For your plan, consider the following 3 areas which we will look at next:

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1. Fundraising Strategy
2. Fundraising Budget
3. Fundraising Timeline

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The sequence outlined above is a well-structured approach because it begins with establishing your financial strategy, which, in turn, serves as the foundation for understanding the extent and pace of your funding requirements. 

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This, then, defines the nature and degree of external assistance required, then influencing the feasibility and budgeting of expenses. This kind of strategic financial planning enables you to reverse-engineer your timeline, aligning all the crucial elements of your journey in a cohesive manner.

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2. Create a fundraising strategy for a tailored path to success

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When it comes to startups, no two businesses are identical. Each one is a unique entity, shaped by its industry, market, growth trajectory, size, and the founder’s vision. It’s this individuality that underscores the importance of crafting a financial strategy that’s uniquely suited to your venture.

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Assessing Funding Needs: The purpose of your financial strategy is to anticipate your funding requirements, plotting what you need, when you need it, and how to secure it. This means being several steps ahead in your financial planning. It involves considering:

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Growth Capital Needs: Identifying areas where you require capital to expand, whether it’s diversifying your product line, entering new markets, or scaling operations.

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Working Capital Requirements: Ensuring day-to-day operational needs are met to maintain financial stability.

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This alignment of your financial strategy with your business plan, ideally over a 3 to 5-year span, paves the way to acquiring the right funding from relevant sources. It’s crucial to remember that not every startup shares the same journey.

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Diverse Paths, Different Strategies: Raising substantial capital from day one isn’t the only way to grow. There are multiple routes that cater to varying risk profiles, and it’s essential to debunk the misconception that the ‘done way’ is to seek venture capital immediately. In reality, only about 1 in 100 applicants succeed in securing venture capital.

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Consider these three straightforward financial growth strategies:

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1. Bootstrap: This self-funded approach allows for organic growth and retains control. It’s ideal for those averse to external influence.

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2. Fundraise and Build: Relying on fundraising as the primary source of capital, this strategy involves investing the initial funds to reach a pivotal milestone, such as entering the market or achieving a significant proof point.

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3. High-Growth: This path prioritises rapid scaling and value creation, often at the expense of short-term profit. It’s particularly attractive to venture capitalists seeking substantial returns.

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As you decide on your growth path, contemplate key factors:

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• Risk Tolerance: Your comfort level with risk and uncertainty.
• External Influence: The extent of external influence you’re willing to accept.
• Growth Velocity: Your growth objectives and the speed at which you intend to achieve them.
• Shareholder Considerations: Your plans for shareholders and the relationships you aim to establish.

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Your answers will guide you in determining the funding types and levels that align with your distinct business vision. The choice between a larger share of a smaller exit or a smaller share of a more substantial exit hinges on your personal aspirations.

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Your chosen path, the funding you seek, and the strategy you employ should align seamlessly with your business’s uniqueness and your future ambitions. The key is to develop a financial strategy that not only keeps you financially stable but also propels your business toward your envisioned success.

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3. Fundraising Budget 

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Fundraising doesn’t come without costs—whether in terms of hard cash or the opportunity cost of your precious time. As you navigate the fundraising landscape, identifying and managing these expenses is crucial:

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Assessing the Costs: The level of costs associated with fundraising increases as you aim for larger amounts. It’s a prudent approach to budget between 5% and 15% of your fundraising target to cover these expenses. Let’s look at an overview of the common types of costs you should consider when raising capital:

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Legal Fees: This is an area where specialist expertise is paramount. Engaging a legal expert is vital when dealing with shareholder agreements, term sheets, and issuing share certificates. Mistakes in these areas can be costly. Overall legal fees can range from thousands to tens of thousands of pounds, depending on the size and complexity of your raise. It’s wise to obtain quotes to budget appropriately, particularly if you plan on raising money through a fund or venture capital, as your business may be required to cover their significant legal fees.

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Tax Relief Schemes: The Seed Enterprise Incentive Scheme (SEIS) and the Enterprise Investment Scheme (EIS) provide favourable tax reliefs to investors. You should apply for advanced assurance from HMRC to make your startup more appealing to investors. These schemes can reimburse up to 30% (EIS) or 50% (SEIS) to investors, and additional benefits include loss relief if your company fails and no capital gains tax on exit. Investigating your eligibility for SEIS and EIS advanced assurance should be a priority.

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Investor Network Access: Depending on your strategy, there may be a requirement to pay to access investor networks or Angel Groups to present your pitch. Fees typically cover administration, due diligence, platform usage, and marketing of your deal to their network. These costs may range from a few hundred pounds to a few thousand pounds.

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Financial Expertise: Your financial numbers are a critical part of your business story, and investors may scrutinise them closely. If you lack in-house financial expertise, it’s beneficial to seek an experienced fractional CFO or Finance Director who can help position your financial model for the specific investors you want to attract. Costs can vary widely, from a financial model template that costs a few hundred pounds to hiring a professional who can charge from £500 to £5,000, depending on your business’s complexity, stage, and requirements.

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Additional Fees: Be mindful of other potential fees, such as equity commissions, debt commissions, grant commissions, investment platforms, investor lists, broker fees, events and travel, online software, PR, and more. These expenses can vary significantly, and you should consider their impact on your overall budget.

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Incorporating Costs into Your Plan: It’s essential to incorporate these costs into your financial model, particularly in your cashflow and budget. Timing is crucial, as some costs will be incurred both before and after your fundraising efforts. Managing these financial challenges may be daunting, so a clear pre-raise cash flow plan is essential to ensure you consider the timing of your fundraising and the associated costs.

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By revising your budget with an updated understanding of costs, you can better determine your fundraising target and valuation. Properly managing your budget allows you to go about your fundraising journey with confidence, making sure that the expenses do not become overwhelming obstacles.

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4. Fundraising Timeline 

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Most fundraises kick off three to six months later than they should, leaving entrepreneurs racing against the clock. However, there’s a structured method to the fundraising madness, which I’ll go through below. Balancing your time efficiently is a substantial challenge when you’re wearing multiple hats, running your business, and learning a whole new skill set to master fundraising. Understanding the logical sequence of activities is vital to ensure a smooth and successful process.

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Perfect Timing: Starting your fundraising journey at the right moment is paramount. It’s best to launch your campaign from a position of strength, where strong traction is already behind you. Selecting the right time of the year is also crucial. For instance, reaching out to investors in December, typically caught up in holiday festivities, might not yield the desired results.

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Understanding the Process: Fundraising involves several phases, and it’s vital to have a clear roadmap to navigate them:

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Preparation: This phase entails engaging third parties, constructing a campaign narrative, and organising the information potential investors will require. Preparation consumes considerable time, so it’s essential to start well in advance while simultaneously managing your business.

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Planning: By the end of the preparation phase, you should have your financial strategy defined, raise budget captured, third-party support arranged, a realistic campaign timeline, suitable funding types identified, a complete set of investment materials ready, an ask and valuation that are justifiable, initial investor approach lists created, a polished pitch, a communication plan, and a data room with all investment materials in place. When you have all these elements ready, you can begin approaching investors.

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Networking: Networking with investors should be an ongoing activity for your business. Building relationships can prove invaluable not only during current rounds but also in future rounds, exits, partnerships, and advisory support.

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Organisation: Maintaining impeccable organisation is a must during any fundraise. Use an investor tracker, whether it’s a spreadsheet, CRM, or specialised software platform. This central repository for all outreach, meetings, follow-ups, and next actions streamlines the process.

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Segmentation: Consider breaking down your round into smaller amounts based on the size of your raise and the types of investors you’re targeting. This segmentation will help you focus your efforts, whether it’s the significant check investors delivering 20-60%, medium check investors providing 30%, or small check investors contributing 10-20%.

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Strategic Timing: Timing is everything in the fundraising world. Well-planned events can kickstart your campaign, maintain investor engagement, generate interest, and instill confidence to close deals. Events, whether in person or online, offer critical forums for engagement, investor buy-in, and positive PR.

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Build Rapport: Don’t rush to close a deal too quickly. Instead, focus on building rapport with potential investors. Allow them to become familiar with you and your business. Let them witness your operational style and gradually win them over. This patient approach often yields better results than trying to rush to the finish line.

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Raise Window: Working within a raise window creates a sense of urgency to close your round, allowing you to shift your focus from fundraising back to growing your business. The timeline for closing each investor’s deal can vary widely. Some may come together in just a few weeks, while others might extend for months due to legal complexities. An efficient venture capital investment usually takes around 8-10 weeks from start to finish, but every deal is unique.

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By adhering to this methodical approach and understanding the critical phases of the fundraising process, you can navigate the marathon with precision. Remember, it’s not just about securing funds; it’s about creating lasting relationships with investors who share your vision for success.

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Closing thoughts

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The FundingHero framework explores four crucial areas in Pillar 1: a robust fundraise plan, a tailored fundraising strategy, a well-structured budget, and a systematic fundraising timeline. 

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On the platform you will see interactive sections which allow you to plan your whole fundraise inside the platform with guided-learning carousels. Following the free section (Pillar 1) of our platform you can choose to upgrade your access to unlock: 

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The 6 pillars of fundraising by Fundinghero:

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1. Planning
2. Funding
3. Materials
4. Ask & Valuation
5. Pitching
6. Due Diligence

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To delve deeper into the 6 pillars of fundraising by Fundinghero and access valuable resources, bite-sized learning, trackers, calculators, and an investor database, sign up for FundingHero. Our platform equips you with the knowledge to help you get funded faster. 

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Sign up here.

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