The most important principle of startup fundraising that every entrepreneur needs to know is: raise enough capital to achieve a set of milestones that will allow the company to attract the next round of investment. As a startup with zero to very low revenue, your friends, family, and cofounders do not expect you to have achieved very many major milestones. Nonetheless, there are a few key milestones that you will need to achieve in order to get them to sign over the check.
Business Plan
Ideally, you will have a business plan with complete market research and a financial model. You will need demonstrate the product, its advantages, who the market is, how the business will run, capital requirements, and financials demonstrating the financial model. If your product is not developed, you will need some sort of mockup.
Personal Investment
Investors at any stage like to see that you have committed personal funds in addition to sweat equity. First, if you aren’t willing to assume any of the risk, neither will investors. Additionally, by putting some skin in the game you are showing your commitment to the company.
Capital and Milestone Timeline
Part of your pitch documentation needs to be centered on your capitalization strategy. You will need to reverse engineer a timeline of capital infusions based on the key milestones that you will achieve with each round of capital. You will want to demonstrate this timeline and the strategy behind it as well as the effects of accomplished milestones on the company’s future valuation.
Market Validation
You likely will not be in a position to achieve the ideal form of market validation: paying customers. However, you may be able to secure letters of intent, customer surveys, or even customer endorsements based on mockups that you have shown them. Market validation can also come in the form of successful companies selling similar products. If none of this is possible, you will want to convincingly demonstrate that there is a real need for the product in the market.
Prior Success
The best milestone that you can achieve to raise your chances of obtaining friends, family, and founder funding is prior success. Ideally, you will want to demonstrate prior startup success as well as prior success with raising capital. If you are a first time entrepreneur you can demonstrate prior career success and entrepreneurial skillsets.
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This book overviews best practices for raising money from the first people you go to — your family, friends & founders. Dealing with money in personal relationships can get a bit tricky. This guide will cover fundamental concepts, legal issues and material you’ll need. It will help prepare you for the difficult conversations and in some cases enable you to avoid them altogether.