Getting investment represents a challenge and every CEO of a company of this type must concentrate on creating an attractive product for the market.
In the United States, 9 out of 10 startups fail to survive, while in Mexico 75% of new businesses fail before they are two years old, according to the Center for the Development of Business Competitiveness. In addition to this, the second reason why startups fail is the lack of capital (29%) and the lack of interest from investment funds ranks number 16 (8%) according to CB Insights “12 reasons startups fail” . Obtaining investment represents a challenge and every CEO of a company of this type must concentrate on creating an attractive product for the market, hiring a great team, maximizing sales, keeping his clients happy that he has already acquired and raising capital .
In theory it should be understood as is; However, in practice it is much more than that, the CEO should make sure they know when their cash will run out, understand what milestones need to be reached before the highest valuation time, create the right plan to achieve those milestones in the appropriate term, but there are some ways to optimize your capital raising strategy and at G2 Consultores, a firm specialized in startups with a seed capital fund for companies like yours, we give you the following recommendations:
1. Understand how startups are valued
First, you should know that valuations do not remain static or grow linearly over time. In practice it doesn’t work that way. Valuations are based on risk calculations and investment returns, obviously the value of your company is involved. Valuations increase as the level of risk decreases or when the size of the reward for investors increases, that is, the value of the shares or what they would obtain at that time as ROI (return on investment), for example.
Risk is not reduced linearly over time, but changes based on the milestones you reach, for example customer traction, hiring a solid team that guarantees the delivery of a product or service to the customer, that the strategy monetization works and is proven; It should be demonstrated that a product market fit has been reached, that the technology works or the team’s ability to execute, and given the moment that you have established yourself as a market leader.
2. Identify your risks
In early stages, the risks to which you are subjected can vary a lot, the important thing is to identify them. For example, if you are in the early stages, the biggest risk you take is checking that the technology or principle works. In other examples, there may be risks in the execution when hiring a team, or when demonstrating the monetization of a product (surely it has demonstrated that the product is accepted by the market for free but it remains to be verified that it is willing to pay for it). Another type of risk may be that the market is too busy and there is no way to penetrate it or that you are not clear when you will take off in the market.
3. Look for quick ways to mitigate risks
For example, if you are looking to go for a Seed round, any customer traction test can greatly reduce the risk of product or service launch and increase valuation. The goal would be to get enough customers to validate that this meets a real need and are willing to pay for it. Do those activities that allow you to achieve this demonstration before you get to your round of capital raising.
4. Raise enough money to reach certain milestones
Identify the next milestones you would like to achieve to significantly reduce your company’s risk. Once you’ve identified that milestone, think about how long it will take you to get to that point (with some conservatism) and what will allow you to get to the next investment round. Remember that the success of companies is much more important than dilution. A mistake that is made a lot is that to avoid it, less money is collected. Pick up what needs to be lifted for that round.
5. Validate milestones with your investors
Consider with your current investors (if you already have some) that the milestones you have chosen to reach in the next round are sufficient and adequate to guarantee the increase in the company’s valuation.
6. Focus your energies on reaching those milestones
As CEO of the company one of your key roles is to bring focus and clarity to your entire company, letting them know that executing those milestones should become the primary focus. Don’t get distracted from it.
Many times the initial rounds are not achieved as quickly as you think due to failures in their execution, so it is important that you plan properly.
6 Ways, capital raising strategy, Money rules, optimize