It has been a challenging fundraising environment for startups in 2016. After years of strong venture financing activity, equity capital has grown scarcer: investment in U.S. venture-backed companies dropped 30% from Q2 '15 to Q1 '16.
Companies of scale in my industry of online lending, for example, made more than 10 fundraising announcements last year. So far this year, there have only been two.
My company was one of them. In July, we announced over $300 million in funding.
From that experience, I can share a few things about raising capital in today's environment. Three areas, in particular, are important to focus on, each of which helped us secure our most recent round and can also help other entrepreneurs looking to raise capital.
Focus on the Fundamentals
In good times and bad, fundamentals win – if not immediately, then over time. As an entrepreneur, you need to expertly communicate the fundamentals of your business to prospective investors.
Some of the key questions you need to be able to answer include:
- What do your unit economics look like?
- What is your Lifetime Value (LTV) to Customer Acquisition Costs (CAC) ratio?
- Are you making a profitable product on the margin? (i.e., are you making money on each additional product sold?)
It’s important for investors to see that you have a demonstrated track record of having scaled your business cost-effectively. Presenting these metrics helps you do that. In our case, we were able to show that our unit economics have remained positive and that our LTV:CAC ratio has been above industry standard (meaning we’re able to acquire our next customer at a lower cost than most). Metrics like this allow you to prove that you’ve been disciplined with your capital as you've grown. If you’re saying you need more money to run the business, then you need to earn the right to do so with past performance, not just future promise.
Entrepreneurs can certainly count on investors asking about these metrics within the first five minutes of conversation, so it’s best to be prepared.
Know What Winning Looks Like
Entrepreneurs who are looking to raise capital must know why they’re going to win. It’s no longer enough to simply have a great idea, show some decent early results and get eight-figure investments. Now, more than ever, entrepreneurs need to have tangible reasons for why they are going to be successful where others may not be.
As part of this process, it's important to have a strong story and to tell it effectively in order to build credibility with investors.
In our case, we identified what investors really wanted to understand, which was our strategy on: 1) capital, 2) customer acquisition and 3) technology. We made sure to cover these in detail and clearly laid out our strategy for winning – not just with narrative, but also with relevant data that helped prove the story – such that when we got into a meeting, we made the most of every minute and addressed what we knew was likely top of mind.
Investors wanted to know what the company has done or will do that will give us the proverbial “unfair advantage” in the market. In our case, one of the things we did was discuss our acquisition of student loan platform Gradible, in order to diversify our revenue streams and increase our market penetration. That acquisition has enabled us to launch a student loan evaluation tool that helps everyone with student loans – regardless of income or credit history – determine the best ways to manage their debt. It also allows us to now enable employers to contribute directly to their employees’ student loan payments. Investors liked hearing about revenue and technological differentiation as well as the opportunity to acquire more customers.
Manage the Resistance
While it is currently not easy for entrepreneurs to raise capital, this is the time when truly great businesses are built. Between 2008 and 2009, in the midst of the financial crisis, Uber and Airbnb were just getting started. Companies can thrive in any environment. The best entrepreneurs are prepared for rejection, and use it as fuel to get better.
Absorb every piece of feedback and improve based on that feedback. Sometimes, this could mean a shift in your business operations. Or, often, it could mean repositioning the way you communicate key facts and metrics so that your next investor meeting will be better. And remember that a ‘no’ from an investor today can become a ‘yes’ in your next round if you continue building a successful business that can last.
Rejection and resistance are going to look different for everyone. In our case, in addition to facing a tougher market for startup investment in general, we had faced some negative headlines affecting our industry. Instead of dwelling on it, we took it as an opportunity to walk through how CommonBond was unique on key dimensions that mattered.
As always, there will be investors who pass on the opportunity. Don’t take it personally – just as important as product-market fit is investor-company fit. Instead of dwelling on those who don’t invest in the company, it’s best to focus your efforts on finding the right investor. In our case, we knew it needed to be someone with a long-term view who understood that lending is a strong and profitable business over the long term. By following this strategy, we ended up partnering with Neuberger Berman Private Equity, which led our most recent equity round.
In today’s more challenging funding environment for startups, it’s more critical than ever to understand the strategies and tactics that set you up for success as an entrepreneur – well before you step into a board room and power up a PowerPoint deck. By focusing on the fundamentals of your business, knowing and articulating why you will succeed, and effectively handling resistance, you’re in a far better position to maximize the chances of getting that next round of funding.
