5 Things Funders Want to Know

  • September 8, 2022

One of the things we always stress to our clients is that determining what a funder is looking for is based on the individual Funding Opportunity Announcement (FOA), but there are some general guidelines to consider for all funders outside of an FOA. These guidelines apply to small businesses looking for any type of funding (e.g., VC/Angel funding, local small business economic development grants, and even some pitch competitions or advanced stage accelerators).

#1: Stage Qualifications

Pre-seed and seed-stage are the most common stage of business requirements for many grant opportunities we work on with clients. Funders want to help emerging businesses get off the ground and not give further resources to businesses already generating a large amount of revenue. For this reason, you will often see that applicants must be in the pre-seed or seed stage of revenue. What does this mean exactly?

Pre-Seed Funding

The earliest stage of funding a new company comes so early in the process that it is not generally included among the rounds of funding at all. Known as “pre-seed” funding, this stage typically refers to the period in which a company’s founders are first getting their operations off the ground. The most common “pre-seed” funders are the founders themselves, as well as close friends, supporters and family.

The earliest stage of funding a new company comes so early in the process that it is not generally included among the rounds of funding at all. Known as “pre-seed” funding, this stage typically refers to the period in which a company’s founders are first getting their operations off the ground. The most common “pre-seed” funders are the founders themselves, as well as close friends, supporters and family.

Seed Funding

Seed funding is the first official equity funding stage. It typically represents the first official money that a business venture or enterprise raises. Some companies never extend beyond seed funding into Series A rounds or beyond.

You can think of the “seed” funding as part of an analogy for planting a tree. This early financial support is ideally the “seed” which will help to grow the business. Given enough revenue and a successful business strategy, as well as the perseverance and dedication of investors, the company will hopefully eventually grow into a “tree.”

Seed funding helps a company to finance its first steps, including things like market research and product development. With seed funding, a company has assistance in determining what its final products will be and who its target demographic is. Seed funding is used to employ a founding team to complete these tasks.

https://www.investopedia.com/articles/personal-finance/102015/series-b-c-funding-what-it-all-means-and-how-it-works.asp

#2: Founders and Team

Funders will only provide capital to entities with demonstrable expertise to do the work required. This means that founders must have domain expertise, and all team members must have quantifiable products to show for their experience in the field. Funders must be able to explain what their own and each member’s role and responsibility will be on the project and why they are the right person for the job.

Pro Tip: This is not the time to throw in those fluffy adjectives about your work style you added to your CV in the early 2000s. Funders do not care if you are a “motivated team player that works well with others” or your “creative thinking and problem-solving skills.” Funders want to know how you will provide a return on their investments. Without relevant expertise to prove you know how to do what you are planning, there is no way for them to guarantee you are a sound investment.

#3: Traction/Paying Customers

Since applicants will be seed or pre-seed, they will not need paying customers. However, do not make the rookie mistake of assuming this means you can get to customer discovery later. You do not need customers, but you need traction with potential customers. This means letters of support from actual businesses who can attest that they are anxiously awaiting the day when they can give you money for your product because it is leaps and bounds better/faster/easier than what they are using now. This also means that you have homework to do before applying. This includes customer discovery interviews, building a competitor matrix, and understanding how your product addresses pain points.

#4: Revenue plan

Investors are parting with their cash for one reason only – to make more of it. They are not investing to help you, your business, or society. This means that whenever you approach a funder (if you expect to be given serious consideration), you must show a clear path to revenue within 12/18 months. This includes doing all relevant market research to determine how similar products are sold, what the potential market is, and completing revenue projections. The next step is to determine what resources you will need to sell this product. Will you need a bigger space? Will you need to hire additional team members for manufacturing or sales? If you do not know the answer to these questions, will you have to hire a business development specialist or COO to develop and implement a plan and track progress? Finally, you will have to implement a commercialization plan and timeline to show funders how you plan to get from where you are now to a place in which you are generating revenue within ~one year.

#5: Value proposition

The product must have a strong value proposition. This means what the product can do in relation to industry-standard products. Investors do not want to hear that it can “mitigate frustration” or “improve quality of life” for customers (unless you come up with a way to scientifically measure subjective feelings like frustration and contentment, in which case everyone will want to invest in you). What does it do right now when stacked against market competitors? Is it faster? Less expensive? More precise? More customizable? This needs to be a measurable value that takes comparison into account. What can a customer get out of this product that they will not get if they buy from your nearest market competitor?

error: