Looking for funding? Tips to approach potential investor organizations

Attracting funding for your startup is a crucial part of your growth and success. However, it is a challenging process that requires a well-planned strategy and fluid communication with investing entities.

Below is a guide on the investment organizations to turn to at different stages of a startup, the typical questions they might ask, and the documentation you should prepare to meet with them. In addition, we explain five tricks to help you get financing.

Phase 1. Pre-seed of a startup (“pre-seed”) and seed (“seed”)

The pre-seed and seed stages represent the starting point of the life of a startup. During these phases, the risk is high and it can be difficult to access financing unless you have a solid network of contacts.

What type of investment entities to look for?

Apart from the capital contributed by the founders, financing can be obtained from: 

• Friends, Family & Fools (FFF): contributions from friends, family and people around the entrepreneurial team, who believe in the project.
• Business angels: people who invest in the initial stages of emerging companies in exchange for an equity stake. They also usually play a mentor role.
• Subsidies and reimbursable advances: non-refundable subsidies or reimbursable advances from public administrations or other organizations.
• Crowdfunding platforms: offer an alternative form of financing where users can make small contributions in exchange for a return.

What questions can the investing entity ask you?

These are some of the questions investors could ask to learn more about your startup:

• Idea validation:
  • How did the business idea come about?
  • What evidence do you have that there is demand for your product or service?
  • Have you done any market validation or proof of concept?
• Founding team:
  • What are the key experience and skills of the team members?
  • What motivates you as an entrepreneur to carry out this project?
  • How did the team members meet and why did they decide to work together?
• Growth strategy:
  • What is your plan to scale the business?
  • How do you plan to acquire and retain customers?
  • What is your marketing and sales strategy?
• Business model:
  • What is your monetization strategy?
• Competition and differentiation:
  • Who are your main competitors and what is your competitive advantage?
  • How do you plan to maintain that competitive advantage as you grow?

 What documentation to prepare?

• Detailed business plan outlining the vision, business model and financial projections.
• Estimation of the required financing and planning of treasury management in the short, medium and long term.
• Partners Agreement.

Other aspects to take into account when looking for investment entities:

• The financing obtained that investment organizations usually offer you at this stage is relatively low.
• It is recommended not to give up more than 15% of the company's ownership to maintain control of it.
• The ownership stake in the company offered to investors is typically between 10% and 30%, reflecting confidence in the company's growth potential and the value that investors bring to the project.

Phase 2. Early stage

In the early phase, the minimum viable product (MVP) is already on the market and generating revenue. Therefore, the objective focuses on scaling the business model and consolidating the startup 's position in the market.

What type of investment entities to look for?

The following investment sources would mainly be sought:

• Venture capital (VC): Venture capital funds not only provide capital, but also strategic guidance and key connections that can be vital to the company's success.
• Accelerators: they have programs, mentoring, work spaces and contact networks that can help you accelerate the growth of startups.
• Business angels: individual investors who invest in emerging companies in exchange for a stake in the capital of the startups, can provide financing and advice.
• Venture debt: funds that offer financing through debt.
• Corporates, which not only do they provide capital, but they also have acceleration programs and offer the possibility of carrying out pilot tests, which will help you develop your project..

What questions can the investing entity ask you?

Here are some of the most common questions:

• Growth strategy:
  • How do you plan to scale the business in the coming years?
  • What are the planned expansion strategies?
• Business model and profitability:
  • How do you currently generate revenue and how will you improve profitability?
  • What are the profit margins and how do you plan to increase them?
• Equipment and execution:
  • What experience do key team members have in executing the growth plan?
  • What roles are you considering hiring in the near future?
• Competition and differentiation:
  • Who are the main competitors and how do they differ?
  • What is the competitive advantage and how will it be maintained?
• Market and sales strategy:
  • How do you plan to acquire and retain customers in a competitive market?
  • What is the marketing and sales strategy to drive growth?
• Use of funds:
  • What are the plans to use the funds being sought?
  • What is the investment strategy to support the growth of the company?
• Risks and mitigations:
  • What are the main risks and how do you plan to mitigate them?
  • What measures will be taken to overcome the challenges you will encounter as the company grows?

What documentation to prepare?

• Updated business plan
• Investor Presentation

Other aspects to consider: 

In this phase it is common for startups to raise series A and B financing rounds. In series A amounts around one and five million euros and series B between six and ten million.

As the startup grows, the founders may need to give up more of the company to raise additional funding. However, it is recommended to maintain a significant stake in the company, and it is advisable not to give up more than 30% to 40%.

Phase 3. Growth stage

In the growth phase, startups have recurring customers and are established in the market. In this case, the objective is to grow and begin international expansion.

It is a maneuver that requires a lot of capital, strategic plans and thorough research of the market in which it is intended to penetrate, which is why it is common to look for strategic partners in these countries that facilitate expansion. 

What type of investment entities to look for?

• Venture capital (VC) funds.
• private equity funds.

What questions can the investing entity ask you?

• Expansion and scalability:
  • What is your plan to expand into new markets or customer segments?
  • From an operational point of view, how do you plan to handle increased business volume?
• Finances and profitability:
  • What is your income and profit projection for the coming years?
  • How do you plan to use the funds you raise in this financing round?

What documentation to prepare?

• Updated Business Plan.
• Strategic growth plan.
• Updated Pitch Deck – An updated version of the investor presentation that reflects the company's achievements, objectives and growth strategies, as well as additional financing needs, if any.

Other aspects to consider: 

• Have the advice of experts in raising financing.
• Prepare the startup 's documentation such as the company's legal documentation, financial information, commercial documentation and other relevant documentation or information for the due diligence process,
• This stage, as its name indicates, is a growth stage. It includes the series C rounds and later.

Phase 4. Divestment stage (“ Exit”)

This is the final stage in which the product or service has been consolidated in the market: investors exit the capital of the company and obtain benefits in return. There are several possibilities for this phase:

• Sale of the startup to another larger company.
• Merger with another company.
• Public Offer of Sale (IPO) for the company to go public.

What questions can an investing entity ask you?

• Motivation for exit :
  • Why are you considering an exit right now?
  • What is your main objective when looking for a way out?
• Exit strategy:
  • What exit options are you considering and why?
  • Have you had conversations with potential buyers or potential investment organizations. 
• Rating and terms:
  • What is the current valuation of the company?
  • What conditions and terms are you looking for in an exit transaction?
• Impact on shareholders and investing entities:
  • How will current shareholders and investing entities be affected by an exit?
  • What return do you expect on your initial investment?
• Transaction process:
  • What is your plan for carrying out the exit transaction?
  • Have you hired financial or legal advisors to help you in the process?
• Future of the company:
  • What will happen to the company and its team after exit?
  • Do you have a plan to ensure the continuity and future success of the company under new management or ownership?

What documentation to prepare?

• Updated economic and financial reports . 

Other aspects to consider: 

• Prepare an exit strategy.

Attracting financing for your startup involves a well-planned process that covers the identification of investors, the preparation of your strategy to attract financing, and negotiation. With a solid strategy and the right approach, you will increase your chances of obtaining funding for your startup.